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Future of capitalism: Is it failing?
Economic Systems 34 (2010) 1–2
Contents lists available at ScienceDirect
Economic Systems jo urnal homepage: www.elsevier.com/loc ate/ecos ys
Editorial
Future of capitalism: Is it failing? JEL classification: E5 E6 F3 F5 G2 G3 P1 O16 O51 O52 N1 R58 Keywords: Capitalism International capital flows Global financial and economic crisis Financial reforms Competition Economic and political freedom The European Union China India Estonia
A B S T R A C T
This special issue includes six papers on issues regarding the recent 2007–2009 global financial crisis. They discuss the underlying reasons for the crisis, offer reforms for preventing future crises, and provide some empirical estimates of the unit price of risk associated with the crisis. In addition, the experience of some individual countries and the European Union dealing with the crisis is explored. Regarding future prospects, the appetite of Chinese and Indian citizens for a capitalistic society is evaluated, and it is investigated whether capitalism is a necessary condition for political freedom. ß 2010 Elsevier B.V. All rights reserved.
The recent 2007–2009 global crisis, which was initiated in the US, has affected many countries and consumers and investors alike. It has brought the biggest recession since the great depression. As a result, many observers have questioned the functioning of free capital markets and even argued that capitalism might be dead. To deal with the crisis, US policymakers, followed later by policymakers of major industrial countries, have implemented a battery of monetary and fiscal policy packages. As we enter the beginning of 2010, it seems that these policies have calmed down the financial markets, but the real sector is still hurting and suffering from high unemployment rates and growing national debt in many industrial countries associated with bailout programs and expansionary fiscal policy may further damage long-run economic growth if the debt causes high real interest rates. The aim of this special issue is to better understand the reasons behind the crisis, compare it with other important historical crisis episodes, provide some estimates of the unit price of risk of the current crisis, and summarize the several suggestions and reform proposals put forward in the literature not only to remedy the current crisis but also to prevent future crises. In addition, some country experiences are provided. Finally, some future prospects about the further viability of the capitalistic system in the world’s two largest nations (China and India) and the necessity of capitalism for political freedom are evaluated. 0939-3625/$ – see front matter ß 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.ecosys.2010.01.001
2
Editorial / Economic Systems 34 (2010) 1–2
In the first paper of this special issue, Turalay Genc and Sel Dibooglu provide some description of the origin of the crisis and evaluate the crisis within a historical context. They estimate the unit price of risk associated with the crisis and compare it with that from other notable recessions in the last century, including the great depression. Then they discuss the link between global imbalances and the current crisis. Finally, they summarize various suggestions put forward in the literature to better allocate global financial resources in order to prevent future financial crises. In the second paper, Richard Pomfret argues that financial development exacerbated by easy monetary policy has increased the vulnerabilities of national economies to financial crises. He reviews the evidence on the link between financial development and economic growth and discusses the need for regulation. He summarizes the developments during the 2007 crisis and points out the common features of financial crises since the 1970s. Finally, he evaluates whether capitalism is indeed failing. The next paper by Marek Dabrowski discusses Europe’s response to the current crisis. He argues that the response from European policymakers not only came quite late, but was not well coordinated either. He outlines the challenges related to large scale fiscal intervention to deal with the current crisis. Finally, he discusses the role and responsibility of the European Union (EU) in addressing global macroeconomic crises and fiscal challenges, including those faced by the new members of the Union. Different countries have been affected by the current crisis differently. In the next paper, Zuzana Brixiova, Laura Vartia and Andreas Wo¨rgo¨tter discuss the experience of Estonia. They first summarize the reasons for the country’s significant capital inflows before the crisis and how this led to credit and real estate booms. Then they discuss how the crisis has affected the economy. Finally, they suggest policy measures to bring it back on a sustainable growth path again and to prevent future recessions. The last two papers provide some prospects for the future of capitalism and its impact on political freedom. Matteo Migheli studies whether Chinese and Indian citizens support a competitive and free market. He also tests whether one nation prefers it more than the other and whether there has been a change in this preference over time. He finds that the Chinese appear to have a stronger preference for a capitalistic system than the Indians. However, there has been a change in the trend of these preferences over time: Both countries now tend to have a less competitive market. Migheli explores the reasons for this. Finally, Frederic L. Pryor provides empirical evidence for Milton Friedman’s claim that capitalism is a necessary condition for nations to have political freedom. In the context of the current crisis and the declining role of capitalism, testing this hypothesis is very timely and critical. Using crosssection regressions, Pryor finds no supporting evidence for Friedman’s conjecture. He finds no reverse causation either. These results are interesting and more work on this issue would be fruitful. Coming back to the question whether capitalism is failing, the discussions and findings in the papers in this issue suggest that capitalism is here to survive but the role played by governments is likely to increase over time. I would like to thank all the authors and referees for their valuable work for this issue. The findings presented here have significant implications for policymakers and all other stakeholders. I hope that this work will further the research on the current crisis and the effects of implemented policies on economic activity, in particular on long-run economic growth. Ali M. Kutana,b,c* Economics and Finance Department, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA b The Emerging Markets Group, Sir Cass Business School, London, UK c The William Davidson Institute, The University of Michigan Business School, USA a
*Correspondence
address: Economics and Finance Department, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA. Tel.: +1 618 650 3473; fax: +1 618 650 3047 E-mail address: [email protected]
Contents lists available at ScienceDirect
Economic Systems jo urnal homepage: www.elsevier.com/loc ate/ecos ys
Editorial
Future of capitalism: Is it failing? JEL classification: E5 E6 F3 F5 G2 G3 P1 O16 O51 O52 N1 R58 Keywords: Capitalism International capital flows Global financial and economic crisis Financial reforms Competition Economic and political freedom The European Union China India Estonia
A B S T R A C T
This special issue includes six papers on issues regarding the recent 2007–2009 global financial crisis. They discuss the underlying reasons for the crisis, offer reforms for preventing future crises, and provide some empirical estimates of the unit price of risk associated with the crisis. In addition, the experience of some individual countries and the European Union dealing with the crisis is explored. Regarding future prospects, the appetite of Chinese and Indian citizens for a capitalistic society is evaluated, and it is investigated whether capitalism is a necessary condition for political freedom. ß 2010 Elsevier B.V. All rights reserved.
