The study aims to answer the following questions. What are the trajectories of the recent financial, economic and livelihood crises? What is their impact on the global welfare? What options are there to stem the tide? The study objective is hence to identify the impact of the recent financial, economic and livelihood crises and options to stem the tide on the Afro-Arab continent...

1. Understanding the
Global Financial Logjam:
Stemming Crises of Livelihoods in the
Afro-Arab Region
Centre for Human Environment
Secretariat of the House of Federation
Afro-Arab Parliamentarian Summit
September 24, 2011, Sheraton Addis, Addis Ababa
BT Costantinos, PhD
Professor of Public Policy, School of
Graduate Studies, Addis Ababa University
costy@costantinos.net

2. Part I
The Impact of the Global Crises on
The Afro-Arab Region
• How did it come and how bad is the
crisis?
• Marx’s critique of Capitalism
• The world of derivatives
• Financial Shenanigans, Greed and
Capitalism
• Stemming the tide of the Impact of the
Economic Crises
Capitalism is not beyond improvement!
“With the US markets in crisis, the financial markets hit a
new low. The rescues, bankruptcies and dizzying write-downs
signal a reckoning for Wall Street wizards who engineered the
credit crisis. The liquidity capacity of these markets was
overwhelmed with the pattern of ever-lowering interest rates
that arose from the tech stock bubble of the late 1990s”
January 7, 2012 BT Costantinos, PhD Slide 2

3. A Century of crises and Marx
The U.S. Sub-Prime Mortgage Crisis (2007-2009)
US Dotcom bubble (2000)
The Asian Financial Crisis (1997-1998)
The Collapse of the Japanese Asset Price Bubble (1990s)
The Latin American Debt Crisis (1980s)
The 1973 Oil Crisis (1973-1975)
The Great Depression (1929-1939) - Wall Street Crash in October 1929
Marx argued that this alienation of human work (when labour itself
became a commodity) and surplus value are precisely the defining
feature of capitalism. Marx believed that this cycle of growth,
collapse, and growth would be punctuated by increasingly severe
crises. This can easily be applied to the current global situation,
because alienation is still a challenge.
But, some suggest that self-interest and the need to acquire capital is
an inherent component of human behaviour, and is not caused by
the adoption of capitalism
January 7, 2012 BT Costantinos, PhD Slide 3

4. The world of derivatives
Economists believe derivatives will allow more precise pricing of
financial risk and better risk management, while they concede that
when derivatives are misused, the leverage that is often an integral
part of them can have devastating consequences.
The world of derivatives is peppered with brain-teaser lingo:
• a forward contract commits the user to buying or selling an asset at a
specific price on a specific future;
• a future is a forward contract traded on an exchange;
• a swap is a contract by which two parties exchange the cash flow linked to a
liability or an asset;
• an option is a contract that gives the buyer the right, but not the obligation,
to sell or buy a particular asset at a particular price, on or before a specified
date;
• an over-the-counter is a derivative that is not traded on an exchange but
is purchased from, say, an investment bank;
• Exotics are derivatives that are complex, available in emerging economies
• Plain-vanilla derivatives, are typically exchange-traded, relate to
developed economies and are comparatively uncomplicated.
January 7, 2012 BT Costantinos, PhD Slide 4

5. The crises shook world-wide
confidence in the system resulting in
declining global wealth

6. Global impact of the financial crises
Stock market wealth declined by 40-60% in Dollar terms–World bank, Morgan
Stanley capital International Indexes, IFC/S&P

7. Investment demand fell sharply worldwide
Export volumes and demand plummeted sharply

8. Does the Crunch affect the
Afro-Arab World?
• Businessmen have always moaned about the excessive
regulations and conservatism of Afro-Arab Region banks.
Controls on foreign exchange often prevent them raising
more money by investing in exciting financial instruments.
Foreign ownership of banks is limited.
• Now, however, this very de-linkage from the Western
financial system has turned out to Afro-Arab Region’s
advantage. Its banks have almost no exposure to the
subprime market causing such havoc elsewhere in the
world.
• No one doubts that Afro-Arab Region will feel the effects of
the crisis eventually. As world trade contracts, so will the
demand for Afro-Arab Region’s oil and minerals, the main
commodities behind its current boom and aid to imperilled
Afro-Arab Region. There is a reasonable chance that Afro-
Arab Region may survive the current world financial crisis
less bruised and battered than some other parts of the
world. The very factors that damaged the continent in the
past may now be working in its favour
January 7, 2012 BT Costantinos, PhD Slide 8

