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Post-neoliberalism or post-capitalism ?

Wednesday 22 October 2008, by Elmar ALTVATER

The rise of Neoliberalism since the 1970s was, first and foremost, a consequence of the deep, even « revolutionary » changes in the world economy. The « revolution » , however, was a « passive revolution » , « transformism » in the sense of Antonio Gramsci. It strengthened capitalist hegemony by means of an all-encompassing transformation of the social, political and economic system. Market-liberalisation was accompanied by a far-reaching de-regulation of politics. Milton Friedman called it a « neo-liberal counterrevolution » against Keynesianism. It was a success and started its triumphal march around the world. It lasted until September 2008, when the liberalised system of global financial markets imploded, causing huge immediate losses of more than $1,4 trillion (SZ, October 8, 2008). In the 1970s the « Keynesian environment » of the post-world war II era literally broke into pieces and the new « neo-liberal » epoch took off. At the end of the days of neoliberalism even the most hard nose-neoliberals, managers of big banks as well as representatives of the Bush-administration were urgently asking for state help and even for a nationalisation of big private banks in order to avoid the final melt down of the whole system. The neo-liberal cycle which began in the 1970s less than 40 years later is over.

It began with the end of the Bretton Woods system of fixed exchange rates in March 1973, and the following « big bang » of the liberalisation of financial markets in Margaret Thatcher’s Great Britain. The formation of crucial prices of the world economy, such as exchange rates and interest rates, were no longer based upon official decisions and state agency, in turn legitimised by the people in a democratic order. Instead, the decisions on exchange and interest rates were up to private actors, i.e. to multinational banks, speculative investment and other funds, and transnational corporations. Thus, the first acts of privatisation concerned the manner by which prices on global financial markets have been formed. This triggered a wave of wild privatisation of public goods and services which swept over the entire world. The new private actors immediately used their new freedom to create financial innovations : new institutions and new instruments to increase the returns on financial investments. Countries with still regulated markets were induced or enforced to give up their techniques of - by neo-liberals so called - “financial repression†(exchange controls, fixed interest rates, credit control, prescribed assets, etc). Since then, financial markets have exerted their own repression of the real economy, of social systems and of the natural environment.

The liberalisation, de-regulation and privatisation mania of neo-liberalism triggered radical repercussions in the relationship between the industrialised and the « Third World » . Liberalised financial markets helped to recycle so-called « petrodollars » from the Middle East, back into oil-importing Third World countries. They have been enabled to accumulate vast debts over the course of a few years when real interest rates were low (even negative) prior to 1979. They slid into the debt crisis of the 1980s after the US Federal Reserve tripled interest rates (the so called « Volcker Shock » ), leading to what later has been described as the « lost decade » for the developing world. The other side of the medal was a strengthening of the US-Dollar : first of all, because oil by oil-producers has been sold against US$ despite the obvious economic weakness of the US$ vis-à-vis other competing, strong currencies. Secondly, the recycling of petrodollars and then the debt-servicing has been managed by the US financial system which occupied the strategic heights of global finance. It was of utmost importance that after the debacle of the USA in Vietnam, the USA found a way out of the hegemonic crisis and restored their economic and political hegemony in the more and more globalised world.

Globalisation mostly is understood as a process of spatial expansion, of world trade, investment, migration flows. This is not wrong. However, it is a one-sided perspective. For, globalisation also means the globalisation of a certain development model, of political concepts and standards of global governance, of rules, norms and a global language. Therefore, the « Washington Consensus » , the financial policy-package which indebted countries had to accept under the conditionality of the IMF, has beeen one of the most efficient globalising forces after the liberalisation of global financial markets.

Monetarism emerged as the hegemonic economic policy concept of the neo-liberal counter-revolution. The monetary base provided by the « independent » central bank should react to market conditions and not be used as a political tool of governmental institutions to realise other objectives than monetary stability. Policies of full employment have been understood by neo-liberals as the most frowned on policy concepts. Consequently, the independence of the central bank is understood as an insulation against democratic political institutions, in order to be free to perform monetary policy according to the necessities of globalised financial markets. The rule of independence has been inscribed into the founding statute of the European Central Bank. The independent central bank must control the quantity of money circulation and nothing else. Fiscal policy in the long run has no influence on the growth rate of the economy and on employment and should therefore follow the rules of monetary stability and not the policy target of full employment.

