The Cost of Crisis

Stephen DeAngelis

April 3, 2009

When greedy and unscrupulous people brokered liar loans, bundled bad debts, and insured high risk derivatives without sufficient capital, they were thinking about how best to line their pockets with gold. I’m sure that few, if any, of them thought about the broader consequences of their actions. They probably didn’t think about the homes that would be foreclosed on, the retirements that would be delayed, or the jobs that would be lost. New York Times‘ columnist Nicholas Kristof reminds us that there are even wider and more serious consequences resulting from the current financial crisis [“At Stake Are More Than Banks,” 1 April 2009].

“According to World Bank estimates, the global economic crisis will cause an additional 22 children to die per hour, throughout all of 2009. And that’s the best-case scenario. The World Bank says it’s possible the toll will be twice that: an additional 400,000 child deaths, or an extra child dying every 79 seconds.”

Most of these deaths will result from starvation as families struggle to find food and relief efforts find it more difficult to obtain funds. Most of us affected by the crisis feel we are innocent victims; but as Kristof laments “the greatest price for incompetence … will be borne by the poorest people in the world … who never approved any bad loans.” He talks about seeing the effects of the crisis firsthand in places like Haiti and the Dominican Republic.

“In the Haitian slum of Cité Soleil, ravenous children tore at some corncobs that my guide had brought; it was their first food that day. In a slum hospital, where admissions for malnutrition have doubled since September, I met a woman who used to sell shoes on the street. Shoe sales dropped with the sagging economy, so the woman was forced to use her sales revenue to buy food for her child instead of to replace inventory. Now she has no more merchandise to sell, no food to eat and the child she cradled was half dead with starvation.”

As everyone knows, the solution to the crisis is the creation of jobs. Getting people back to work will help get food back on the table. Finding work for the poor and unskilled, however, is not an easy task. Kristof points out that near-term deaths are not the only impact of the crisis. Even children who survive are likely to carry the scars of malnutrition for the rest of their lives. “If you have prolonged malnutrition in kids, it will have a long-term impact on cognitive abilities,” Ann Veneman, the executive director of Unicef, said. “It impacts your ability to learn in school and to earn as an adult.” Kristof reports that effects of the crisis are also gender skewed. Parents in many developing countries ensure their boys remain alive by feeding them more than their daughters. “The United Nations Development Program says that in some countries, the increase in child mortality during an economic downturn is five times higher for girls than for boys.”

There is no doubt than Kristof’s angst is justified. He goes on to rail against the rich and note that “the 500 richest people in the world … earned more than the 416 million poorest people.” The best of the rich people also created millions of jobs (directly or indirectly), provided billions for philanthropic endeavors, and they will undoubtedly play a large role in getting the economy back on track. Good jobs created by the spread of globalization are what is going to close the wealth gap that liberals are always pointing to as a humanitarian disgrace. Is it fair that some people are very rich and others very poor? The simple answer, of course, is no. Neither is it fair that some people are smarter than others, better looking than others, have more talent than others … well, you get the point. The reason that people talk about the economic gap is because they believe they can do something about it. One group simply wants to take from the rich and give to the poor — an approach that I believe has shown itself to be bankrupt. Helping people help themselves is a better approach. Even then, however, some those emerging out of poverty are going to do much better than others. The ones that do the best will be the entrepreneurs and they will help create the jobs that improve the lives of those around them — and many of them will get rich in the process. It might not be fair, but it’s life. The current bad economy is also part of life.

No one can doubt that the global economy has been derailed. The World Bank had already revised downward the forecast it made last November for world GDP growth [“World Bank Sees Global Contraction In 2009,” by Annys Shin, Washington Post,1 April 2009]. The downward spiral is hitting some developing economies extremely hard.

“Developing nations have been especially hobbled by a falloff in demand for exports, the flight of foreign investment and a decline in commodity prices. The World Bank said the developing world might need up to $1.3 trillion to finance current account deficits and to cover debt payments.”

