Guyana and the Wider World
E – Mail address cythomas@guyana.net.gy
Observations
Last week’s column sought to make three major observations about the ongoing global economic crisis. First, to be properly understood it should be located against the backdrop of the rising food and fuel prices crisis, which had engulfed the global economy (2007-08) – the year preceding the commencement of the present global crisis at the end of August 2008. Because of this, juxtaposition, the misery that is being generated by the present crisis is being heaped on that generated by the previous crisis of exploding food and fuel prices, which did not go away.
Second, arising from this, the present global economic crisis has been transformed into a deep and complex humanitarian, social, cultural and broad-based development crisis. I illustrated this last week with World Bank estimates, which show that a majority of the eight Millennium Development Goals (MDGs) are at grave risk of not being met by the target date of 2015.
The third observation is that global prosperity is heavily dependent on the rapid growth of global trade, even after acknowledging the tremendous contributions made by capital flows (both public and private) and remittance flows to poor countries. Every year for nearly three decades now, global trade in goods and services has grown in total value. Indeed as I pointed out in earlier columns, growth in global trade accounts for about three-quarters of the annual growth in global GDP.
Because of these three major observations and others made in earlier columns, the inescapable conclusion is that the resolution of the present global economic crisis requires global solutions. Solutions, which are not dimensioned globally, stand no chance of even solving the problems of those countries or regions to which they are specifically targeted. Fortunately, this seems to have been recognized by the leading players (governments, inter-governmental organisations and transnational enterprises) operating in the global economy.
G20 summits
The G20 summits held last November 2008 (Washington) and this year April 2009 (London) as well as those scheduled for later this year are testimony to the recognition of this truth.
The G20 comprises a group of 20 Finance Ministers and Central Bank Governors from 20 countries. These are the persons with portfolio and the highest level technical responsibilities to deal with the global crisis. They include 19 of the largest economies plus countries of the European Union, accounting for 85 per cent of global GDP, 80 per cent of global trade, and about two-third’s of the world’s population.
Also participating at the summits are the heads of the IMF, World Bank, the Development Committee of the IMF and World Bank, and the International Monetary and Financial Committee.
In November 2008 the then President George W. Bush, at the height of the eruption of the global economic crisis, requested a G20 meeting “to discuss and take corrective measures” to deal with the burgeoning crisis. Their initial declaration committed them to classic neo-liberal positions. Thus the leaders pledged commitments to 1) free market principles 2) the rule of law 3) respect for private property 4) open trade and investment 5) competitive markets and 6) “efficient and effectively regulated financial systems”, as they combated the crisis.
At this year’s London G20 summit they covered a wide ranging agenda that focused on (1) the coordination of actions to stimulate the global economy, after reviewing measures already taken (2) the reform of the global financial sector and systems and, (3) specifically, the reform of the three main international financial institutions (IFIs), namely, the World Bank, International Monetary Fund and the Financial Stability Forum.
Risk of ‘business as usual’
While the G20 summits recognise the premium which needs to be paid to global coordination and to finding global solutions for what is truly a global problem, there is a grave risk that there will be ‘business as usual’ and only token or inadequate recognition of this will come out of the deliberations and proposals from the G20. To my mind it still remains an open question as to whether the horrendous financial crisis and credit crunch dimensions of the global economic crisis are fully appreciated. The economic recession data are more readily available and thus speak more clearly, as they are best illustrated in movements of widely available global national accounts data: consumption, investment, government activity, exports and imports of goods and services, incomes and value-added.
But as my friend and colleague (Sir Ronald Sanders) has reminded me in a private communication while the United States authorities have held “stress tests” for their banks, the Europeans and others have not. As a result we do not know what surprises might lie around the corner for the operations of non-American transnational financial firms and banks.
The decades preceding the eruption of the crisis have witnessed extraordinary financial successes and excesses. While there have been remarkable strides in financial innovation, equally, there has been an enormous deterioration in credit-risk management, and outlandish abuses in leveraging and securitization of assets. These latter have created fertile ground for systemic fraud and financial market manipulation. The worst examples of greed, manias, and panics have been revealed. All these have spread like a pandemic throughout global financial and credit markets, raising the notion of ‘contagion’ to exceptional levels of virulence.
Two features now complicate the global financial scene. One is that self-regulation by financial firms and businesses is no longer a credible option in which regulated markets will be allowed to operate. Everywhere, both nationally and at the global level, there are calls for new state-led regulatory regimes. But, there is, stiff resistance to this.
The other feature is that the true extent of the fragility of global and national financial systems cannot be fully gauged. The evidence does suggest, however, that this is immense. When taken in conjunction with the fact that the global economic recession has severely strained the capacities of most economies, particularly the developing ones, to ameliorate the negative impacts of the global crisis, we find in poor countries massive reversals in the social, economic and environmental gains of previous decades.
Next week I shall proceed from this proposition.