UP THE STAIRS GOING DOWN

We will hardly be mistaken if we describe the global financial crisis as the most popular topic of discussion among the politicians and economists of different countries. What does this financial crisis represent and what are the reasons behind it? It is a default of the financial system of a country, accompanied by inflation, non-payment, sharp fluctuations in currency rates and the outflow of foreign investment. A considerable budget deficit is an important manifestation of such a crisis.

In the late 19th and early 20th centuries financial crises were caused by the excessive production of goods, they were not long or deep and affected one or more countries. In the latter half of the 20th and early 21st centuries, at a stage when the global financial system has been formed, the crises are deeper, sharper and longer, they affect most countries and become global in nature.

The qualitative change in crises and their global development is explained by a globalization of the economy.

The new role of financial markets in recent years has dramatically changed the architecture of the global economy. Several decades ago the main objective of financial markets was to ensure the operation of the real economy. In recent years the global financial market has been self-sufficient. As a result of a broad spectrum of speculative operations, this market has increased in volume. The process of making money from money has become much simpler due to the exclusion of the production of goods and services. Production, i.e. the real economy, has been replaced by speculative operations involving different financial instruments and gambling on the differences in currency rates.

The colossal proportions and turnover of the international financial market pose a serious threat to the global economy. The vast amounts of speculative capital circulating freely around the globe can easily revive or collapse the financial system of practically any state. Recent history has seen quite a few examples. They include the decline of the national currency in the UK (1992) caused by the speculative operations of the George Soros Foundation, and the recent Asian crisis (1998). Today only 10% of all financial operations in the international currency market serve foreign trade, i.e. real production.

Recent decades have seen a flow of capital from the real sector into the financial one. Today we are approaching the absolute limit of redistribution: it is no longer possible to support the speculative economy by reducing expenditure in the real sector.

Classical political economics considered that the most significant relations were concentrated in production. Then came distribution and exchange, while consumption, despite being the ultimate goal, was a derivative. Karl Marx stressed the primacy of production and underscored the need to maintain proportion between different spheres of production, distribution, exchange and consumption.

It is no wonder that the current crisis, which has led to bankruptcies and mass layoffs, has revived interest in Marx's ideas in Europe. Publishers from Berlin are saying that "Capital", the programmatic research by the founder of scientific communism, is literally flooding out of bookstores. Politicians have quickly captured public sentiment. French President Nicolas Sarkozy has recently been photographed reading "Capital". German Finance Minister Peer Steinbruck has said, "Some of Marx's arguments are not so bad in practice." The church had its say, too. Pope Benedict XVI praised Marx for his "great analytical skills". The head of the Anglican church has said, "Marx long ago described the way in which unbridled capitalism turns into a mythology stealing away reality". The picture is completed by the fact that about 40,000 tourists visited Karl Marx's homeland of Trier last year, while German film director Alexander Kluge has begun making a film about "Capital".

So, what do we see? The halt in the flow of money in national economies is caused by the fact that there are very few spheres in the global economy in which it would be rational and profitable to invest resources. Speculation in oil has become one of the most attractive businesses. So has the play on food prices. Such measures are leading to global catastrophe in the world's economic system, but no-one seems to care.

A new situation has taken shape in the world economy - global economic devolution. Whereas revolution is a sudden change in socioeconomic or scientific and technical development, and whereas evolution is a movement forward, devolution is a deviation from the objectives desired, i.e. a backward movement!!! This means the reversal of global economic indicators to the levels of previous years!

Since mid-2008 the global economic environment has indicated that society is moving backwards. If we take as a basis the situation in the world's financial systems and the extremely unstable economic situation in all leading countries, we can clearly observe a devolutionary economic trend. Even in its "Prospects for the global economy in 2009" report, the World Bank predicts a decrease in the growth of global GDP to 0.9%.

At the same time, although the growth of developing economies in 2007 constituted 7.9%, the World Bank predicts that the figure for this year will be 4.5%. Thus, as we can see, in addition to the slowdown of the world economy, economic might is gradually shifting towards China, India and developing countries as a whole. Revenues and currency reserves have also changed in favour of China and oil exporting countries: in 1998 OPEC countries collectively received $100 billion and Russia $30 billion, while in 2007 their revenues increased sevenfold - to $700 and $210 billion respectively.

