An overview by Rainer Falk and Barbara Unmüßig
It is not even spring yet but 2009 is already being termed a recession year. The global financial crisis hit the real economy everywhere and stimulus packages are frantically being thrown together. The pressure for change is rising on the “construction sites” of globalisation. Thus 2009 is also representing a window of opportunity: the consequences drawn from the global financial crisis and the course set this year can decisively shape the face of global governance for the foreseeable future.
The global economic development trend is clearly pointed downward, and there is almost no difference any more between the forecasts of the relevant institutions (see notes). Whereas the UN Global Outlook forecasts only 1% of global growth in 2009 (compared to 3.8% in 2007), the World Bank’s Global Economic Prospects forecasts only 0.9% (compared to 3.7% in 2007). Growth in the developing countries ought to decline in 2009 to an average of 4.6% (2007: 7.1% according to the UN) resp. 4.5% (2007: 7.9% according to the World Bank), whereby these figures reflect the moderate scenario. The IMF is even more pessimistic: the Fund’s last projections for 2009 point to only 0.5% world-wide growth, with -2% in developed countries and 3.3% in emerging and developing countries on average.
The beginning of a second Great Depression?
The epicentre of global recession tendencies clearly lies in the industrialised countries. Yet it has to be taken into consideration that the conventional recession criterion (decline in GDP in two consecutive quarters) hardly makes any sense in regions outside the industrialised world.
For China, a decline in growth from 12% to 6% would be a hard landing. At least 10% growth is considered necessary if 12-15 million poor peasants are to be integrated into the modern economy annually. Already today factories are closing daily and sacking thousands. Social unrest is the angst of the day, and the government reacts brutally to any form of protest.
For countries like Brazil and South Korea it is already a recession if growth slides below 3%. For countries in Africa dependent on commodities the current price collapse means a relapse compared to the boom years of the last half decade, whereas many commodities importers are still stuck in deep deficits—despite the price declines.
Altogether the UN warns that in 2009 for the first time in years—globally and in important regions of the South—per capita income could decline again, not to mention the global rise in distributional inequality.
Not only the figures indicate how severe the crisis is, but also the specific constellation of economic activities in major countries under shock: decline in manufacturing; banks that generally refuse to lend; and enterprises and consumers that spend no more money. As the Bank of Sweden Economics Prize laureate, Paul Krugman wrote in his New York Times column: “This looks an awful lot like the beginning of a second Great Depression.”
Time for change
Despite the drastic impact of the crisis in the South the potential pressure for changes is unambiguously found in the North this time. However, the emerging economies are needed more than ever to manage the crisis as the ascent of the G20 to a new centre of global crisis management clearly indicates.
Under these conditions remarkable changes can be seen at least on two levels. At the institutional level, the G20 have advanced nearly overnight to the central platform for shaping a “new Bretton Woods”. On 2 April, the G20 will assemble in London already for the second time as a sort of financial summit. At the same time, a large majority of the developing countries again is calling this body into question and want the UN strengthened as a platform.
The UN Conference on Financing for Development in Doha resolved at the end of last year to convene a UN summit on the world financial crisis, the modalities of which are to be clarified by the General Assembly before April. The summit is now proposed to take place for 26-29 May. That could also relativise the importance of other meetings in the long-term—whether of the anachronistic G8 meeting in La Maddalena, Italy in July or the semi-annual IMF/World Bank meetings in the spring and autumn.
The major subject in the global governance debate remains: how can representation and democratic participation for everyone go hand-in-hand with the ability to decide and act? It is an unresolved question which has long occupied, e.g. the World Trade Organisation (WTO) bodies, without having found a satisfactory answer.
Perhaps the most significant changes can be seen at the level of political-economic discourse, for example at a colloquium convened by French president Sarkozy in Paris a few weeks ago entitled “New World – New Capitalism”. That would have been a feast for a rhetorically powerful globalisation critic like Walden Bello to underline his theses of the emergence of a “new global social democracy”, whereby this new “project” does not even recruit its personnel from actual social democrats but clear across to the traditional parties (which naturally makes the allocation of such labels questionable).
It is remarkable that two conservative heads of government—the German chancellor Merkel and the French president Sarkozy—univocally demand the establishment of a world economic security council. Without a doubt it is the Europeans who are making a massive attempt to shape the agenda of a new international financial architecture, whereby the impulses are coming in alternation from Paris, Berlin and London. The fact that there are often deep gaps between radical rhetoric and actual outcome ought to be reason for watching these activities very critically.
The need to define concrete steps
Now would be the time to bridge the gap between far-reaching demands and miniscule progress by means of clear concepts. Two examples show how that could happen: The G20 global financial summit last November proposed to significantly enhance the Financial Stability Forum (FSF) by expanding its mandate and its membership. This might challenge the monopoly of the Basle Committee on Banking Supervision, today dominated by a handful of industrialised countries’ central bankers who in turn dominate the regulation (or non-regulation) of the financial markets. In the communiqué released by the G20 summit international supervisory colleges for the cross-border financial industry were mentioned which could prefigure an independent global regulator for the financial sector. Such a new institutional venue is urgently needed if the financial crises are not to be repeated after the “crash”. The constant chatter about enhancing the IMF’s role is only a distraction.
Naturally none of this would constitute a new international financial architecture. However they would be steps in the right direction to be followed by others. Two crucial issues which have not yet been mentioned at all need to be addressed: firstly the global imbalance between deficit countries and surplus countries (such as the USA on one hand and China and Germany and Japan on the other) and secondly the massive speculation with currencies and primary commodities that became so glaringly obvious last year.
Restructuring of global finance
This includes the question, how in a new global financial model, the cyclical function of global capital flows can be reset counter-cyclically and comprehensiveness can be produced in the financial system. Stephany Griffith-Jones of the Initiative for Policy Dialogue at Columbia University submitted some interesting proposals at a conference of the German Institute for Development Policy (DIE) and InWent in Berlin (see notes). Counter-cyclical financial market regulations could be structured so that provisions and capital reserve requirements for banks are stricter during boom periods and relaxed in periods when lending is declining. Such a dynamic rule could prevent excessive lending.
In terms of “comprehensiveness” a few regulations for e.g. hedge funds would not suffice. Rather the entire “shadow financial sector” would have to be integrated in a new, comprehensive regulatory scheme—from hedge funds to OTC derivatives, the so-called structured investment vehicles and credit default swaps to the tax havens, without which the deregulations orgies of finance capital would not have been possible in the past years. Finally, what challenges does the IMF have to accept to meet its original mission today? By extending lending for the victims of the financial crisis, the Fund is essentially on the right track. However it must be much more generous and waive a substantial portion of its policy conditionality to give the developing countries sufficient space to run counter-cyclical policies during the crisis.
Even that will have to be discussed this year when the consequences of the global financial crisis are taken seriously.
- Conference Report, Effects of the Global Financial Crisis on Developing Countries and Emerging Markets, Berlin, 11 December 2008. Available together with other conference papers: at www.inwent.org/dialogues
- UN, World Economic Situation and Prospects (Global Outlook) 2009, United Nations: New York-Geneva 2009. Available at: www.un.org/esa
- World Bank, Global Economic Prospects 2009: Commodities at the Crossroads, The World Bank: Washington DC 2009. Available at: www.worldbank.org