Economic Crisis and Need for Wise Policies

Tuesday, November 11, 2008

Abdolreza Ghofrani

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Now, after one month that developed countries are painstakingly grappling with the worst financial crunch since the Great Depression of 1929, there is still no prospect of a brighter horizon over the months and even the years to come that indicates an improvement in financial markets; although stocks markets in the US, Europe and Asia are relatively rallying.

No one, given the volatile situation, dares to be unrealistically optimistic. Some economists, the realistic ones of course, do believe that the era of some Western economies being the super powers is over and that they also have the conviction that the crisis would be far from over at least for the next five years.

In the present global situation that economies, being developed or developing, are tightly interdependent, undoubtedly, no nations may be immune from the dire consequences of the present economic turmoil.

Moreover, it is not the time and neither is it instrumental to blame those who with their unreasonable and sometimes unwise policies as well as miscalculations for this miserable situation, caused this comprehensive crisis and made the people of the world worse off.

It is the time to act and start working out solutions. Such a solution cannot only address one country's problems.

It requires a collective solution as now is being worked out. Because as we all witnessed apparently the most powerful economy, i.e., the US is not able to brace the situation just on her own.

But in a broader perspective, other nations have to pay a heavy price for unrealistic policies adopted by others without having a role in the current crisis.

Those countries with single product economies are remarkably and particularly great losers. Oil producing countries are certainly among this group of states. For decades, certain countries have been unrealistically responsible for the cyclical recessions and economic downturn of the advanced economies and their financial turmoil.

Politicians and economic policy makers of developed countries have time and again alleged that single economy product countries and oil producing countries are to blame for either the recession and /or inflation in the western world.

The present financial crisis, however, has proved that this view erroneous.

The advanced economies practically (albeit decades earlier) had to seek for the roots of the problem and economic turmoil in their own countries. Now, the so called advanced economies have not only generated this miserable situation but put the single product economies in a beleaguered situation; and this will cost the latter a heavy price and eventually an economic crisis for years to come.

Over the past three months, crude prices have taken a steep downturn or have halved; namely oil prices were at US $150 per barrel. Now it has downed to only 69 US Dollar.

Some oil analysts predict the prices would be even lower despite the fact that the cold season has already arrived in some areas.

The past three decades have proved that oil producing countries have been at the mercy of economic fluctuations of the oil consumers most of whom has been advanced countries. And now is the time for both parties to remedy the situation. Oil producing countries now have learned much and gained valuable experience from history to ensure and serve their economic interests. At best, they have to reduce their dependence solely on a single product.

So the time has come for them to adopt the economic approaches and policies that seek for a source other than oil, although the latter can be a reliable basis for contribution to their economic development.

Some oil producing countries, given their economic conditions, have initiated policies in order to brace for crises. Their economies have suffered less. However, the story for those that have not taken serious and timely action is pretty different. They, given the present process of the global economy with no good prospect for a couple of years, are in need of impending policies and actions.

The most pressing measure for these countries is to use the revenues from their oil and invest it in areas that can buildup their economic infrastructure that eventually generate income. These countries have different potentials; some of them may do this through the development of their industries. Others may use agriculture as it can play an important role and help them out in time of crises, particularly now that the world population is in desperate need of food products.

Certainly these grounds not only contribute to their economic development and their people being better off, it will also help to solve the global food crisis. Of course this needs to be in cooperation with advanced economies who are also important stakeholders in this context.

Any country should adopt and execute policies that fit its conditions. Trade, services and information technologies are all in all also among the areas that need to be reckoned with in achieving these goals.

OPEC members are scheduled to hold their extraordinary Meeting on November 18, 2008. They will decide on the production quotas of this organization that eventually determines and posts the crude prices for at least the next six months. It sounds like a pretty reasonable action on the part of the member states given the rapid fall of oil prices in the course of the last two months and which is expected to continue over the months to come.

The member states will certainly reduce production to stabilize the prices as well as the markets. The OPEC member states' decisions have always been in pursuit of special market situation. In the time of supply tightness, they have increased their production with their full capacity. Now, however, these countries not only must observe the global economic crisis, but need to work out solutions to make up for their revenues cuts; while their economies are heavily dependent and given the global economic crisis, no one may be of any help.

Certainly OPEC will do what it thinks is the right thing to do. However, no one can ignore the fact that despite the financial package that the great stakeholders (crisis stricken advanced economies) are working out to salvage the economies through an influx of hundreds of billion of dollars, there are still many economists, and interestingly in the United States, particularly, the 2008 economics Nobel Prize Winner Paul Kraguman, of Princeton who predicts that this economic package may not salvage the economic fiasco and is a temporary solution to the problem.

They mean a long term economic recession looms. Naturally, an economic slump will have an impending impact on the oil consumption and again, it is the producing countries and single product economies that will be the big losers.

Another factor that may make the situation worse for those countries is the policy for US's oil independence that the two US Presidential candidates are, time and again, reaffirming.

It is naive if any country perceives that is immune to consequences of this crisis, or it is that the crisis is only restricted to developed nations. This is the world of interdependence. As we see with any crises that erupts in the developed or developing countries, it can easily unravel the global economic structure.

At the very beginning of the crisis, the developing nations and particularly those dependent on the single product economy could learn many lessons; extreme over consumption tempted by western propaganda and the absence of 'collective rationalism' is a great lesson.

Developed nations that now are struggling with this crisis also have been well aware that the era of over consumption (or as put by an economist the era of consumption oriented approach or addiction to consumption) no longer works.

Laisser faire system, given the new global situation, may need to be redefined. Therefore, all those countries pursuing this system will definitely take stock of their past experiences.

Fortunately, a number of political leaders over the past two weeks have bluntly called for this to be redefined. This was an experience that the United States paid a heavy price for. The crisis, as Paul Kraugman, Nobel Prize winner and others pointed out last week had started almost two years ago but no attention was paid to it.

Now, we must think, and do it realistically if the world economic powers aspire for their people to be better off and the global economy weathers the crises that we all are now experiencing.


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