Getting to work with the hangover of 2008

Prateek Awasthi (@prateekawasthi) is the Director of Policy and Advocacy at Engineers Without Borders (EWB) Canada.

For a lot of people, this past week included returning from the holidays, making resolutions (here are some tips from psychologists on how to keep them!) and returning to work (here is what the US National Institutes of Health has to say about hangover treatments).

While most Canadians are getting back to work (with the jobless rate at an all time low), this isn’t the case for about 200 million people around the world who are unemployed and the hundreds of millions more who are underemployed. In fact, with the world going the way it is, being able to go to work isn’t something we can take for granted (not just because robots may steal your job).

The global economy is growing but still hasn’t recovered from the 2008 economic crisis, and what little growth there has been since then is not creating jobs like it used to. The U.S. Federal Reserve has added 3.5 trillion in new money since 2008, and European, Chinese and Japanese banks did the same; however, that money was not being invested by lending to businesses, for example, but is being used to purchase financial instruments, sitting unspent in private equity funds, or being dumped in the stock market. As a result, we don’t have the real economic growth we need, just rising asset prices (and big bonuses for financiers).

Let me explain.

When you deposit your savings with a bank, they lend it to entrepreneurs who are growing their businesses (through loans or by purchasing shares in their companies). These entrepreneurs use the extra money to hire more workers and buy new machinery, and sell their goods or services in the market. When they make profits, they pay back the banks, who in turn, pay you back with interest. Of course, it’s more complicated than this, but in its basic form, this is how the economy grows and wealth is created. Or at least that’s how it’s supposed to work.

Recently, however, banks have been more interested in making money from speculating on assets – trying to buy low and sell high on anything that’s being traded. Derivatives (such as swaps, options, futures, and other complicated contracts) are one example. Technically, these contracts are supposed to reduce financial risk and have an important place in a modern market, but instead bankers are creating, buying and selling these contracts at a dizzying pace, creating instability by driving up the prices.

As a result of this activity (which some describe as gambling), derivatives are now valued at over one thousand trillion dollars (no, that’s not a typo, it’s a quadrillion dollars, which is over 20 times the world’s GDP). That makes the speculation on Bitcoin look like peanuts. More importantly, it does not make the necessary capital available to entrepreneurs who are struggling to grow their business.

Sound familiar?

To some extent, the 2008 economic crisis was caused because banks failed to do their job – which is to convert savings into investment that grow the economy. Instead, banks decided to make money from buying and selling mortgages, and increasingly complex contracts, such as mortgage-backed securities and credit default swaps, that were in some way based on the underlying mortgages. At a certain point, everyone lost track of what they had actually bought or sold, and what the value of the underlying assets were, causing the financial crisis (which was described so memorably in the movie, The Big Short) and leaving us with an economic hangover that just won’t go away.

The lesson we ought to have learned is that increases in asset prices (whether derivatives, bitcoin or houses) is not the same as real economic growth. What we need today are new investments in renewable energy, sustainable transport, smart cities, advanced medicine, and other promising areas of the new economy that will create high-paying jobs of the future we need.

Looking ahead.

If we are to look ahead to the 2020s and 2030s, the issue of getting – and keeping – a job is only likely to get more difficult. About 40 million young people are expected to join the labour force every year, mostly in sub-Saharan Africa and Asia, meaning we will need to create almost 600 million new jobs over the next fifteen years to absorb them.

This is a huge challenge, but it may be our greatest chance to end poverty and reduce inequality in the world.

Good productive jobs have been responsible for over 40% of the reduction in poverty in the previous decades. All we need to do is to make investments in new businesses and entrepreneurs (how’s that for a new year’s resolution?), because that’s how we make the real economy grow and since 90% of all jobs are created by the private sector.

That’s why EWB is investing in ventures, providing much needed capital to entrepreneurs who are creating new socially-responsible businesses, and calling on Canada’s Development Finance Institution to do the same. In fact, many countries around the world are providing loans to the private sector as a part of their overall development assistance envelope.

What’s better – grants or loans? And if a loan is made at conditions better than market-rate, how much of that should be counted as a grant? How should the two should work together? These have been subjects of some controversy – which we will explore by hosting a debate between two international development heavyweights: Julia Sanchez, the President and CEO of the Canadian Council for International Cooperation (CCIC), and Aniket Bhushan, the Lead Analyst and Principal Investigator at the Canadian International Development Platform (CIDP) at our upcoming conference, xChange2018.

If you are attending, I look forward to seeing you there! If not, watch this space for a recap blog and video.

Happy New Year!