In addition to economic devolution, devolution also affects production. The life spans of production assets and consumer goods are shortening. The service period of household appliances, cars, equipment, clothes is being deliberately reduced in order to speed up their replacement by new goods. This is intended to encourage the consumer to spend more money. Further, thousands of tons of out-of-date goods pose a serious threat to the environment, the restoration of which will require millions. The military industry, weaponry, the fight against terrorism and the maintenance of peace and security also require colossal expenditure - these investments have nothing to do with the real sector of the economy.

Most economists believe that the global financial crisis is the consequence of the mortgage crisis in the US which, in turn, is attributed to collective mistakes by the administrations of a number of companies. The first indication of the downfall of the US financial system was the bankruptcy of the fifth biggest investment bank, Bear Stearns, which declared insolvency in July 2008.

Well-known financier George Soros has given the following description of the crisis: "Defaults have occurred everywhere. What started out with low-quality mortgages has spread to all bonds supported by other securities, endangering municipal and mortgage insurance companies and those dealing with secondary insurance, as well as the multi-trillion CDS (credit default swap) market."

Geoffrey Sucks, Professor of Economics at Columbia University, says the following about the financial crisis: "This global economic crisis will go down in history as 'Alan Greenspan's Madness'. This crisis was artificially created by the US Federal Reserve Department in the easy money period and by the termination of financial control from the mid-1990s to the present day… Greenspan created two balloons - the Internet 'balloon' from 1998-2001 and the subsequent 'balloon' in the housing market, which is about to blow up now."

At the end of 2008, almost 25% of US financial and credit institutions were unprofitable. This is the worst figure in 25 years. In January 2009, the number of new houses built in the US dropped to its lowest level in history. The collapse constituted 16.8%, or 466,000 houses, in one year.

A similar situation is observed in other countries. Thus, the decline in Japan's GDP in the fourth quarter of 2008 reached its worst level since 1974 - 12.1% in one year. The economy of Iceland has gone into deep recession. The UK army of unemployed is growing… In fact, recent weeks have seen indications that the situation in the world economy is deteriorating much faster than economists could have predicted. 

And yet, what are the key reasons behind the global economic recession? In my view, one of them lurks in the peculiarities of capital outflow, first of all, portfolio investment. This is explained by countries' abnormal economic development and the domination of transnational corporations. In the late 1990s, the total volume of out-flow capital was around $5 trillion, while direct investment by transnational corporations exceeded $3 trillion. Transnational corporations have worked hand in hand with transnational banks to form transnational financial capital which, supported by the world's most influential countries, exploits poorly developed countries and reaps the highest profits. This is excess and free capital. It leads to an uneven form of interstate flow of capital owned by the transnational state and supra-state oligarchy. Its objective is economic and political domination of the world.

The uneven nature of such capital outflow and the uneven economic development in different parts of the world create favourable conditions for the capture of such capital. This leads to the formation and development of contradictions between transnational financial capital and national economies. While in some parts of the world the mass and norm of transnational profit are declining, transnational financial capital is exported in the form of portfolio investment to the more profitable regions, which preconditions a financial crisis triggered by large-scale sales by non-residents of securities in local corporations. Such sales are executed in local national currencies which are exchanged for hard currency and exported. In parallel, foreign investors withdraw their currency deposits from commercial banks, thus generating immense demand for hard currency.

A huge number of transactions are carried out in the world's currency markets. By the end of the 20th century the volume of contracts involving currency were up to $1.3 trillion a day. Since a large number of such transactions are of a speculative nature, this strengthens the instability of exchange rates which, in turn, causes an increase in the volume of financial transactions. These transactions are stimulated by the existing currency system which has done away with the fixing of market exchange rates within a range of 1% of gold and dollar parities and enabled a regime of free rates. Imperfections in the world's currency system and the contradictions within it are yet more reasons for the financial recession, which has also exposed the shortcomings of the existing structure of international economic regulation. Neither the IMF nor the WB has been able to take measures to overcome or even mitigate the crisis.