The recent 2007–2009 global crisis, which was initiated in the US, has affected many countries and consumers and investors alike. It has brought the biggest recession since the great depression. As a result, many observers have questioned the functioning of free capital markets and even argued that capitalism might be dead. To deal with the crisis, US policymakers, followed later by policymakers of major industrial countries, have implemented a battery of monetary and fiscal policy packages. As we enter the beginning of 2010, it seems that these policies have calmed down the financial markets, but the real sector is still hurting and suffering from high unemployment rates and growing national debt in many industrial countries associated with bailout programs and expansionary fiscal policy may further damage long-run economic growth if the debt causes high real interest rates. The aim of this special issue is to better understand the reasons behind the crisis, compare it with other important historical crisis episodes, provide some estimates of the unit price of risk of the current crisis, and summarize the several suggestions and reform proposals put forward in the literature not only to remedy the current crisis but also to prevent future crises. In addition, some country experiences are provided. Finally, some future prospects about the further viability of the capitalistic system in the world’s two largest nations (China and India) and the necessity of capitalism for political freedom are evaluated. 0939-3625/$ – see front matter ß 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.ecosys.2010.01.001
2
Editorial / Economic Systems 34 (2010) 1–2
In the first paper of this special issue, Turalay Genc and Sel Dibooglu provide some description of the origin of the crisis and evaluate the crisis within a historical context. They estimate the unit price of risk associated with the crisis and compare it with that from other notable recessions in the last century, including the great depression. Then they discuss the link between global imbalances and the current crisis. Finally, they summarize various suggestions put forward in the literature to better allocate global financial resources in order to prevent future financial crises. In the second paper, Richard Pomfret argues that financial development exacerbated by easy monetary policy has increased the vulnerabilities of national economies to financial crises. He reviews the evidence on the link between financial development and economic growth and discusses the need for regulation. He summarizes the developments during the 2007 crisis and points out the common features of financial crises since the 1970s. Finally, he evaluates whether capitalism is indeed failing. The next paper by Marek Dabrowski discusses Europe’s response to the current crisis. He argues that the response from European policymakers not only came quite late, but was not well coordinated either. He outlines the challenges related to large scale fiscal intervention to deal with the current crisis. Finally, he discusses the role and responsibility of the European Union (EU) in addressing global macroeconomic crises and fiscal challenges, including those faced by the new members of the Union. Different countries have been affected by the current crisis differently. In the next paper, Zuzana Brixiova, Laura Vartia and Andreas Wo¨rgo¨tter discuss the experience of Estonia. They first summarize the reasons for the country’s significant capital inflows before the crisis and how this led to credit and real estate booms. Then they discuss how the crisis has affected the economy. Finally, they suggest policy measures to bring it back on a sustainable growth path again and to prevent future recessions. The last two papers provide some prospects for the future of capitalism and its impact on political freedom. Matteo Migheli studies whether Chinese and Indian citizens support a competitive and free market. He also tests whether one nation prefers it more than the other and whether there has been a change in this preference over time. He finds that the Chinese appear to have a stronger preference for a capitalistic system than the Indians. However, there has been a change in the trend of these preferences over time: Both countries now tend to have a less competitive market. Migheli explores the reasons for this. Finally, Frederic L. Pryor provides empirical evidence for Milton Friedman’s claim that capitalism is a necessary condition for nations to have political freedom. In the context of the current crisis and the declining role of capitalism, testing this hypothesis is very timely and critical. Using crosssection regressions, Pryor finds no supporting evidence for Friedman’s conjecture. He finds no reverse causation either. These results are interesting and more work on this issue would be fruitful. Coming back to the question whether capitalism is failing, the discussions and findings in the papers in this issue suggest that capitalism is here to survive but the role played by governments is likely to increase over time. I would like to thank all the authors and referees for their valuable work for this issue. The findings presented here have significant implications for policymakers and all other stakeholders. I hope that this work will further the research on the current crisis and the effects of implemented policies on economic activity, in particular on long-run economic growth. Ali M. Kutana,b,c* Economics and Finance Department, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA b The Emerging Markets Group, Sir Cass Business School, London, UK c The William Davidson Institute, The University of Michigan Business School, USA a
*Correspondence
address: Economics and Finance Department, Southern Illinois University Edwardsville, Edwardsville, IL 62026-1102, USA. Tel.: +1 618 650 3473; fax: +1 618 650 3047 E-mail address: [email protected]