9. Impact of the global crises
Increase in the number of poor due to changes in food prices
(since December 2005)
Global Food Prices 2008 Food prices in 2009
Lower bound estimate Upper bound estimate Lower bound estimate Upper bound estimate
24,000,000 26,000,000 21,000,000 22,000,000
Source: World Bank, Global Income Distribution Dynamics
Note: Lower bound estimate assumes low-income farm laborers work for low-income farm owners. Upper bound
estimate assumes low-income farm laborers work for rich farmers. Poverty line is 1.25 (2005) dollars per day
Decline in Tourism
Declines overall ODA – Multilateral, bilateral, NGOs
Proprietary and open knowledge investment flows decline
Capital outflows
Portfolio investment plummets, bonds and stocks are held,
Short term credit provided by foreign to local banks ceases
de-leveraging of banks;
exchange rate falls at unprecedented rate

10. Net capital inflows:
developing nations
Dramatic Decrease
Increasing trend

11. Corruption and Foreign Aid:
January 7, 2012 BT Costantinos, PhD Slide 11

12. Pricing, quantity, and
Social impact of a Binding
Price Ceiling
Non-binding price ceiling
This is the principle that the market price rises or falls to the level at
which the quantity of a good people are willing to supply is equal to
the quantity that other people want to buy. Nevertheless, sometimes
governments for political reasons or for reasons of equity may wish
to over-ride that principle. When they do, the outcome is
predictable. Hence, our ability to predict what will happen when
governments try to control supply and demand shows the power and
usefulness of supply and demand analysis itself.
January 7, 2012 BT Costantinos, PhD Slide 12

13. Part II
Stemming the tide of the Impact
of the Economic Crises in Afro-Arab
Region, Advancing Human Development,
and Protecting Human Security
“A system needs to be designed where
participants cannot threaten the safety of the
economy. The swaps market, often involving
individually tailored contracts, has virtually no
regulation. To assess risks building up in the
system, regulators should demand more
transparency as oversight of different types of
securities needs to be more consistent”.
ACCA Lecture - BT Costantinos,
January 7, 2012
PhD Slide 13

14. China's hunger for African exports
3500
3000 1 9 9 9 =1 00
China & The 2500
2000
Afro-Arab
1500
1000
500
Region 0
Soy abean s Cr u del oil Min er als
1 999 2001 2003 2005 2007
China has become the source of billions for Afro-
Arab Region and one of the voices for the poor
nations and the Region's most audacious
financier. The China ExIm bank has facilitated
loans to the tune $10 billion to the Region, albeit,
on more commercial terms..
January 7, 2012 BT Costantinos, PhD Slide 14

15. Is developmentalism the way forward?
• Proponents of a strong developmental state in Afro-Arab
Region assert that reforms neo-liberal market reforms pushed
by the Washington Consensus have failed to generate the
kind of growth they sought in Afro-Arab Region. Hence strong
developmental states are the way forward, as they in any way
endanger the reforms of good governance because only those
that were home-grown ever had a chance of success.
• On the other hand, there exit current schools of thought that
“organisational adaptation to political emergencies is part of
public policy. It is an ad hoc process -- rather than societal
convergence, the emerging system is adapted to the process of
co-evolutionary and separate development that systemic crisis
in Afro-Arab Region has given rise to - developmentalism
that is hooked to the umbilical cord of international
charity and thus the incorporation of aid in national
development.
January 7, 2012 BT Costantinos, PhD Slide 15

16. Governance issues in
Developmental States
• Governments recognises that strengthening State
Independent Institutions
capacity will have major knock-on effects for all •Legislature
other areas of development and poverty reduction •Judiciary
agenda. •Ombudsman
• A key distinction, which runs through much of the •Human Rights
history of political theory: Developmentalists emphasise •Auditor General
the stewardship/ guardianship while neo-classical •Inspector General
economists augur its guiding functions guiding/steering
•Justice system
responsibilities of the state on the other.
• GOVERNANCE is the conscious management of regimes •Anti-corruption
with the aim of enhancing the effectiveness of political •Attorney General
authority and applied realm of politics, in which •CSOs
political actors seek mechanisms to convert •Professional
political preferences into managing society. It Associations
involves improvements in the technical competence and • Media
efficiency of the public sector as well as measures to
…
make public policy more accountable, transparent, and
predictable to society at large.
January 7, 2012 BT Costantinos, PhD Slide 16

17. Requisites for economic governance
1. The first requisite of good economic
• Finance
governance is the spirit of Legislation
tolerance. It requires that political Political • Ownership
Governance of structure
and policy differences are resolved finance
in a spirit of respect for the views of institutions
others, more specifically, citizens.;
2. The spirit of tolerance is enhanced
• Policy and
if there is a proper recognition of Strategy
the right and responsibility of • Structure and
Economic
citizens and entrepreneurs - right of Governance Process
association and expression for
collective action;
3. Diffusion of power is achieved • Purposeful
through the establishment of mobilization
• Social Safety nets
independent institutions for the
Social • Corporate Social
performance of state functions; Governance Responsibility
January 7, 2012 BT Costantinos, PhD Slide 17

