By Martin Khor*
IDN-InDepth NewsViewpoint
GENEVA (IDN) – It is now clear that the world is slipping – or has already slipped – into a new economic downturn, and that this will have serious consequences for the developing countries. Indeed, some prominent economists have warned that this time the crisis will be more serious and more prolonged than the 2008-9 Great Recession.
Firstly, a double-dip recession is now likely because of the sovereign debt crisis in the European region and the weakening of the U.S. economy. Secondly, the tools that helped the world quickly recover from the 2008-9 recession – fiscal stimulus and easy monetary policy – are no longer so easily available in the developed countries; in some countries they are not available at all.
Thirdly, the kind of coordination of policy actions among developed countries and several developing countries as well that fought the last recession no longer seems to exist, at least in the immediate future.
A new global recession, or at best a downturn with slow growth, could thus be more prolonged that the short 2008-9 recession. The developing countries could thus face serious economic problems. In order not to be caught as helpless victims to the new crisis, they need to take three types of action:
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– They should prepare themselves with policy responses to reduce the impact of the new crisis and the external shocks that may come with it, particularly a sharp fall in exports, including in commodity prices and demand, a reversal of capital flows and a sharp decline in value of their currency.
– They should review their previous development strategies to see if they are still valid or whether changes are needed to respond to the changed international situation. In particular, developing countries that have relied heavily on exports to lead their growth may now find a decline in demand especially from the developed countries. They need to examine how to rely more on domestic demand and on regional South-South cooperation.
– They should also take an active part in the discussions on reform of the international financial and monetary system, as well as on the coordination of macro-economic policies of systemically important countries. Developing countries are adversely affected by the dysfunctional global system, and therefore have an interest in its reform. Unfortunately there is an absence of an appropriate system of global economic governance that enables the developing countries to participate fully. Thus, this is also a good time to advocate for establishing such a governance system.
South Centre’s Recent Papers
The South Centre has been analysing the global financial and economic situation in the past three years. Its research papers on the global economy provided suggestions on the policy responses required to assist developing countries during the 2008-9 recession; examined how the LDCs (least developed countries) were being affected by the economic recession; and warned about how the recovery of 2009 would not be sustainable due to global imbalances among key countries that impede the expansion of global effective demand.
The papers examined the export dependence of Asian countries and called for a review of development strategies. And they warned about how the unregulated flows of capital were continuing to cause boom-bust cycles that have devastating effects on developing countries. They predicted that the boom in capital flows and in economic growth could come to an end when the global situation changes. The accuracy of these analyses and predictions has been shown by the recent events.
South Centre Conference on Financial Turbulence
The need for developing countries to respond to a new downturn led the South Centre to organise a Conference on Options for developing countries in the global financial turbulence. It was co-organised with the Third World Network and the Consumers’ Association of Penang and held at the International Labour Organisation in Geneva on May 25, 2011. Linked to this conference, the Centre also organised an expert group meeting on financial policy issues on May 24, and co-organised an NGO strategy meeting on May 26.
The Conference brought together many experts from the developing countries as well as from international organisations such as UNCTAD and the ILO. Diplomats and policy makers from developing countries and NGOs specialising in financial and economic issues also attended.
The theme and tone of the Conference was set by a presentation on the current global situation by the South Centre’s Chief Economist, Dr Yılmaz Akyüz. If the lessons of the last financial crisis are not acted on through coordinated global action, there will be a bigger crisis soon, and an even bigger one after that, he warned.
The world we face in the next 10 years will be different, with the developed countries facing massive public debts, said Y.V. Reddy, former Governor of the Reserve Bank of India. From the developing countries’ viewpoint, there will be a lot of uncertainties, and they must prepare themselves to face the uncertain future.
Agreeing with this, the former Governor of Nigeria’s Central Bank, Charles Soludo, said the key lesson for the developing countries is that they have to prepare now for the next crisis, which is caused by coordination failure at the global level. When that happens, commodity prices are likely to collapse, and many poor countries may face new debt crises.
