By Dani Nabudere
Wednesday 14 January 2009
The present financial crisis afflicting the global economy should not be seen from the narrow focus of the credit crunch and its relationship to the subprime mortgage crisis in the Western countries, especially the US. The crisis goes to the very foundations of the global capitalist system and it should be analyzed from that angle. What is at the core of the crisis is the over-extension of credit on a narrow material production base. This is in a situation in which money has become increasingly detached from its material base of a money commodity that can measure its value such as gold.
The expansion of the world economy from 1945 onwards was based on the US providing some kind of link between money and the gold standard, which the US tried to maintain until its collapse in the 1970s. Increasingly the dollar became the global currency but without a backing to its currency from a money commodity. The over-expansion of credit that has taken place since then, especially with the globalization of the world economy, has meant that a lot of paper money and monetary instruments in the form of derivatives and ‘future options’ have lost any relationship to the ‘fundamentals’ in the material production of the world economy.
That is why there has been a growing outcry that the growth of ‘speculative capital’ has over-run the growth of ‘productive capital’ with large amounts of money and credit circulating without the backing of any production at all. That is also why the relationship between the ‘fundamentals’ in the economy and the new credit instruments created on a daily basis in many cases from speculative ‘short-selling’ have become narrower and narrower over time. This is also why the present financial crisis is also a reflection of the energy and food crisis, because oil and food products such as wheat, rice and other commodities have been subjected to speculative trading to back up paper money many years in the future. The British Prime Minister, among the world leaders, is the only one who has seen this connection when he brought it up in the World Bank meeting a few months ago and also when he met the US Democratic Party Presidential candidate, Barrack Obama, when he visited Europe recently.
Thus the amount of credit floating around the world is ‘loose money’ completely run-wild, which claims a relationship with a narrow production base. This is in a situation when the US is increasingly unable to repay debts it has accumulated in its Treasury Bonds and Bills, in which the rest of the world have placed their reserves. Most African countries have millions of dollars in these US Treasury bills, which are held as the countries’ ‘reserves.’ China, India and Japan have trillions deposited in these ‘T’ bills and bonds This means that should the world economy collapse under pressure of ‘loose money’ wanting to be given a value (which they do not have) so that the holders of that ‘money’ can preserve their wealth, those holdings in US Treasury bills (or US debt to the rest of the world) will be lost forcing many weak economies to collapse along with it.
This is why it is wrong to conclude, like many people do that capitalism has the capacity, as it has shown over the years, to always reinvent itself by growing a new skin to resist the pangs of crisis inflicted on it by its own greed. That is a false conclusion. US and British capitalism are being put under pressure to stay a float only by nationalizing a number of banks and the corporations that can no longer sustain their operations because of shortage of ‘liquid cash.’ These corporations and banks demand that the state should bail them out. The state is being forced to bail these enterprises out on condition that they shall sell the bulk of their shares to the state. This means that these capitalist states are being forced to move in the direction of central planning and management of the economy. For lack of space, we cannot go into this matter in greater detail.
In short, what Karl Marx called ‘the financial oligarchy’ is demanding that the state should take over their burdens and maintain the ‘value’ of their valueless credit instruments while insisting that the poor workers and the middle classes shall take care of themselves. In other world, the oligarchy demand communism for themselves while relegating socialism and capitalism for the middle class and the working class and the other poor strata of society because socialism and capitalism are the only ways through which the middle class and the working poor can ‘compete’ among themselves for survival. Remember that Marx defined communism as: ‘to each according to his needs’ and socialism as: ‘to each according to his capacities.” Capitalism can now better be defined as: ‘to each according to his own devices,’ which is a paradigm fit for the working poor.
THE CREDIT CRUNCH AND THE FOOD CRISIS
The economic crisis has also revealed the way credit over-expansion has affected food prices throughout the world. In fact when the credit crunch struck the world and the food crisis was announced, the crisis was recognized as a global food crisis. That is why the International Monetary Fund and the World Bank immediately held a special session of the Boards of Governors of their institutions to develop policies to deal with this crisis when it became clear that the food crisis was likely to stay with us until 2015 at the very least.
Immediately following the meetings of these multilateral institutions, the World Food Organization-FAO held an urgent Food Summit on June 3-5 in Rome, in which the Summit called for an immediate response by governments. After the World Bank meeting, the British prime minister, Gordon Brown, wrote a letter to the Japanese Prime Minister Yasuo Fukuda, who was at the time the chair of the G8, in which he asked the group to act with speed to address the soaring food prices. What was significant was that Gordon also recognized that the financial market-based risk management instruments, including derivatives, had to be considered as contributing to the food price volatilities. What did Gordon Brown mean by this statement? The real problem underlying currency instability and commodity price volatilities is the fact that the dollar, which acts as a global reserve currency, is not backed by any solid money commodity such as gold or silver. These money commodities were historically overwhelmed by the growth of capitalist wealth. As a result not all paper wealth that was held by economic actors could be changed into gold in periods of crisis when the demand for ‘real’ money became overwhelming. With the collapse of the gold standard in the US in the 1970s because of the outgrowth of Eurodollars, attempts were made to rely on other commodities such as platinum to back up the dollar, but this was a non-starter because the cost of storing platinum was too high to be borne by paper wealth holders. But financial instruments, especially future options and instruments called derivatives continued to grow in volume.
