Oil spill, failure of laissez-faire governance
By Dennis Morrison, Contributor:
AMERICANS ARE feeling helpless as there appears to be no end in sight to the oil spill in the Gulf of Mexico and the round-the-clock cable coverage with images of coastal wetlands being overrun and beaches tarred in a large section of the region. It is a catastrophe not just for the Gulf region but for North America, as these wetlands comprise nearly a half of the total wetlands of the continent and support a substantial part of the United States (US) seafood industry. The Obama administration is taking a shellacking for the inevitable chaos that has resulted as confusing layers of federal, state and local bureau-cracies scramble to mount clean-up operations.
I suspect, however, that the frustration Americans are feeling arises from the sense that their society, which prides itself on technological mastery in all human activities, is powerless to plug the leak. This sense of powerlessness does not fit at all well with the psyche of the all-conquering America that has dominated the race to outer space and outdone its rivals in military technology for the last century. Shouldn't the US military with its smart technology and super-efficient command and control systems be able to sort out the mess? Surely, this ought not to happen to Americans, of all people.
What the Deepwater Horizon disaster has laid bare is not so much American technological inadequacies, but the failure of its oil industry regulatory system at all levels. It comes 30 years after laissez-faire ideology gained ascendency in the Reagan-Thatcher era and the crusade to roll back government involvement in regulating markets. We now know, too, that in the new milieu, relations between public officials and the oil industry were marked by rampant corruption. This is how BP came to have been permitted to drill for oil at record depths below the ocean floor with scant consideration for disaster mitigation, as their plans were simply rubber-stamped.
The calamitous failure of government regulation has not been limited to the oil industry or, for that matter, to the United States. The near collapse of the US and British financial systems in 2008 can be traced directly to the liberalisation of Western financial markets that was at the centre of the resurgence of laissez-faire capitalism in the 1980s. Regulatory systems put in place after the banking system meltdown in the 1930s were upended on the altar of ideology. Only after massive bailouts were major economies able to avert disaster, but now the painful fallout is being felt and the recovery appears tepid.
In the porous regulatory systems that existed since the 1980s, yuppies on Wall Street and in the City of London turned financial markets into casinos, gambling with the savings of the economies. With financial institutions collapsing like ninepins, credit markets froze, sending the world economy into decline for the first time in 70 years, and simultaneously with world trade for the first time ever. The US, and more so Europe, are struggling to emerge from recession, which is being made harder by the huge fiscal and debt burdens arising from the financial crisis, and the Americans are plagued by record levels of long-term unemployment.
Jamaica did not escape the liberalisation fever, freeing up its financial system in the 1980s and 1990s. Leaky regulations allowed reckless lending between connected parties, backed by inadequate collateral. Banks, especially indigenously owned ones, operated without regard for prudent risk management. After what was an enormous govern-ment bailout in the late 1990s, among the highest as a percentage of the size of the economy, new financial regulations to tighten the system had to be promulgated, which is partly why Jamaica's financial system was unaffected by the recent crisis.
Where Jamaica perhaps suffered the greatest damage from economic liberalisation was the premature abolition of exchange controls in September 1991. That action, taken at the behest of Washington-based international financial institutions and the leadership of the local private sector, came ahead of the necessary fiscal and monetary measures to ensure a less-turbulent transition to a stable foreign-exchange market. What transpired was a protracted period of high inflation which was only put down by repressive monetary policy [high interest rates] that contributed to the financial sector meltdown of the late 1990s.
The business failures arising from escalating debt due to the hike in interest rates hurt several sectors of the local economy. Moreover, the high interest paid on 'safe' government instruments distorted the risk appetite of investors, even as it sent government debt payments skyrocketing. Borrowing had to be increased to service existing debts, and with interest payments eating up a greater share of revenues, less was available for investment in education, health, and national security.
The failure of markets globally has been costly and, in the aftermath of the Great Recession, the rationale for regulation of markets has regained legitimacy. Reflecting this, the International Monetary Fund, World Bank, and other institutions that shape the Washington Consensus have adopted a more pragmatic view of the role of the State in regulating economies. The resurgence of the political right in the US, notwithstanding, the ideological centre has shifted to the left globally, hence we have in Britain a Conservative-Liberal-Democratic coalition, which is projecting a softer face for British capitalism.
Financial markets, though, are exerting pressures to rein in government economic stimulus that could set back the recovery. It would be a mistake to put the state back into a laissez-faire mode, bearing in mind the consequential damage to the economy as is being witnessed even now in the Gulf of Mexico.
Dennis Morrison is an economist. Send feedback to columns @gleaner jm.com.
June 20, 2010