From Poverty to Power Green, Oxfam 2008 - weman

FROM POVERTY TO POWER• Sudden inflows can lead to currency appreciation, making thecountry’s exports less competitive.• The threat of crises forces governments to waste resourcesamassing huge ‘war chests’ of international reserves to wardoff a run on their currency.• The constant need to appease the markets can underminedemocratic government. Private credit ratings agencies suchas Standard and Poor’s or Moody’s judge the creditworthinessof governments, determining the interest rates at whichgovernments can borrow on financial markets. Their judgementon what financial risk is posed by different economicpolicies is typically based on a highly orthodox economicanalysis that has often been proved to be of limited value(see Part 3) but which exerts a huge influence over policydecisions, such as how much a government feels able tospend or the setting of interest and exchange rates.When a stampede of capital out of a country triggers a crisis, there isan almost inevitable sequence of events. The government raises interestrates in a vain attempt to lure investors back, but the exchange ratecontinues to drop, eventually triggering a run on the banks. Creditdries up and business grinds to a halt, job losses mount, and thegovernment turns to the international community for help.Such help comes at a price: governments are usually requiredby the IMF or other bodies to cut spending and raise interest rates,exacerbating the recession, and typically end up bailing out thefinancial sector by taking over its bad debts. Private debt is convertedinto public debt, so that creditors get paid but the taxpayers get stuckwith the bill. As one foreign banker admitted to the Wall Street Journalat the time of the Latin American debt crisis of the 1980s,‘We foreignbankers are for the free market system when we are out to make a buckand believe in the state when we’re about to lose a buck.’ 36The impact of these arcane financial manoeuvres on poor peoplecan be devastating. In the 1998–99 financial crisis, Indonesia’s economywas cut almost in half (a loss of 45 per cent of GDP). 37 In Argentina,poverty doubled in a single year during the crisis of 2001–02. 38 Sincerich people are usually better at protecting their assets (for example,by spiriting their wealth out of the country before a crisis hits), financial312