The Deputy Prime Minister, Ken Henry, believes that Australia is headed for a China fueled resources boom that will last to 2050. I still have in my garage a redback spider infested copy of the Australian Financial Review from well before September 2008 that had then BHP boss Chip Goodyear also predicting that the commodity price boom would last for decades.
The economic policy debate in Australia has shifted very quickly following Henry's remarks. The issue now is how this coming boom should be managed. The debate is being led by two big hitters, with Henry pitted against Ross Garnaut. The latter warns that the boom threatens to distort the Australian economy and will lead to unsustainable current account deficits, thus preventing a resources lead escape from the boom-bust cycle. This point, as we shall see, is crucial.
Even if Henry should prove to be correct, notice that any long term escape from the business cycle would not be due to the structure of the Australian economy itself. His case depends upon what is happening in the global economy.
There seems to be an underlying presupposition that another big boom is on the horizon. The current debate concerns its longevity, its impact and how best we can benefit from it. But could we instead be heading for another global financial bang?
We tend to think that the current crisis is sui generis that's why we call it "the" rather than "a" global financial crisis. I think, however, that the crisis of 2008-2009 should be dubbed "global financial crisis 2.0".
We have been through a post-depression global financial crisis before this one; in fact that crisis subsists underneath the contemporary one. This is known as the global debt crisis. We don't notice it because it affects primarily the world's poor and has done so for decades.
In the late 1970s western private and multilateral borrowers extended credit to third world countries on a grand scale. It was assumed, Ken Henry like, that the world was headed for a commodities boom. At the time Malcolm Fraser was pinning his hopes on this supposed boom to ensure longevity of government in the face of a resurgent post Whitlam Labor Party.
It was felt that third world debtor countries would be able to pay back these loans on the back of rising commodity prices, given that they relied upon commodities to maintain favourable terms of trade, much like Australia. Instead, commodity prices went into decline and, subprime mortgage like, many developing countries were not able to meet their debt obligations. Some were on the verge of default (read foreclosure).
This threatened to unravel the entire financial system of the West. Because the debt crisis affected the developing world and threatened the global financial system based in the developed world it would be fair to call this a global financial crisis. The financial system, like today, was essentially bailed out.
This bailout involved extending further loans to third world countries multilaterally through the IMF but also bilaterally making these countries even more indebted.
Ultimately, however, the bailout took the form of IMF imposed "structural adjustment programs" designed to extract capital from the developing world and then funnel it back to the western financial system. These programs were based on enforced neoliberal economic policies that were highly contractionary. The affect on the poor was devastating.
Structural adjustment programs were put in place despite the fact that these loans constituted "odious debt". Most of the debt was not used for economic development projects but rather went into the pockets of grossly unrepresentative and corrupt regimes. Yet it was the poor who were basically slugged with the duty of repayment. What happened was that the rich of the West and the rich of the Third World engaged in a fancy little game which involved offsetting risk to the poorest of the poor.
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