The World Council of Churches, which claims to speak for most Orthodox Churches around the globe, has formulated a number of proposals to reform the global financial system because of its inherent “injustice.” General Secretary Samuel Kobia sees the need for new transnational financial watchdog organizations that will “qualitatively regulate the growth in massive movements in capital.”
The problem here is that Kobia fails to understand that a global economy requires an international flow of capital — along with an international flow of goods and services and, very often, labor (indeed immigrant labor). In cataloging a long list of ills flowing from the current economic crisis, and the “neoliberal economic myth” of efficient markets, Kobia neglects to mention — or fails to see — how markets work to create wealth, economic growth and jobs. These are not things created by, as he would have it, “democratizing all global finance and trade institutions” across international boundaries. Nor is economic growth created by watchdog groups or ecumenical bodies. And Kobia also fails to see that in some of the most desperate regions of the developing world, including his own native Africa, more and more people are asking only for a chance to operate in a real market economy.
Here are some of Kobia’s more extreme proposals and my parenthetical responses:
— Debates on new financial architecture should include representatives of all developing countries and members from the civil society including religious communities. (Do we want church bureaucrats with no competence in economics or finance building this new “architecture”?)
— Support for the proposal for an International Convention to facilitate the recovery and repatriation of funds illegally appropriated from national treasury of poor countries. (Is this a reference to the massive corruption that exists in many developing countries and the looting of foreign aid dollars from these same developing countries? If we are talking about despotic kleptocrats with Swiss bank accounts let’s just say so.)
— Apply a Currency Transaction Tax to curb short-term volatility of capital movements and exchange rates. (Yes, and choke off flows of capital to developing countries? And the industrialized nations they do business with?)
“I sympathize with those who would minimize, rather than those who would maximize, economic entanglement among nations,” Kobia said in a Nov. 14 statement. “Ideas, knowledge, science, hospitality, travel-these are things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible and above all, let finance be primarily national.”
To the extent that Orthodox clergy or laity are taking Kobia’s proposals seriously, we are all in a lot of trouble in this Church (to see a list of Orthodox members of the WCC Executive Committee, go here). To illustrate just how extreme the WCC thinking is on these matters, read “Prudential Oversight of Finance: First Principles for International Cooperation” by Brooking Institution analyst Ralph C. Bryant. Brookings, the Democrat-leaning Washington think tank, is currently supplying much of the transition help for President-elect Barack Obama.
Bryant reminds us that the “beginning of wisdom about prudential financial oversight” is to eschew extreme perspectives and to recognize that these extremist remedies are unlikely to do any good in the present situation. Here he is on the manifold causes of the present crisis:
It is true that inadequate supervision and regulation of financial activity significantly contributed to the evolution of today’s crisis. Banks and nonbank financial institutions were allowed to become badly “overleveraged.” Financial institutions moved assets off their balance sheets to avoid having to hold adequate capital reserves. There was insufficient transparency, disclosure, and supervisory monitoring for complex financial instruments such as collateralized debt obligations and derivatives such as credit default swaps. Credit default swaps, essentially insurance contracts, were not subject to regulation acknowledging their insurance as well as derivative character. Hedge funds were not required to disclose sufficient information and were lightly regulated. Internal techniques for evaluating the risks taken on by financial institutions were faulty and were not adequately second-guessed by prudential supervisors. Credit-rating agencies failed to give cogent appraisals of the instruments they rated. Sadly, the preceding is merely a partial list.
Yet it is also true that today’s crisis had multiple causes. Inadequate prudential oversight was not the only, not even the primary, difficulty. Imprudent behavior of both lenders and borrowers in projecting housing values and in the origination of mortgages were critically important. First-best supervision and regulation could have mitigated that imprudence, but not forestalled it altogether. As investors became skittish and confidence declined sharply, the crisis became increasingly unanchored from its original triggers. Herd behavior led to a freezing of all lending and borrowing, which in turn threatened even healthy, adequately capitalized financial institutions.
Bryant offers a number of sensible principles for solving the current crisis including this:
World standards and oversight should, when possible, rely on market incentives rather than direct restrictions.
At the bottom of this post, I am offering some suggested reading for anyone interested in learning more about market economics, including some specifically Christian views. But first, some observations from Africans working hard to introduce market-based systems in their own economies.
Thompson Ayodele of The Initiative for Public Policy Analysis in Lagos, Nigeria:
Millions of Africans are today on the verge of starvation. Millions more are malnourished and millions die each year because they lack of clean drinking water and good sanitation. All of these are ultimately the consequence of our poverty. The conclusion is obvious: If we are to be enabled to fight diseases, our incomes must rise.
Unfree trade spells misery for Africa, where over 60 percent of the labor force are farmers who struggle to grow enough food to feed their families, much less generate an income. One way to increase investment is to increase demand. But demand won’t increase unless agricultural income increases. This is how Africans can create wealth to fight various diseases and live decent lives.
James Shikwati of the Inter-Region Economic Network in Kenya:
The gap between the rich and the poor in Kenya is expanding at a very high rate despite the improved national outlook on economic growth. Aid tends to expand the political elite as opposed to the business elite. In order to fight poverty, a sector of business class innovators must transform Kenyan problems into business opportunities; but aid makes it difficult for local innovators to respond to the needs of their immediate environment.
Foreign aid ought to be avoided and replaced with sound policies that promote a healthy business environment. For instance, if African governments focused on improving and enforcing the rule of law, it would be easier for international venture capitalists to partner with Africans to make products and generate profits. Another option is to fund initial business start-ups through expanded and competitive stock markets in Africa. African entrepreneurs should to be provided the opportunity to allow private capital investments from all over the world to expand and improve their businesses. A business-oriented population will be more productive, more willing, and more driven by the motive of profits and could thus provide solutions to Kenyan problems ranging from famine and disease to poverty in general. Excessive reliance on aid precludes the development of a self-sufficient agricultural sector, perpetuating an unsustainable short-term approach to food policy.
Economics in Christian Perspective: Theory, Policy and Life Choices, by Victor V. Claar and Robin J. Klay (IVP Academic, 2007).
The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, by Hernando de Soto (Basic Books, 2000).
Wealth and Poverty in Early Church and Society (Holy Cross Studies in Patristic Theology and History), edited by Susan R. Holman.
A Humane Economy: The Social Framework of the Free Market, by Wilhelm Ropke (Intercollegiate Studies Institute, 1999)