Those are the kinds of issues that G20 leaders will continue to wrestle with at the macro-level as they try and figure out how to reform the international financial system. In London, G20 leaders pledged to make $1.1 trillion available to help stimulate the economy and promised to make “longer-term plans to try to prevent a new crisis by tightening regulation of banks, extending oversight to hedge funds and setting benchmarks on executive pay” [“A Lifeline for Nations Both Rich and Poor,” by Anthony Faiola and Mary Jordan, Washington Post, 3 April 2009]. As I’ve written before, however, I believe the recovery will rest more in the hands of the private sector than the public sector at the micro-level. Stimulus packages are enacted in hopes of creating jobs, but only private sector jobs hold the promise of sustaining global economic growth.

One of the more interesting developments that is likely to emerge from this crisis is China’s ascension to the very highest pinnacles of global economic power. Analysts predict that China will surpass Japan sometime this year (if it hasn’t already done so) to become the world’s second largest economy. Chinese officials understand that their new position places new responsibilities on their shoulders; but with that new responsibility Chinese leaders also want a greater say in global policies [“Rising Powers Challenge U.S. on Role in I.M.F.,” by Mark Landler, New York Times, 29 March 2009]. On the other hand, Chinese leaders still show a reluctance to pony up what others feel is China’s fair share.

“A senior Chinese leader, Wang Qishan, said … that Beijing was willing to kick in some money [to the IMF], but he called for an overhaul of the way the fund is governed. China wants its quota — which determines its financial contribution and voting power — adjusted to reflect its economic weight better. China’s contribution, Mr. Wang said, should not be based on the size of its reserves but on its economic output per person, which is still modest.”

China’s reluctance stems mostly from the fact that it continues to wrestle with numerous problems at home [“An Unsure China Steps Onto the Global Stage,” by Michael Wines and Edward Wong, New York Times, 1 April 2009]. Wines and Wong point out that China still suffers from “widespread poverty, authoritarian rule, a culture shrouded by decades of isolation and poorly understood intentions. China’s global ambitions are unlikely to be realized until it resolves those issues.” They also remind us that as much as China might enjoy poking the United States, they also know that China’s future is inextricably connected to America’s future.

“China’s economic fortunes remain deeply entangled with those of the United States, its biggest customer, rival, debtor and still — by far — the world’s biggest economy. So although Beijing may agitate for changes in the global financial structure, and relish some schadenfreude at Washington’s expense, its interests lie very much in getting America back on its economic feet. That does not negate China’s newly enhanced status. With most of the world in financial collapse, China’s economy has suddenly become too big — and too healthy, expected to grow by at least 6.5 percent this year — for the rest of the world to ignore.”

Wines and Wong also remind us that “while Chinese megacities boom and the country’s coast has become the world’s factory, 800 million of the nation’s 1.3 billion citizens remain farmers, many mired in poverty. China remains a developing nation, still vying for first-world status.” This brings us back to where this post began. The best hope for the millions of people in poverty — whose suffering has increased as a result of this economic crisis — is to get the world back to work. Although stopping death and starvation are the most important reasons to get people back to work, security is another good reason. Analysts are increasingly concerned that job losses are going to increase global instability [“Job Losses Pose a Threat to Stability Worldwide,” by Nelson D. Schwartz, New York Times, 14 February 2009].

“Worldwide job losses from the recession that started in the United States in December 2007 could hit a staggering 50 million by the end of 2009, according to the International Labor Organization, a United Nations agency. … High unemployment rates, especially among young workers, have led to protests in countries as varied as Latvia, Chile, Greece, Bulgaria and Iceland and contributed to strikes in Britain and France. … The new United States director of national intelligence, Dennis C. Blair, told Congress that instability caused by the global economic crisis had become the biggest security threat facing the United States, outpacing terrorism.”

Government and business leaders alike must look at the current crisis an opportunity — an opportunity to reform, to build, to change, and to progress. There will be winners and losers, but we shouldn’t spend much time or money trying to save the losers. Resources and effort are better spent on fostering companies and industries that have the greatest potential for sustained growth. In the meantime, we can’t afford to ignore the plight of the world’s poorest people as they struggle to cope with crisis that was not of their making.