Lou Jiwei, the head of China’s sovereign wealth fund, raised a chuckle last December when he called on the World Bank to guarantee investments in the US and Europe, just as it does in developing nations, because investing in those places was no longer safe. But was the sage of Beijing so far wide of the mark to lump America et al in with the ropier emerging markets?
Not according to Simon Johnson, former chief economist of the IMF, who argues in an essay in the Atlantic that America (and by extension, Britain) are becoming like the sort of banana republics the agency so often has to wade in and save. Typically, Johnson observes, emerging market countries “are in a desperate economic situation for one simple reason.”
He continues: “the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.”Sound familiar? Think of the way the financial sector jigged the rules in its favour and the manner in which it has been rescued. And it gets worse. Johnson argues that financiers in the US, who created the crisis, are now using their influence to prevent precisely the sorts of reforms that are needed to pull the economy out of its nosedive just like emerging market oligarchs. “The government seems helpless, or unwilling, to stop them,” he says. Once this sort of thing gets entrenched, the only thing separating us from Latin America is sun and an annual carnival…
Johnson observes that, with his IMF hat on, he wouldn’t advocate stepping in to rescue the US or Britain until they had proven themselves willing to confront the financial oligarchs and shrink their swollen and risk-prone sector. As Britain could conceivably need support at some point, that’s a tad worrying. Last year, I argued in Prospect (“A greedy giant out of control,” November 2008) that the financial sector was too big and needed to shrink dramatically. The time for shrinkage is now. Jonathan Ford is commentary editor of Reuters
This article appeared in the crisis watch collumn in the May edition of Prospect, published 30th April.