This is what led to the food commodities coming into the picture to back up future contracts and derivatives expressed in US dollars. The centre of the global commodity trade is the Chicago Board of Trade-CBOT. It is here that global trade in commodities is valued and undertaken together with other commodities markets. It is also here that all commodities, including food commodities, are ‘financialized’ in dollar financial instruments Wheat, oats, corn, rice and soybean are all agricultural products traded on various commodities exchanges, including the CBOT. Here the exchanges also trade the financial ‘products,’ as well as futures and options contracts on these and several derivative products such as bean oil. Coffee, cocoa, sugar, cotton and orange juice are all ’soft’ commodities, many of which are traded on the CSCE (Coffee, Sugar and Cocoa Exchange). Interestingly, since 80% of the oranges grown in the U.S. are turned into frozen orange juice concentrate, it’s the juice that is traded as a commodity, not the fruit.
An article that appeared in the Toronto Globe and Mail of 31st May 2008 argued that it was the deregulation of financial markets and the systematic exploitation of US regulatory loopholes that had led to the upsurge of speculative investments in food commodity markets, much of it by institutional investors such as the managers of pension funds. "These funds", wrote the authors, "have ploughed tens of billions of dollars into agricultural commodities as a way of diversifying their assets and improve returns for their investors.”
According to the authors, the amount of fund money invested in commodity indexes had climbed from just $13-billion in 2003 to a staggering $260-billion in March 2008, according to calculations based on regulatory filings. There were warnings that this amount could easily quadruple to $1-trillion, if pension fund managers allocated a greater portion of their portfolio to commodities, as some consultants suggested they were poised to do. Thus, it was the progressive loosening of regulatory requirements, which made possible the enormous influx of money, much of it fleeing the meltdown in the market for mortgage-backed securities and the wider fallout, including big leveraged buyouts in banks.
Because agricultural markets are small - relative to stock markets - the amount of cash pouring into these markets gives these funds substantial clout. The authors observed that these big institutional investors controlled enough wheat in futures instruments, which could supply the needs of American consumers for the next two years. They blamed the "demand shock" from these recent entrants to the commodities markets as the primary factor behind the sudden soaring of food prices. They noted that if no immediate action was taken, food and energy prices were bound to rise still further leading to the catastrophic economic effects on millions of already stressed U.S. consumers and the possible starvation of millions of the worlds poor.
For instance, the Ontario Teachers’ Pension fund, which began with a modest investment in food commodities in 1997, had by 2008 invested some 3 billion dollars in this market. With rising investor activity and increasing demand, prices began to rise. Between 2000 and 2007, the price of wheat increased 147 per cent on the Chicago Board of Trade. Over the same period, corn increased by 79 per cent and soybeans by 72 per cent. As more funds moved in to invest, speculators began clamor for more flexibility with trading limits and since there were no controls, the food commodity prices kept on rising.
It has been estimated that for every one percent increase in the price of food, there is an additional 16 million people who go hungry. In its briefing paper for the World Food Summit, the FAO Secretariat devoted two whole paragraphs to the influence of financial markets in pushing upwards the cost of staple food commodities in its assessment of recent developments. However, it had nothing to say about the matter when it came to recommending "policy options" for dealing with the problem. This was not accidental, but a reflection of the positions of the States.
This is why it was correct to conclude, as we have done above, that for the financial oligarchy who wield power in the States, the demand is that the State must guarantee them ‘communism’ (which can assure them their needs) while for the producing and middle classes the attitude of the State is only to guarantee them the conditions for ’free competition’ for the little the financial oligarchy is able to leave aside for the ‘markets’ (to compete over according to their abilities and devices). Financial markets in the global capitalist system, as well as global inter-governmental organizations such as FAO, it seems, have no ‘policy options’ to attend to the needs of the starving masses. There always are, however, ‘options’ for ‘bailing out’ the financial oligarchy while the masses are left to the devices of ‘the markets.’
THE WAY OUT OF THE CRISIS FOR AFRICA
It is clear from the above that agricultural production has become a victim of late capitalist crisis. This is as it has been because from its birth capitalism had always profited from agriculture as an ‘old industry’ in which this ‘industry’ provided the raw materials for its expanded reproduction at low cost. Capitalist crisis has therefore contributed greatly to the exploitation of agricultural workers and ultimately to its collapse. It did so first, by plundering the European peasantry and converting them into paupers through the enclosure system by using the proceeds for its ‘primitive accumulation’ of capital as one of the sources of its birth.