The financial crisis has also given rise to different strategies of response: American and European "self-administration" in the USA and the EU, and assistance from international financial institutions in developing countries. In fact, the positions of the USA and Europe regarding further action diverge. The USA believes it is necessary to increase financial inflows to the economy, while the EU opposes such measures. It first wants to assess the effectiveness of previous measures and suggests focusing on the regulation of financial markets so far.

As for the CIS, they have experienced the consequences of the global financial crisis in the form of the depreciation of their national currencies. Thus, the Russian rouble has fallen 35% against the US dollar, while the country's gold and currency reserves shrank from $426.5 billion to $396.2 billion between 9 and 16 January. In other words, a total of $30.3 billion was channelled into maintaining the stability of the national currency in just one week. The Independent has published the losses suffered by Russian oligarchs: Abramovich has lost more than $20 billion, Deribaska $28.4 billion, Potanin $13.2 billion, Usmanov more than $14 billion, while Mordashov has lost up to three quarters of his wealth, valued at $22 billion.

In early February, the National Bank of Kazakhstan carried out a single-step depreciation of the national currency - the Tenge - by 18%. Since November 2008, Kazakhstan has been maintaining the exchange rate from the country's gold and currency reserves. In Ukraine the exchange rate fell by 40% and in Belarus by 20%. Latvia's gold and currency reserves have been reduced by 20%, in Lithuania and Estonia by 13%.

Considering the fact that the financial crisis is of global proportions and, as we said earlier, leads to economic devolution, a way out can be found only by the collective effort of all countries. Besides agreed international efforts, every country has to find its own recipe to suit its own national economy. Anti-crisis measures by CIS countries should focus on managing collective demand and supply. The implementation of such programmes should be based on mechanisms of financing and structural policies.

For example, financial mechanisms may include tax reductions, increases in state budget allocations to the real economy, financing mortgage programmes and the stabilization of the real estate market, targeted injections by central banks and measures to boost confidence in the financial system.

Mechanisms of structural policies may include improvements in the business environment, reform of the public sector and the creation of capital markets. Improving the business environment entails the simplification of procedures for doing business, real protection of ownership rights and private enterprise, and the elimination of monopolistic tendencies.

Has the global economic crisis affected the Azerbaijani economy? It is impossible to give an unequivocal answer. Our country is developing its economy in conditions of globalization and currency fluctuations. The decline in the cost of a barrel of oil from $147 to $40 leaves its mark on the national economy. At the same time, the thought-through strategy and effective tactics of the country's leadership has minimized the impact of the recession. Thus, over the last few years the Azerbaijani economy has been growing at the highest rate in the world. The growth in GDP in 2005 was 26.4%, in 2006 34.5%, in 2007 25.0% and in 2008 10.8%.

Over the last six years, the average real annual rate of growth in GDP in Azerbaijan is 2.5 times higher than that of all CIS countries!

World economic growth in 2008, as compared with 2003, was 25.4%, specifically: in the USA 13.3%, in EU countries 13.7%, in CIS 45.4% and in China 66.5%. The Azerbaijani economy has grown 2.6 times in the last five years.

The WB's "Prospects for the global economy in 2009" report says that our GDP will grow 10.4% in 2009 and the country will maintain its leadership over European and Central Asian states in GDP growth.

In 2010, the bank predicts a 7-8% growth in GDP in Azerbaijan, which is the highest, not only in the region, but also in the CIS.

Against the backdrop of national currency depreciations unfolding in CIS countries, our republic is managing to secure the stability of the Manat. Since the beginning of this year the rate of the Manat to the US Dollar has declined by 0.5%, while it has strengthened by more than 9% against the Euro. Azerbaijan possesses sufficient currency reserves to ensure the stability of the national currency. The country's gold and currency reserves exceed the volume of cash in circulation by 2.2 times.

I would like to sum up this analysis with the words of President Ilham Aliyev, spoken at a meeting of the Cabinet of Ministers of the Azerbaijan Republic on the results of socioeconomic development in 2008. "In the current crisis every country will show what it is capable of, what it will emerge with from the crisis. I am sure that Azerbaijan will come out even stronger," he said.