Akyüz said that the developed economies face a slowdown in the next few years, with the United States having to respond to their deficits, several European countries in debt crises, and the steam going out of their previous reflationary fiscal and monetary policies.
Asian countries will be able to continue with their economic growth but at a moderate rate as most of them are not so vulnerable to currency or balance of payments problems. However the situation will be less orderly in Latin America and Africa, which are vulnerable to changes in global financial conditions and commodity markets.
Akyüz warned that there may be balance of payments crises in some major developing countries that have significant current account deficits and are thus dependent on the inflow of capital flows, since these flows may reverse.
There is risk of fiscal and sovereign debt crises in some developed countries. And the sluggish growth and high unemployment in the North will increase tension in the trading system, with the higher risk of protectionism.
Systemic reforms are needed in global finance, added Akyüz. There is a lack of multilateral discipline on financial, macro-economic and exchange rate policies of major countries. There is an absence of control of financial markets, capital flows and speculation. And the G20 (Group of 20 major industrial and developing countries) has failed so far to address these systemic issues.
According to Akyüz, globalization had been oversold to developing countries, which were asked to fully integrate into the global financial markets. The lesson is that developing countries should rethink their integration into the world economy. They should seek strategic integration (in areas and ways that are beneficial) but not full integration.
Three Scenarios on the New Crisis
Soludo commented that he was intrigued by the scenario outlined by Akyüz and asked what would happen if the systemic problems are not tackled. Akyüz replied that we can then expect another crisis, and without reforms an even bigger crisis after that, and the possibility of conflicts among countries.
In Soludo’s view, the financial crisis was triggered by coordination failures at the global level, and there will be more crises if this is not addressed. He gave three scenarios of what could happen:
First, there would be greater global policy coordination, with a world economic council setting rules for finance, disciplining major countries and establishing an independent panel for resolving debt crises.
Second, the present situation continues without global governance, each country sets its own policies, but there is regulation of financial institutions with cross-border effects, and a fund is set up to provide financing to developing countries hit by external shocks.
In the third scenario, there is only talk of reforms but no global action. Each country then tries to protect itself against a future crisis, by building foreign reserves, in a race to the bottom. This may be supplemented by regional financial measures.
Need for South to be Pro-active
Reddy commented that there had been too much of shadow banking in the past without the knowledge of whether the institutions and financial instruments are safe or toxic. The problems of financial institutions being “too big to fail” or “too powerful to regulate” remain.
In developing countries, it is necessary to design a financial system that not only avoids instability but also promotes development. Since the markets do not ensure stability or development, governments have to take charge and they must not give up the space for public policy.
Therefore countries must be allowed to have the policy space. It is important that there be diversity of policies. In the developed countries, the financial institutions were practicing the same model and making the same mistakes, and this led to a failure affecting the system. Those regulators that did not follow this model were able to avoid a crisis.
Up to now, the developing countries had been reactive (only reacting to others’ views) in the global debates on finance. Reddy urged researchers and policy makers to examine the realities in developing countries and to be pro-active in voicing their views on global and national policies.
Malaysian researcher and former banker, Lim Mah Hui, made four policy proposals for Asian countries.
First, Asia should not follow the Anglo-Saxon model of finance but bring back the role of the financial sector as serving the real economy. Second, Asian countries should rebalance their economic growth by reducing their export dependence and also reducing income inequalities.
Third, Asian countries should reinvest their savings in the region. The foreign reserves should be invested in the region itself rather than being channelled to the West only to be recycled from there to Asia. Fourth, in view of the volatility of capital flows, Asian countries should be prepared to make use of capital controls to avoid the adverse effects.
*Martin Khor is the Executive Director of the South Centre. He can be contacted at: director@southcentre.org. This article first appeared in South Bulletin Issue 56. [IDN-InDepthNews – October 04, 2011]
2011 IDN-InDepthNews | Analysis That Matters
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