Of squids and leadership

Economists love to speak about equilibrium but know that real life is all about upswings and downswings. The present global economic recession could be seen as just part of this cycle. Especially, for neo-liberal economists, with their blind faith in the market system, the present economic crisis is simply a transitory period that will soon lead to a recovery and more economic growth. Many other economists, however, recognise that the present problems have been long coming and are due to a mix of ideological and structural factors.

The big question is what sort of remedy is the global economy going to get? The fact that the US has a left-leaning President augurs that the world leaders will not opt for cosmetic solutions. Despite all the goodwill, this will not be easy. Powerful groups will do their utmost to try and take the global economy where it was a year ago. Little do they care about the suffering that millions of people have been and are still going through. About those parents who have lost their jobs and have great difficulty in meeting the basic needs of their children. About those families that had their homes taken from them. About those elderly citizens whose savings have melted away.

These powers criticise governments for their excessive borrowings so as to pump life into their economies and prevent them from falling into a depression. Of course, there will be a price to pay and it will be the small taxpayer who will bear much of the burden. Unless governments have the guts to reverse their fiscal policies so as to make the rich carry their fair share. Unlike a progressive income tax system, a flat VAT rate on all goods and services penalises the poor unduly.

Although there is talk about "flattening out" and "green shoots", the global economy is still in dire straits. After a period of shock and disbelief, the jinx of speculation is pushing up the prices of oil and minerals as well as stock prices. Recently, Goldman Sachs, the most venerated US investment bank, revised upwards the projected earnings of the S&P 500. The large corporations that make up this index are now expected to increase profits by an additional 30 per cent in 2009 and 19 per cent in 2010. These forecasts sent investors on a spending spree. Goldman's forecasts are not due to increased investments or consumer spending but purely to the fact that the elimination of "weak players" will now benefit the remaining ones.

Goldman itself is a big player on the stocks, currency and commodity markets. This year, the company is posting record net revenues and profits. In the second quarter its turnover reached $13.8 billion while profits soared to $3.5 billion. This enabled Goldman to fully pay back the money it received from the US Treasury under the Troubled Asset Relief Programme. It is now free to pay its top managers and other key personnel any compensation it deems proper: an estimated $20 billion payout for 2009.

This was bound to cause many raised eyebrows. In an article entitled The Wall Street Bubble Mafia, Rolling Stone, the rock magazine, described Goldman as a "giant vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money" (July 9-23). Goldman may represent an extreme case but it is not an isolated one.

World leaders have no option but to take drastic action. Their action to date may have saved the global economy but there is little doubt that it has benefitted most the culprits themselves. Now it is time for these leaders to show their true mettle. It is useless to talk about self regulation and good corporate governance.

Finding proper solutions to global structural economic issues will take time, especially since institutions like the World Bank and the International Monetary Fund will not find it easy to change their mindsets. Clear policies and specific measures are required. If Goldman wants to pay bonuses let it do so but make it pay taxes. It is encouraging that David Cameron, leader of the UK Conservative Party, has departed from his party's orthodox stand and promised that if elected he will ensure that the rich will be asked to carry a "fair share" of paying back the national debt.

Ultimately, it is we citizens who have to be vigilant so as to safeguard our hard-won rights and standard of living. Our little island is not shielded from what is taking place in the world. This year's government budget will be our next litmus test. The past does not augur well for the future. We lost too many opportunities to come up with a workable social pact. The task is now much harder as our economy continues to face the prospect of the most feared of all economic spectres: persisting high inflation in a shrinking economy.

We urgently need an equitable formula that will not hurt our competitiveness, further erode government finances and unduly penalise the working classes. Now is the moment of truth. Can our leaders please stand up?