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Economic and Financial Crisis

 

One World. Two Tracks. Multiple Crises
By Fraser Reilly-King

 

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“The issue of aid to the world's poorest nations is ‘secondary’ to the need to restore global economic growth.”  Kory Teneycke, Spokesperson for Prime Minister Stephen Harper just prior to the G-20 London Summit.

 

“The response of the G-20 was focused on ‘business as usual’, because its role was to restore the confidence of the markets. We are looking to restore the confidence of the world.” – His Excellency, Ambassador Camillo M. Gonsalves-Romero, Permanent Representative to the United Nations of Saint Vincent and The Grenadines and co-Facilitator of the UN Conference on the World Economic and Financial Crisis and Its Impact on Development.

IMF Building and G-20 Protest, London, England

Photo on the left: IMF Building

Photo on the right: G-20 Protest, London, England

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

It is human nature that during times of crisis our tendency is to be short-sighted and to pick the most expedient route to remedying the problem at hand.  However, since no disaster is without cause, a more sensible option might be to identify the root problems of the crisis to ensure it doesn’t occur again. Crisis brings with it opportunity.

 

These two approaches characterize the principal responses to the current global financial crisis; one reflected through the Group of Twenty (G-20) world leaders and the other through the United Nations (UN).

 

The Current Crisis – History Repeats Itself


While the current financial crisis is the most severe and global of its kind, it is far from being the first. The 2008 crash has followed on from the dot com crash of 2000, the Brazilian and Russian crises of 1998, and the Asian financial crisis of 1997-98. All followed a similar pattern of speculative investment “highs” in markets that promised quick profits – detached from any productive investment in the real economy – followed by spectacular lows as the bubble burst and the casino crashed.

 

The current crisis is not much different. Banks in North America and Europe overleveraged their lending to consumers in the US, and Western and Eastern Europe, taking advantage of low interest rates, a booming global economy, and a decade of blind deregulation and financial liberalization. But capital feeding capital can’t last. And in the US, it only took three out of 100 people (3% of borrowers) to default on their loans to bring the entire banking system to its knees.

 

But the boom also gave rise to a new set of players. This is the “shadow banking industry” characterized by trillion dollar hedge funds and new impossibly complex credit derivatives – all out to turn quick profits in a high stakes game in whatever markets they could play in. They had more to win, but ultimately, they had even more to lose. And when they did, unfortunately, so did we.

 

The Impacts – Felt by All, Felt Harder by Some

 

The initial assumption was that many developing countries would be shielded from the impacts of the crisis. Countries in Asia and Latin America had learned from past crises by building up significant hard currency reserves to protect their exchange rates and economies from speculative attacks. But with banks overextended with insufficient loans loss reserves, a global freeze on credit markets, export prices and markets collapsing, and companies defaulting, the close integration of global markets meant that the fallout was swift and relentless.
 
It is the most impoverished countries and groups who are suffering and will suffer the most. Recent estimates by the World Bank put an additional 53 million people living under $2 a day as a result of the global economic crisis. This is on top of the 130-155 million people already pushed into poverty in 2008 from the food and fuel crises. Seventy percent of these individuals are women. Furthermore, the International Labour Organization expects 51 million men and women will lose their jobs in 2009. Export growth is slowing rapidly, and is expected to shrink by 16.8% in Asia, 12.5% in Africa, and 10% in Latin America. The crisis is likely to be long and severe.

 

This point has not been lost on many in the global South. Speaking ahead of the April G-20 summit in London, Brazilian President Lula da Silva was frank about his anger: “I can only say it is not possible for this part of mankind [the South], which is victimised more than any other, to pay for the crisis.” So what has the G-20 done to address this?

 

G-20 to the Rescue?


Rather than focusing on development and poverty in the South, the G-20 has focused on restoring “confidence and stability” in the markets to try and stave off a global recession.   Northern governments have nationalized and recapitalized their banks, guaranteed savings, injected subsidies into ailing institutions, coordinated interest rate reductions and re-regulated their financial sectors – all to the tune of 4 trillion dollars. Now even the International Monetary Fund (IMF) – famous for promoting cut backs in the South – is calling for increased government spending (in the North). It seems Keynesian economics – after John Maynard Keynes who proposed active government intervention to stabilize the market – is back in fashion.

 

Last month, when the G-20 met in London, they announced an additional $1.1 trillion to stimulate the global economy. The impressive figure grabbed the headlines and stock markets responded positively the next day.

 

But the G-20 communiqué fell well short of civil society demands for more systemic reform to the international financial system and for a “green” new deal towards a low-carbon economy. On March 28, of this year, some 40,000 people protested in London under the banner of “Jobs, Justice and Climate”.  Their calls went unheeded.