The result of policy programs based on these rules is by no means convincing. Unemployment did not decrease since Neoliberalism has been the ideological basis of economic policy concepts, instead unemployment increased in nearly all countries - and if not, this was due to the expansion of the informal economy or of the sector of precarious labour. Distribution of income and wealth became more unequal in most countries and in the world as a whole. The number of millionaires increased as well as the number of poor peoples. The future expectations of the working classes are sinister in neo-liberal capitalism. Many economies are crisis ridden, with extremely negative effects upon social systems, political stability and the natural environment. The balance of the neo-liberal epoch is disastrous for the majority of peoples ; it temporarily was golden and sometimes good for financial wealth owners, but it is bad for labour.

2. The hierarchy of disembedded markets
If Karl Polanyi’s concept of « disembedded markets » makes sense altogether, then with regard to financial markets. Markets are disembedded from society and nature since the « great transformation » to a market economy in the 18th and 19th century. Financial markets are moreover disembedded from markets for real goods, services and labour : The monetary economy is « autonomised » and self-valorising, i.e., delinking from dynamics in the real economy. Financial markets are self-referential, they follow their own logics of development. The relations between social reproduction and the accumulation dynamics of the real economy on the one side and the working of financial markets on the other have widely been dissolved. This is a consequence of the all-embracing liberalisation of markets in general and particularly of finance since the end of the Bretton Woods regime in the 1970s.

Neo-liberalism is the theoretical background of liberalised and self-referential financial markets. The necessity of disembedding financial markets is justified by the concept of market equilibria and the possible efficiency-gains. In the neo-liberal understanding, an equilibrium is possible on each single market so long as decision makers are free to follow market signals. There are no interrelations and interferences between markets. Unemployment above NAIRU is interpreted as the result of an inefficient allocation of labour and of economically unjustified wage levels. The dogma of autonomous markets is an explicit argument against the Keynesian (and also the Marxian) theory of a hierarchy of markets and their connectedness : labour markets depend on investment decisions of capital owners on commodity markets. The investment decisions on their turn depend on future expectations concerning prices of products, i.e. on the performance of product markets, as well as on the development of interest rates, i.e. on capital markets. The prices on the latter determine prices (the wage level) and volumes (employment) on the labour market. Consequently, in Keynesian as well as in Marxian approaches, an equilibrium in labour markets depends on the performance of financial markets.

However, the autonomy and self-reliance of financial markets are by no means a guarantee against financial crisis-tendencies. On the one hand, crises have their origins in the « real economy » in the case that real flows of income are not sufficient to service the claims of financial investors. On the other hand, crisis tendencies spill over from finance to the real economy and to society and nature, as crises at the end of the first decade of the 21st century so dramatically have demonstrated. The concept of « disembedded markets » therefore does not mean that they in fact are autonomous and independent on each other. In the contrary, markets are highly interrelated and interdependent. Keynes and Marx are right, and neo-liberalism is wrong.

Contrary to some neo-liberal simplifications the interest rates and rates of return on financial investments have to be produced in the real economy. A virtual economy without a real basis is a nice but stupid idea. If not, high yields on financial assets of 20% and more cannot be paid in real terms ; the financial pressures on the real economy are producing an inflationary bubble : asset inflation rather than price inflation. When prices of products and services are stable or even declining, and simultaneously asset prices soaring, a radical distribution of real flows of incomes in favour of the financial sector is going on. This tendency then is responsible for new speculative attacks on the real economy because of the high liquidity of financial investors (funds and banks). They try to reap as much as possible of the surplus produced in the real economy ; and by doing so they are pushing it into a crisis. This mechanism, basically, is driving the most recent financial crisis.

Karl Polanyi described disembedded markets in general as "satanic mills" , pushing labour into misery, nature into environmental destruction, and the monetary system into a malfunctioning state. Disembedded financial markets work even more than product- and labour-markets as satanic mills, because their horizon is not the « real » national economy but the world market, i.e. the economy on a global scale. In terms of time they are characterised by an endemic « myopia » . Financial actors only have a very short-term horizon. The higher the interest rate and the financial yield, the shorter the perspective of actors on financial markets. Therefore, the counter-movements against the destructive functioning of the satanic mill in order to protect labour (the emergence of the welfare state), nature (environmental regulations) and money (the monetary and financial authorities, i.e. central banks, national and international authorities of supervision etc.) must develop a global and long-term perspective.