In so doing, it turned the peasants into workers and in its imperialist phase turned to the colonies for agricultural raw materials where the colonial peasant producers were paid prices below subsistence subsidized by female and child free labor working on land. Only after decolonization and the establishment of the European Common Market did Europe develop a common agricultural policy to avoid being starved in case of wars in the post-colonial States.
Secondly, with the increasing securitization of commodities, in which the central banks relied on a variety of commodities to give value to paper debt instruments, capitalists fell to agriculture in the post-colonial States of Africa to save their currencies from collapse. This as we saw above is what led to the escalation in the prices of food products leading to their destruction as commodities. The collapse of the dollar and other ‘hard currencies’ has meant a doom for those agricultural food products as their prices begun to plummet with the collapsing currencies.
This is what the economists are calling a ‘recession.’ But nobody knows when the recession will end although many of them now agree that it is already on in all the developed capitalist countries. So those who believed that with high food prices the peasant producers would earn high incomes had better rethink their arithmetic because they need to revise their knowledge of how capitalism operates in its old age. African agricultural and food production based on exports to the markets of the developed countries can no longer be assured and so the African farmer has to find a way out of this mess as quickly as possible.
What we have said above must already alert us as to what we have to do to get out of the mess. First, we have to look at how we can survive in terms of food availability. For the first time, we have to wake up to the reality that African countries need a food security policy as a matter of urgency about which leaders can no longer dilly-dally. That means African countries have first to focus on the home market followed by the regional market and finally the global market. With the home market becoming the focus for our production, we can create regional currencies because in that case we shall have no alternative but to create them to serve the regional markets, but operating under completely new conditions and principles. But we cannot develop a food security based on food crops of which people have very little knowledge, especially since with the currency crisis; we shall not have sufficient dollars to buy foreign food products with in the short and medium terms.
This means we have to rely more on indigenous food products as the basis of our food security, which we must quickly encourage the farmers to revive. Although many of our indigenous food crops were abandoned in favor of exotic products that could also be sold on the market, there is still a reservoir of knowledge about these crops in the rural communities. So reviving these crops would not be an uphill task if we have a policy that is driven with the same zeal as that of the current production for export. The African elites will have to content themselves with consuming indigenous crops since they can no longer depend on exotic foreign products.
Secondly, we have to consider the strategy of encouraging cooperative production because with the increasing population driven by poverty and the great fragmentation of land holding, it will not be possible to sustain families on the small farm-holdings. A cooperative policy also presupposes a sound credit policy that can enable farmers to borrow for their production and hence the need to hasten the creation of a regional currency that can inform the creation of new local credit systems drawing on the experiences of the ‘informal sector.’ We should learn what the people of Somaliland have done in this respect because they have managed to create a very strong local currency that is not pegged to any global currency.
The collapse of the global capitalist system will not mean the end of the world! On the contrary, it will release the bottled up energies of the people that have been suffocated by the collapsing capitalist system. We shall survive by burying the old system and creating a new one. Such a new system will have to be socialist-oriented since even the most developed capitalist countries have no alternative but to do so as we can already see with the whole sale nationalization of banks throughout Europe and the US. Some countries such as Iceland have already gone bankrupt.
This means that even the political system has to change. The key to political rejuvenation will lie in the ‘deepening of democracy’ right from the family level, to the clan and to the traditional institutions level since the post-colonial state would have collapsed along with the dollar. New forms of political power will emerge at a local level unless new warlords try to occupy the political space. But the warlords are already doomed as the Somali situation already demonstrates. The local power structures will need a wider cooperative basis on the model of confederal or federal regional states and we should consider Southern, Eastern African or the Great Lakes region for such a partnership.
The development of local markets will need the backing of regional markets for wider exchange of commodities. Therefore, new forms of agricultural and industrial production will have to be tailored to local needs and tastes. Similarly, new local markets will emerge in other parts of the world calling for global exchanges of commodities with those consumers. Eventually a new global currency or currencies based on a basket of commodities will have to be created to facilitate these exchanges on a completely new basis not based on capitalist super-profits run by transnational corporations.
At a political level, we shall increasingly see the emergence of a global civil society along side the new global market. Hence, we can already envisage the emergence of a GLOCAL SOCIETY (a Global society based on local nationalities and global citizenship). Along side with these developments will eventually emerge a federated global State, which will be developed by the local powers. We can no longer return to the caves, we can only move forward to a new world. Yes, a New World is possible and it can now be said with certainty: A NEW WORLD IS INEVITABLE!
* Professor Dani W. Nabudere is the Executive Director of the Afrika Study Centre.
Credit: Pambazuka News.








 

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