Pimco CEO and co-CIO Mohamed El-Erian says the financial crisis raises questions about capitalism itself.
“Capitalism has always, and will always be, prone to traditional market failures, El-Erian writes in the Financial Times. “The answer is to accept this, and work harder at reducing the chances of a catastrophic failure reaching the few areas that amplify the good and bad aspects of the system.”
In the last decade, El-Erian notes, Iceland, Ireland, Switzerland, the United Kingdom and the United States lost sight of the fact that finance isn't a standalone industry but, instead, depends on its ability to serve the real economy.
“This failure was compounded by the view held by some that finance could even constitute the next phase in the natural evolution of capitalism (from agriculture to industry, services and, ultimately finance),” he says, illusions that were abetted by patchy prudential regulation, bad incentives and horrid compensation practices.
“Society as a whole produced and consumed too much finance, especially through a disruptive technology that was insufficiently understood and tested,” says El-Erian. “The result was the mother of all capitalistic overdoses, the implications of which are enormous and will be felt for years to come.”
Also during the past decade, emerging economies such as China embarked on their own capitalist economic revolution. “This enabled them to pull millions of their citizens out of poverty,” El-Erian says. “In the process, they added considerable productive capacity to a global economy, which only partially understood the consequences.”
According to El-Erian, too many of the institutions critical to the smooth functioning of capitalism utterly failed to deliver when they were needed most, hindered by poor governance in both the public and private sectors, uneven global representation and partial information.
“Each of these areas can be corrected,” El-Erian says. “Theoretically at least, what has occurred is less a calamity of the system as a whole, and more an issue of how it was run.”
Yet, four years into the crisis, little has been done to repair the damage coherently and comprehensively and to safeguard the real victims, let alone counter the risk of further costly dislocations.
“Until this is done, it will be difficult to convince the world that capitalism itself is not the problem,” says El-Erian.
The Financial Post reports that besieged capitalism will be the subtext at the World Economic Forum held in Davos, the five-day conference that is the world’s most elite gathering of political and business leaders and academics.
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