Anthony Giddens describes the tendency of market-disembedding as a « mechanism » ; however, neither the processes of disembedding nor the counter-tendencies for protection against the effects of disembedding work like mechanisms. They are the outcome of hegemonic conflicts and struggles in the political sphere (the state in a wide sense) and the social system (performed by social movements and political organisations).

3. Financial crises shake the neo-liberal belief system
Global crisis tendencies since the last quarter of the 20th century regularly appeared as crises of the financial sector : the best known hallmarks of the crisis cycle after the liberalisation of financial markets in the 1970s are the debt crisis of the Third World in the 1980s ; then the financial and banking crisis of the 1990s (the Peso-crisis of 1994 and the devastating Asian crisis in 1997-98 with repercussions in Russia and South Africa in 1998, and Turkey and Brazil in 1999) ; the Argentinian crisis of 2001, which affected all aspects of economic and social life of the country leaving much of its industry in ashes ; the burst of the US new economy bubble in 2000, and finally the US-american « subprime crisis » of 2007-08 and their metastases in many other market segments (credit cards, investment banks, insurance, credit default swaps etc.) and countries of the world. The end is (in October 2008) still impossible to predict. The last decades of the 20th and the first decades of the 21st century will enter history as the era of the neoliberal financial disaster.

In any event, neo-liberal promises of growth and stability, of employment and of wealth have proven to be an insincere ideology, grossly false and responsible for the sufferings of hundreds of millions of peoples around the world. No wonder that neoliberal ideology lost much of its former attractiveness and thus much of its power in a hegemonic system of « governmentality » . The neoliberal crisis tendencies together with the loss of hegemonic attractiveness are the soil on which new economic policy concepts beyond neoliberalism begin to blossom.

In view of the financial disaster of 2008 and the series of recent financial crises since the « big-bang » liberalisation of financial markets at the end of the 1970s, it seems as if neoliberals themselves changed their mind. The neoliberal belief-system is breaking into pieces. First of all, one of the lessons to be learnt was that financial stability can only be achieved by means of political regulation and not by the working of the market mechanism, and by deploying the mechanisms of self-regulation of the financial industry. The IMF’s "Financial Stability Forum" (FSF) was established after the Asian crisis in 1998, and immediately after having been set up, began to elaborate on rules of improved transparency, prudence, surveillance. This was done partly in order to avoid more radical proposals of global civil society movements such as ATTAC, to control the capital account and even to forbid certain financial activities (offshore financial centers, hedge- and private equity funds, short-term speculation etc.). It was by no accident that ATTAC was founded in the same year in which the FSF was set up – one as a civil society-response to the financial disaster which affects so many millions of peoples, the other as an official response in order to re-instill financial stability for financial actors against market turbulence.

The crisis of 2008, however, goes far beyond the capacity of harmless reform proposals from the FSF and other bodies after the financial crises of developing and newly industrialising countries. The crisis did not hit the metropolitan countries of the world system. This is different today and so neo-liberals discovered anew the state as an important and indispensable institution of economic (fiscal and monetary) stabilisation, as market actor of last resort. Even the most neo-liberal governments like that of the UK and of the USA did not hesitate to nationalise banks in 2008, thanks to obvious market failures and to obvious shortcomings of neo-liberal economic policy-concepts (in the fields of fiscal and monetary policy), and because systemic financial risk threatened the whole capitalist economy. This is the reason why even notorious neo-liberals are joining the herd requesting less market-self-regulation and more state intervention.

Masses of peoples are affected by the recent financial crises - in the subprime-crisis alone five million home-owners in the USA lost their houses - filling up the army of homeless peoples. Tens of million peoples suffered under the Asian crisis, many of them pushed into dire poverty and even into misery. The debt crisis of the Third World in the 1980s cannot be forgotten, for it was responsible for a « lost decade » of development in Latin America and elsewhere. These are only few of the destructive consequences of financial crises. Therefore, popular resistance grew up in many places of the world, generating a growing alliance against neoliberal ideology and the subsequent policy concepts which were based on it. Today, however, neoliberals themselves leave their untenable positions and try to find rescue in the camp of their contempted adversaries : less market and more regulation. Although they might prefer self-regulation by the banking industry itself and not by the state, they do not hesitate to « bring the state back in » , in a manner even more radical than in Keynesian times. They are transforming crisis-ridden neoliberal capitalism based on financial markets into a kind of a « financial socialism » (as Richard Sennett termed it in the Financial Times on October 8, 2008).

