[Peace-discuss] World economic crisis

[C. G. Estabrook]

[The Obama administration, as was only to be expected, is pursuing the same 
policies as its predecessor in war and finance, but more vigorously and 
ruthlessly.  The next few weeks will see major demonstrations against them 
around the world, but not I think in the US, where consent has been successfully 
manufactured.  --CGE]

	Reform is needed. Reform is in the air. We can't afford to fail

The task is to build a new financial architecture. If we flunk it, the pain will 
strike most cruelly in the world's poorest countries

           o Joseph Stiglitz
           o The Guardian, Friday 27 March 2009

The financial crisis that began in America's sub-prime mortgage market has now 
become a global recession – with growth projected to be a negative 1.5%, the 
worst performance since the Great Depression. Even countries that had done 
everything right are seeing marked declines in growth rates, and even deep 
recessions. And much of the most acute pain will be felt by developing countries.

A UN commission of experts on reforms of the international monetary and 
financial system, which I chair, has just published its preliminary report. It 
focuses especially on the impact of the crisis on developing countries and the 
poor everywhere, which is likely to be severe. An estimated 30 million more 
people will be unemployed in 2009 compared to 2007. The increase could even 
reach 50 million. Progress in reducing poverty may be halted. The report warns 
that: "Some 200 million people, mostly in developing economies, could be pushed 
into poverty if rapid action is not taken to counter the impact of the crisis."

While this is a global crisis, responses are undertaken by national
governments, who quite naturally look after their own citizens' interest
first. Particularly invidious are protectionist measures, such as the US
"buy America" provision in its stimulus package. In fact, the World Bank
reports that 17 of the group of 20 countries have engaged in protectionist 
measures, after making a commitment not to do so in their meeting in Washington 
in November. By focusing on national, as opposed to global impacts, the global 
stimulus will be less – and the global recovery weakened.

While there is a consensus that all countries should undertake strong
fiscal stimulus measures, many developing countries do not have the
resources, and it calls for a concerted approach for additional funding,
both for spending and liquidity support for countries and corporations in
developing countries that are strained by the current credit crunch.
Developed countries should contribute 1% of stimulus spending; there should be 
an immediate issue of special drawing rights (SDRs), the "IMF money" that can be 
used especially to help those facing difficulties, and an expansion of regional 
efforts, such as the Chang Mai initiative in Asia.

It is important that any assistance be provided without the usual strings.
Conditions such as those which force developing countries to contract
spending and raise interest rates are counterproductive: the intent of the
assistance is to help them expand their economies, thereby assisting the
global recovery. Deficiencies in current institutional arrangements for
disbursing funds – for example, through the IMF – have long been noted, but the 
reforms so far are insufficient. Countries with funds are often reluctant to 
give money to institutions in which they have little voice, and which have 
advocated policies that they do not support; and countries are often reluctant 
to borrow, given the stigma associated with turning to these institutions. The 
commission urges the creation of a new credit facility, in which the voice of 
the new providers of finance and the borrowers are both better heard.

There are several important lessons to be learned from the crisis. One is
that there is a need for better regulation. But reforms cannot be just
cosmetic, and they have to go beyond the financial sector. Inadequate
enforcement of competition laws has allowed banks to grow to be too big to fail. 
Inadequate corporate governance resulted in incentive schemes that led to 
excessive risk taking and short sighted behavior, which did not even serve 
shareholders well.

The Commission recommends the establishment of a Global Economic
Coordinating Council, not only to co-ordinate economic policy, but to assess the 
economic situation, identify gaps in the global institutional arrangement, and 
propose solutions. For instance, there is a need for a Global Financial 
Regulatory Authority – without which there is a risk of regulatory arbitrage, 
undermining regulation, and creating a race to the bottom. There is a need for a 
Global Competition Authority – markets are global in scale. There is a need for 
a better way of handling defaults of countries, of which there may be several in 
this crisis. And there is a need for better ways of managing the many risks that 
developing countries face, especially with debt and capital account management.

The other important commission recommendation concerns the creation of a new 
global reserve system. The existing system, with the US dollar as reserve 
currency, is fraying. The dollar has been volatile. There are increasing worries 
about future inflationary risks. At the same time,
putting so much money aside every year to protect countries against the
risks of global instability creates a downward bias in – aggregate demand – 
weakening the global economy. Moreover, the system has the peculiar property 
that poor countries are lending trillions of dollars to the US, at essentially 
zero interest rate, while within their country there are so many needs to which 
the money could be put. The Commission argues that a new Global Reserve System 
is "feasible, non-inflationary, and could be easily implemented".

After the East Asia crisis, there was much talk of reform, of a new global
financial architecture. But there was just talk; as the global economy
recovered, the impetus for reform faded. This is a more severe crisis. It
will last longer. Hopefully, this time, we learn our lesson.

• Joseph E Stiglitz is university professor at Columbia University, chairman of 
the UN Commission of Experts on Reforms of the International Monetary and 
Financial System and recipient of the 2001 Nobel Prize in Economics
josephstiglitz.com