18. Consultative Council on
Fiscal Affairs (CCFA)
• CCFA should be set-up as the highest authority
for consideration of socio-economic policy
analysis, formulation, and management in
relation to economic activities reflective of
long-term policy objectives.
• While ministries and district administrations
formulate their respective plans, the CCFA will
undertake real time analysis of the challenges
facing the economy from a global perspective.
• The CCFA will be constituted from citizens of
all walks of life with a potential for
international advisory services by think tanks
and renowned development practitioners
addressing issues of abject poverty and
economic and financial management. Slide 18
January 7, 2012 BT Costantinos, PhD

19. Policy options for Afro-Arab Region
• Civic and parliamentary oversight committees,
especially in the area of public accounts,
• Creating a metric civil service for rebuilding
public confidence in the state and the market
• Optimizing state involvement in the economy,
streamlining government, limiting discretionary
decision-making to reduce opportunity for
corruption, eliminate state monopolies, economic
distortions which facilitate it
• Reviewing the quality of training and education
• Non-inflationary sources of finance and sound
FDI climate (telecom, power, transport, etc…)
• Conditional cash transfers, investments in labor-
intensive infrastructure
• Finance management reforms
• Founding independent human quality development
think tanks - investment in human qualities. Slide 19
January 7, 2012 BT Costantinos, PhD

20. Sovereign Wealth Funds and
potential for investing them in Africa
Country Fund Billions $
UAE ADIA 712.4
Forex reserves ($Millions)
Saudi SAM 439.1
Kuwait KIA 202.8 Saudi Arabia 456,200
Qatar QIA 85
Libya 107,300
Iraq 45,680
Libya LIA 70
Nigeria 43,360
Algeria RRF 56.7
Egypt 27,812
Iran OSF 23
Morocco 23,638
Bahrain MHC 9.1 Kuwait 22,420
Oman SGRF 8.2 Qatar 22,410
Saudi Arabia PIF 5.3 Tunisia 7,804
Nigeria ECA 0.5
January 7, 2012 BT Costantinos, PhD Slide 20

21. Assets under management of SWFs
increased to $4.7 trillion in July 2011,
• There is an additional
– $6.8 trillion held in other sovereign investment
vehicles, pension reserve funds, development
funds, state-owned corporations’ funds
– $7.7 trillion in other official foreign exchange
reserves.
– Countries with SWFs funded by commodities'
exports, primarily oil and gas exports, totalled
$2.7 trillion at the end of 2010.
– Non-commodity SWFs totalled $1.5 trillion.
• Part of this huge sums are Afro-Arab
resources and more that are FROZEN in the
hands of Western banks could have been
invested in Africa.
January 7, 2012 21
BT Costantinos, PhD Slide

22. Democratic regime change:
Rules and institutions
• Rules
– Constitutional rules
– Legislated Rules
– Administrative Rules
• Institutionalisation of rules
– Impartial and independent electoral bodies are vital;
– The Bill of Rights, entrenched in the Constitution, must
be respected to the letter.
– An independent judiciary (in theory and practice) is the
last hope against tyranny.
– Political parties are vehicles through which democracy
is practised. They must show respsonsibility that goes
Slide 22
with the mandate. BT Costantinos, PhD
January 7, 2012

23. Political rules and institutions
Democratisation requires a plural set
of organisations which promote and
protect rules of peaceful political
participation and competition.
Together, democratic institutions
(plural organisations plus rules of
accountability) ensure control of the
state executive. The relative strength
of organisations determines the rules
of the game installed.
January 7, 2012 BT Costantinos, PhD Slide 23

24. Strategic approaches in mainstreaming a
Rights-based Approach to Recovery
Rights-based enquiry and situation analysis
Evaluation Policy & Strategic analysis and
Managing strategic Strategic Framework
Information
Rules and Institutional
Sustained Arrangements
Implementation of
Mainstreaming operational
Activities
Plans
RBA local level decentralised management
Strong systematic campaigns must be launched with a communication strategy
developed to include public relations to enlighten society, social marketing
of new ideas and ‘cultures’ and enabling negotiations, and advocacy.
January 7, 2012 BT Costantinos, PhD Slide 24

25. Thank
You
BT Costantinos, PhD
Professor of Public Policy, School of Graduate
Studies, Addis Ababa University
costy@costantinos.net
January 7, 2012 BT Costantinos, PhD Slide 25