The bailouts mean taking a step beyond the neo-liberal mind-map ; but is this tendency already the first sign of the emergence of a post-neo-liberal order of global finance ?

4. Software and hardware of neo-liberal financial markets
In order to answer this question it is necessary to take the physical preconditions of neoliberal finance into account. While the profit rate on capital in the real economy suffered an underlying tendency to decline (leaving aside for now the old controversy on Marx’ law of the tendency of the profit rate to fall), the rates of return on financial assets were soaring – at least for a certain period of time. Financial innovations and the creation of new financial investment vehicles pushed the yields in the financial sectors above the profits to be obtained in other industries. Since the liberalisation of financial markets, most OECD countries recorded real interest rates far above the real growth rate of GNP. This relation is even more explicit in developing and newly industrialising countries, because of the high spreads on the prime rate or London Interbank Offer Rate. Since financial claims in the last instance have to be serviced out of real flows of income, a redistribution of incomes and of wealth from the real to the financial economy is an inevitable outcome. Financial liberalisation and the subsequent financial innovations work as a mechanism of increasing the yields of financial assets and of repression of the real economy.

This constellation is inevitably crisis prone. After all, extremely high yields on financial claims require high real growth rates. But growth meets social, natural and even economic limits. Growth is an obsession which only can be transformed into reality by an acceleration of the process of production and reproduction, and by extending its spatial reach, i.e. by creating a typically capitalist time-space regime. It requires and fosters at the same moment high speed, high mobility, the massive use of resources (mass production and mass consumption). It thus also exerts massively negative effects on the environment and on social life which follow other rhythms than those imposed by the neoliberal time-space regime.

Neoliberalism’s disdain of nature and society is a consequence of the concept of the world as populated by people who only follow the utilitarian rationality of profit maximisation and thus act as homo economicus. These rational constructs are operating in a spaceless and timeless world, thus lacking the coordinates of nature. The « annihilation of time by space and of space by time » , which Marx invokes in the Grundrisse is inscribed into the neoliberal belief-system, which takes no notice of the specific characteristics of time and history, of space and territories. Only because of this reduction is it possible to develop and then apply an economic policy-menu like that of the « Washington Consensus » . It is an economic policy recipe for all countries in all times which only have one characteristic in common : that they are highly indebted and that they therefore have to follow the rules of global financial markets and their regulating institutions (in the first place the IMF).

The system can only obey the rules of physical expansion and acceleration, i.e. transforming the annihilation of time and space into reality insofar as it has specific « hardware » at its disposal. This hardware consists, first of all, of fossil energy sources, especially oil, and the (industrial) technical and organisational (social) systems of their transformation into working energy. Oil fuelled growth since the beginning of the 20th century and thus turned an apparent obsession into a real political concept for the economy over a long period of time. Economic growth has, since then, been the fetish of economists, even of so called alternative, non-neoliberal economists. They do not take into consideration that growth of the real economy and even the working of the « virtual » financial sphere are dependent upon the secure provision of fossil fuel for production and consumption, for transport and communication. Most economists remain blind vis-à-vis the contradiction between growth as a geometrically extensive process and its fuels which are a finite resource - and the fuel supply curve is not going up, but down. Oil is running out, hence the « hardware » of the neo-liberal system is fatally flawed. The production of oil is peaking so that in the foreseeable future it will be available to a much lesser extent than today, and if available then at increasing prices. The limits of oil supply become a physical hindrance to further growth and consequently to the high yields on financial assets. Yet the financial sector in the last neo-liberal decades has become addicted to these unrealistic yields. Now, it must learn to reboot the hard-drive, and reprogram the driver software. The neo-liberal bonanza is over, and the comfortable times of plenty of oil are gone. The growth-rates of the past cannot be achieved in the future unless a new paradigm of production, another time-space-regime is emerging.

