Failed States

Dr Mahathir Mohamad writing in his blog Chedet gives as clear and as simple an explanation for the financial crisis as any I have ever heard.

1. At the beginning of America’s war on terror, President Bush categorised several developing countries as failed countries.
2. I wonder whether Bush thinks a country like Greece, which is totally incapable of paying its debts after irresponsible financial management, is a successful country.

3. The debt of Greece has not only destroyed the country but it has dragged down all the European countries as well. Such is the disaster brought on by Greece’s impecunious ways that Europe is threatened with the possibility of financial collapse. So far the great economic and financial minds of Europe have not found any real solution. Instead there is the possibility that the failure would spread to Italy, Spain and Portugal.

4. Why has this happened to Europe? To find the answer one has to look into the European economic history, to look at how the European countries became so rich.
5. In the days of European imperialism, only Europe could make use of their engineering and technological skills to export manufactured goods to the rest of the world.

6. Feeling secure that they would be able to sustain this superiority in industry and trade and often benefitting from cheap raw material from their colonies and captive imperial markets, they allowed wages and profits to spiral up. Accordingly their GDP and per capita appeared to be high and they enjoyed ever higher standards of living. They classify their countries as developed.

7. Democracy and socialism forced the introduction of all kinds of social benefits. They acceded to demands for less work and more pay. They introduced pension schemes, paid leaves and holidays, double and quadruple pay for overtime, costly medical benefits and unemployment benefits. Very early workers were given the right to form unions and to strike. These were to prevent exploitation. But the rights were abused so that the remunerations and perks demanded had nothing to do with being exploited.

8. Soon the demand for higher remunerations and perks spread to the higher grades of workers and then to the executives. Bonuses for all were no longer related to profits made. They became actually delayed salaries, paid half-yearly or yearly.

9. The top executives were given stock options, bonuses exceeding their yearly pay, cars, houses and numerous allowances including golden handshakes even when they failed.

10. Naturally all these cause all their products and services to become very costly. With this comes an increasingly higher cost of living. Wages and perks were revised every now and again. With each round of wages and perks increase, there would be increased cost of living which in turn lead to demands for more increase in wages and perks.

11. All these would have gone on indefinitely but for the emergence of new industrial countries in the East. Japan, followed by Korea and then China industrialised and their low-cost high quality products pushed practically all the manufactured goods of the West off the shelf.

12. Threatened with the possibility of lower standard of living they created a financial market. Non-tangible products were invented for them to speculate and gamble. And they or at least the moneyed people and the game-theory experts made considerable amounts of money. With this no more capital was invested in the real business of producing goods and supplying services.

13. Then, they became very greedy. They started creating money to finance their gambling. To cut a long story short, the bubble burst. They lost all their money. Unable to go back to doing real business, to producing goods and supplying services, they began to fiddle with the monetary and banking systems.

14. They succeeded with Iceland and Ireland. But Greece proves intractable. This country enjoyed high life on borrowed money. Less work, more pay and more social benefits ate into Government revenue. Unwilling to face the wrath of the people the Government borrowed to finance the national budget. Unable to pay or service debts the lenders refused to give any more loans.

15. Actually the country became bankrupt. There is no way for the country to become solvent again. Its bankruptcy would in turn bankrupt European banks. This would be disastrous for Europe.

16. Basically the countries of Europe have failed. Their claim to be the showpiece of capitalism and democracy becomes hollow after they are forced to look at socialist undemocratic China for help.

17. But all efforts will fail unless they admit that they, like the developing countries, are poor. Poor people must live like poor people. Their bonuses, share options, perks, high pay and less work creed etc must be given up. The gambling in the financial market must also be stopped.

18. They have to go back to working, to producing goods and supplying service with lowered wages. They must sell off most of their assets (Greece is trying to do this now). But industrial discipline would be needed for foreign investors to buy the assets and run them.

19. Printing money and writing cheques will not help. They must cease to be in denial. They must admit they have failed, their creed and their systems have failed.

20. Many developing countries have failed. But many European countries including the United States of America have also failed.

This clear and simple explanation sound true but is it the whole truth? Dr M asserts that we are all poor in the developed and the underdeveloped world and that we must face the facts. And yet we see evidence of real wealth and creativity all around us, as well as evidence of destitution. Excessive wealth and excessive poverty suggest that wealth is not being sufficiently shared and or sufficiently created.

Anyway Dr M’s article provides an excellent introduction to a discussion about wealth. The discussion on his site looks interesting too.