 

New standards announced for regulating the global banking system remain vague. Of the $1.1 trillion pledged, only an estimated $50 billion will go to the poorest countries. The money is also predominantly loans rather than grants foreshadowing a new debt crisis.  The governance reforms announced for the World Bank and IMF simply fast-track existing plans.  Meanwhile, the IMF – which last year was selling its gold reserves and cutting staff to address dwindling revenues given record loan re payments – may be back in business. But the IMF, still lacking legitimacy, is now preaching one set of policies for the North and another for the South.

 

Greening the global economy remains but an aspiration. And calls for a conclusion to the Doha Trade Round ring hollow in the context of a continued stalemate over approaches to address markets and liberalization in a context of crisis. Seventeen countries of the G-20 have introduced protectionist measures since November. Meanwhile previewed Doha commitments would actually push for more financial liberalization – a major cause of the meltdown.

 

Getting to the Root of the Problem – The UN’s Approach


The day before George W. Bush announced the first G-20 meeting in Washington, the UN President of the General Assembly, Miguel d’Escoto, established an Expert Commission on Reforms of the International Monetary and Financial System. Chaired by Nobel Laureate and economist Joseph Stiglitz, and made up of a panel of international economists, the Commission’s role is to “review the workings of the global financial systems and to explore ways and means to secure a more sustainable and just global economic order.”

 

Parallel to this, in December 2008, governments, civil society and the private sector met in Doha, Qatar, to review the Implementation of the Monterrey Consensus, which had been an outcome of the  important 2002 UN Conference on Financing for Development. While the Doha meeting failed to generate much momentum in specific policy areas, the big victory was the agreement and call for a high-level conference on the world financial and economic crisis and its impact on development. The UN Conference will take place from June 24 to 26in New York and the Stiglitz Commission’s report is an input to the meeting.  

 

The recommendations from the Commission go much deeper than anything the G-20 has proposed to date, and go to the heart of some of the underlying challenges (See box).

 

More Voice for the World, Deafening Silence From Many of the G8 and G20


The UN process – referred to often as the “Group of 192” to underscore its inclusiveness – has helped crack open the debate and created  significant space for countries to more openly discuss their concerns – at least within the context of the UN. For example at the April High-level Meeting of the Economic and Social Council (ECOSOC) with the Bretton Woods institutions, the World Trade Organization and UNCTAD, Barbados –  speaking on behalf of the Caribbean Community – gave a powerful and radical speech calling for reforms. Yet within the Bank and Fund, where Canada represents the Caribbean as part of its constituency, there are no such calls.

 

Canada’s position with respect to the Stiglitz Commission and Conference has been very disappointing. Ottawa has either remained silent on the conference at key international meetings, or along with other G8 countries, has attempted to undermine the process all together.

 

From Crisis, Comes a New Crisis


A year from now, the G-20 response may have helped to bring about short-term recovery of the global economy. But short-term measures won’t take the world far. As long as the G-20 ignores the long-term needs and vision of the global community – as represented in the G-192 – the future food, fuel, finance, and climate crises, will simply get deeper and more devastating. If the battle being waged between the G-20 and UN is anything to go by, multilateralism may also become more divisive.

 

Crisis brings with it opportunity.  And Canada – and the G-20 – would do well to reconsider its approach to the calls for a more thoughtful re-think of the current financial system.

 

UN (Stiglitz) Commission of Experts – Recommendations (A/63/838)

  • Industrialized countries should dedicate 1% of their stimulus packages to developing countries to help offset the impacts of the crisis, in addition to existing aid commitments;
  • A new democratically-governed credit facility should be established to disburse the funding, without attaching conditions to the loans/grants;
  • More Special Drawing Rights (SDR) – the “IMF’s currency” that automatically increases central banks’ foreign exchange reserves should be issued. This will free  up dollars, pounds, yen or euros for spending;
  • A new Global Reserve System (an SDR+) should be established to address the asymmetries in country’s reserves (e.g., massive Chinese reserves subsidizing massive US overconsumption) by redirecting excessive reserves into investments in developing country’s real economies;
  • Countries should be given more space to make decisions about their own policies, in particular to address and protect themselves against volatile capital markets and regulatory failures in significant countries;
  • New innovative mechanisms for financing development should be explored (e.g. financial services tax);
  • A genuine “development” trade round should be established that truly promotes growth in developing countries, an end to current forms of protectionism, an immediate stop to developed country export subsidies, and access for least developed country exports to advanced economy markets;
  • The short-term establishment of a mechanism within the UN to enhance member policy capacity on issues of global economic and financial architecture and the longer term creation of a Global Economic Coordination Council at Heads of State level within the UN;
  • Fundamental governance reform of the World Bank and IMF, including a double majority voting system.

 

Fraser Reilly-King is the Coordinator of the Halifax Initiative, a Canadian coalition working to transform the international financial system and its institutions. He was on the streets at the G-20 meeting in London, and will be in the building at the UN Conference in New York.

 

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