Financial markets are providing the driver software of this time-space regime of acceleration and expansion. Time is money. The shorter the cycles of financial investment, the faster the returns and the higher the revenues to obtain. The software is permanently improved by making use of financial innovations with the overarching objective to increase the financial yields. But this software is ruthlessly applied and very often predatory and fraudulent. The drivers are designed to exploit all possible spaces to make money even when law and moral rules are obstacle to such an endeavour. In these cases rules and laws have to be broken. The liberalisation of financial markets opened the entrance to the criminal economy, it was a method of issuing the licence to “print†money. No wonder that even « honourable » financial institutions and big transnational corporations are involved in money laundering, grand corruption, illegal transfers, assistance to tax evasion, risky speculation etc. It is said that financial institutions are prudent and therefore avoid risks (risk-aversion). But when the driver-software allows the system to hide the risks and to sell risky assets as secure ones, a speculation bubble can be blown out and out – until it blows up. This is what happened in the most recent financial crisis, and it is an important reason why even official institutions of the global financial system triggered a debate on new regulations of financial markets, i.e. on a new software of the time-space regime. The criteria for the quality of the driver software are disputed. The speculators want regulations to be as loose as possible, perhaps with some safeguards against a crash and with huge amounts of public money at their disposal, when possible without public democratic control. Some political regulators argue in favour of control, and some social movements even ask for a full nationalisation of the financial system, to submerge finance under democratic control in a democratic society. They also want the prohibition of certain financial vehicles, and of highly speculative institutions and businesses. And they pose the question of whether it is enough to exchange the software without also changing the hardware, i.e. the energy regime and the capitalist mode of production, the social formation.

5. The resilient real economy
For many observers the real economy seems to be not affected by the crises of disembedded financial markets. Capital is performing a cyclical movement : from the state of productive capital (real means of production and labour), which in combination are producing commodities to be sold on markets against money, so that at the end of the cycle capital appears as a financial stock which again can be invested into real means of production and labour – or it can be used for speculation and investments in financial assets on financial markets. The accumulation cycle of capital thus encloses the « real » and the « financial » economy as aggregates of a capitalist system, only in the last instance linked to the real world (London 2008). Consequently, the financial crisis is also an expression of contradictions of the real accumulation process, and it has repercussions on the real world. Here it is necessary also to take time lags between fast-reacting financial flows and the inertia of the real economy into account. The consequences of financial turmoil for the real economy are extremely bitter as the consequences of the debt crisis, of the financial crisis, and of the « subprime crisis » and its after-effects show. Debtors can not afford to pay the interest service and thus the loans’ security, the « collateral » of the debts, is taken away. In the case of the current financial crisis this means that workers not only are losing their jobs but they are also evicted from their houses. Moreover, they are cut from access to new mortgage credits so that their real disposable income dramatically is becoming reduced. This might be interpreted as a « normalisation » . The question, however, is why this normalisation has not been realised without pushing many peoples into economic distress.

« Contagion » also has to be taken into account. It not only should be understood as the spread of financial crises across national boundaries, as in the case of the Asian crisis which spilled over from Thailand to the Southeast Asian and East Asian neighbours, and then to Russia, South Africa, Brazil, Argentina and Turkey. Financial crises also have a serious impact on labour markets, i.e. on the quantity and quality of employment, on the environment and on the provision of food. Financial crises have been the most effective vehicles for transforming formal labour into informal labour and thus amplifying the informal economy’s precarious work. In some structuralist interpretations, the informal economy is not understood as a consequence of financial distress, bus as a remedy against the most negative consequences of the crisis. In many parts of the world, the informal economy is the only sector offering precarious jobs to otherwise unemployed peoples. This is the reason why the informal sector and its accompanying ideology of self-help and individual responsibility are, paradoxically, presented as a solution to the crisis of neo-liberalism, as « neoliberalism from below » (Wilpert). Strategies such as microfinance reconstruct the legitimacy of the system by organising popular consent from below. It is a telling example of the working of neo-liberal governmentality.

