• Wednesday, May 29, 2024
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BusinessDay

The crises nexus

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Graciana del Castillo

Policymakers, academics, and journalists usually discuss the global financial crisis and the wars in Afghanistan and Iraq as if they somehow exist on parallel tracks. But today’s financial and foreign-affairs crises are in fact closely linked. Indeed, the way the world has sought to resolve the financial crisis offers interesting insights about how the foreign-affairs crisis should be approached. Today’s foreign-affairs crisis goes well beyond Afghanistan and Iraq. The record of countries that move from conflict to a fragile peace through military intervention or negotiated settlements is dismal: roughly half of them revert to conflict, leading to more human tragedy and large numbers of refugees. Moreover, failed states are an incubator for terrorism, trafficking of drugs and people, piracy, and other illicit activities. Of the half that remains at peace, the large majority end up highly dependent on foreign aid hardly a sustainable model in the context of the global financial crisis.
The two crises have created immense human suffering worldwide: thousands of families have lost loved ones in wars, and the financial crisis has taken people’s jobs, livelihoods, assets, pensions, and dreams, as well as worsening fiscal and debt conditions in most industrial countries. As a result, taxpayers in donor countries are demanding more transparency and accountability in how their money is spent both domestically and abroad and rightly so.

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There are notable links between the two crises. The war in Iraq contributed in part to the increase in oil prices from $35 per barrel in 2003 to $140 in 2007. This increase put pressure on businesses and consumers, and was a major factor in the increase in world food prices. As prices went up and recessionary pressures increased, many homeowners failed to pay their mortgages. The sub-prime sector in the United States was hit, and the financial crisis spread from there.
Both crises require policymaking that departs from business as usual. Short-term emergency policies are needed to deal with high unemployment, home foreclosures, business bankruptcies, and often with hunger, disease, and a number of other ills. Emergency or humanitarian policies may improve basic consumption in the short run, but they may also discourage investment, increase inflation, and lower prospects for economic in the long run. As a result, such policies should be discontinued as soon as possible.
Recovering from both crises will require effective economic reconstruction to create jobs. In addition to restructuring the financial sector, recovery programs in the US, the United Kingdom, and other industrial countries hardest hit by the financial crisis must include relief for home and business owners, and job creation through infrastructure projects, clean-energy technologies, and improvements in healthcare and education.

In Afghanistan and Iraq, reconstruction must include not only the rehabilitation of services and infrastructure, but more challenging the creation of a macroeconomic, legal, and regulatory framework for effective policymaking. To avoid a continuation of conflict and aid-dependency, the main focus of the international aid commitment should be to reactivate small enterprises and promote startup companies in various sectors in order to create viable economies that enable people to earn a legal and decent living.