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Wednesday 11 March 2009

Lessons for developing countries from the first world's banking crisis 

One positive development of the current global financial crisis could be the recent election of Barack Obama as President of the United States of America, in the opinion of economist Prof Panicos Demetriades of the Economic and Social Research Council's (ESRC) World Economy and Finance (WEF) Programme, who is today speaking at the 'Politics of Macro-Adjustment and Poverty Reduction Conference.

"The theory that, to promote financial growth, the role of government has to be a limited, hands-off approach is probably gone forever. The new US administration could and should liberate financial institutions from these views. It will not be easy but less ideologically biased advice to LDCs would help promote global growth" says the Prof of Financial Economics at the University of Leicester. "What it should not do is to continue protecting the narrow interests of the US financial lobby."

Policies, such as financial liberalisation, bank privatisation and non-intrusive/passive regulation, have been prescribed to Less Developed Countries (LDCs) by the US Treasury through the International Monetary Fund (IMF) and the World Bank. These policies, the root cause of the current crisis across developed nations, have sometimes been forced on LDCs through structural adjustment programmes. 

The crisis has forced governments in developed countries to once again take a leading role in finance, albeit reluctantly in some cases, by taking over major banks. It has highlighted the serious dangers of passive financial regulation. 

"Developing countries should therefore take stock, as should the IMF and World Bank, who have been the key institutions promoting this set of policies." said Panicos "My research has shown that the role of government in finance has been pivotal from the beginnings of financial systems in Europe and Asia."

"Assuming the new US administration succeeds, we should see better, less ideologically biased advice to LDCs, to help to promote growth worldwide, even if it does not protect the narrow, short-term, interests of the US financial lobby in LDCs."

What about the UK?

Looking at the future for the UK, Panicos says. "I expect that, eventually, politicians in Europe and the US will realise that investing billions in banks and running them at arms length will not work and we will see a much more 'hands on' approach in future." 

Individual banks, acting in their own self interest, will not address the massive market failures that currently exist. In a downturn, repossessions may be good for the bank but not for the economy, as they push prices lower and deepen the recession. However, a nationalised bank can be instructed to re-structure loans in arrears instead of repossessing. This course of action may be less profitable in the short term for an individual bank but it could be profitable for the banking system as a whole in the medium term. More importantly, if all banks do the same, it is good for the economy. 

Research suggests that nationalising the greater part of the banking system and running banks in the interests of the country rather than the shareholders may be the only way forward. As Panicos points out "In many cases, the shareholders have been more or less wiped out so nationalisation may be the only way forward if we are to come out of this recession sooner rather than later. Governments must become more hands-on. After all, they have invested billions of our money in the banks, we will not forgive them if we see no return."

For further information contact

University of Leicester Press Office:

  • Ather Mirza, Press and Corporate Communications
    Email pressoffice@le.ac.uk
    Telephone: 0116 252 3335
  • Panicos Demetriades is available for interview through University of Leicester Press Office.   

ESRC Press Office:

Notes to editors

  1. This release is based on the session "Looking forward: The current (2008/09) crisis and its implications for LDCs" at the Politics of Macro-Adjustment and Poverty Reduction Seminar on 11 March 2009.
  2. Useful links:
  3. The Economic and Social Research Council (ESRC) is the UK's largest funding agency for research, data resources and postgraduate training relating to social and economic issues. It supports independent, high quality research which impacts on business, the public sector and the third sector. The ESRC's planned total expenditure in 2008/09 is £203 million. At any one time the ESRC supports over 4,000 researchers and postgraduate students in academic institutions and research policy institutes.
  4. The University of Leicester is the Times Higher Education's University of the Year 2008/09. Founded in 1921, the University of Leicester has more than 20,000 students from 136 countries. Teaching in 18 subject areas has been graded Excellent by the Quality Assurance Agency- including 14 successive scores - a consistent run of success matched by just one other UK University. Leicester is world renowned for the invention of DNA Fingerprinting by Prof Sir Alec Jeffreys and houses Europe's biggest academic Space Research Centre. 90 per cent of staff are actively engaged in high quality research and 13 subject areas have been awarded the highest rating of 5* and 5 for research quality, demonstrating excellence at an international level. The University's research grant income places it among the top 20 UK research universities. The University employs over 3,000 people, has an annual turnover of over £200m, covers an estate of 94 hectares and is engaged in a £300m investment programme - among the biggest of any UK university.