The spillovers of financial crises into nature also are serious. As we have already seen, the crucial fossil resources required for fuelling the neo-liberal order are running out, not to speak about the harm done to the environment by actions which only follow the individual logic of selfish market actors. But neo-liberalism would not be as successful as it has been, were it not able to offer an answer to the ecological challenge. For F.A. von Hayek, markets are a powerful device of discovering new and innovative solutions to problems that arise in the course of economic and social development. Therefore the creation of a market for tradable CO2 emissions rights is the logical neo-liberal strategy to overcome the climate crisis. At the same time, the new certificates offer new areas of profitable financial investments. After the recent crash of the real estate and other markets, this is good news for financial investors searching new areas of profitable investment. The market is estimated as to be very dynamic and potentially available for future turnover (especially with new World Bank financing support and the extension of the Kyoto Treaty to the whole world), soon reaching $2 trillion. The food crisis as well as the 2002-07 price hike of other commodities also offer new opportunities for financial speculation. These developments may stabilise the neo-liberal financial system for a while, until an even larger bubble bursts again. But this time, the real world of the daily life of peoples all around the world and not only the « real economy » are involved and adversely affected by the crisis. Neo-liberal finance is, more and more, undermining the living conditions of mankind.

Therefore, the built-in tendency to disembed markets out of society and of nature must grind to a halt. It is necessary to rethink the relationship of finance to the real economy on a global scale. Scale matters and requires regulatory measures which go beyond traditional (nation-state) Keynesianism, although, paradoxically, national solutions are the main ones on offer in order to overcome the financial turmoil, and are far more urgent than European-wide or even global ones. The nation state comes back in, because market solutions to the deep crisis are simply not in the global or regional policy basket.

Regulation on a global scale – how is it possible ? The question can only be answered by posing another question : Is the recent crisis a crisis of neoliberalism or is it a crisis of neo-liberal capitalism ? Is a post-neoliberal financial system possible under capitalism or is it necessary to go beyond capitalism as we know it ? Is a financial socialism already emerging, and could it be an answer to the challenges of the crisis ?

The crisis of neo-liberal ideology does not necessarily result in a post-neoliberal order which aims at social forms beyond capitalism. In the contrary, post-neoliberalism in finance can result in new forms of capitalist hegemony which again include a stronger role of the state. Contrary to « old Keynesian » state interventionism, the new interventionism – including austerity with regard to the social wage - will not be designed in favour of workers’ interest and the environment, but in an undisguised political support of financial interests. Financial socialism is not the socialism of the workers or of broad popular masses. It is the expression of the expectations of bank and fund managers who are threatened with drowning in the whirlpool of the financial crisis. They search and find support from governments and central Banks. Their trust in the working of free markets is over. People like the CEO of Deutsche Bank, Josef Ackermann, request the nationalisation of bankrupt or defaulting financial institutions : Fanny Mae and Freddy Mac, AIG, most investment banks, and other financial institutions in the USA, Alitalia in Italy, Northern Rock in Great Britain, IKB and Hypo-RealEstate in Germany, the whole banking system in Iceland and many more still to come. Instead of self-regulation of the market, state action is requested - and vast public monies must be spent out from the state budget. This will increase the tax burden of citizen, the public debt. It will increase the inflation rate and thus reduce the purchasing power of citizens, in order to save the financial institutions. Consequently, the financial institutions will survive by giving up some of the most predatory neo-liberal exaggerations. Post-neoliberalism for financial markets is nothing less than a bundle of bail-out methods to save capitalist finance from the overshooting irrationality of financial neoliberalism. It might be post-neoliberal, but it is not in the same instance a post-capitalist order.

The neoliberal « counterrevolution » was, as we have seen, a Gramscian passive revolution whose outcome is a further strengthening of capitalist hegemony. It lasted about four decades. At the end of the days of neoliberalism, a new passive revolution is in the making. It will bring the state back in as a stabilising institution of a postneoliberal, but capitalist world order.

Or are social movements intellectually and politically strong enough as to bring their own, very different post-neoliberal - post-capitalist - agenda forcefully and successfully into the process of restructuring the financial system of 21st-century-capitalism ? Can this process become a social struggle ?

Welzer, Harald (2008) : Klimakriege. Wofr im 21. Jahrhundert gettet wir, (S. Fischer) Frankfurt am Main

Klare, Michael (2008) : The end of the world as we know it, in : Red Pepper, issue 161, Aug/Sep 2008 : 42-45

Presented to the World Forum for Alternatives and Network of Artists and Intellectuals in Defense of Humanity Working Group on the World Economic Order Caracas, Venezuela - 15 October 2008.