Imbalances and fragility of the world economy

The multiple challenges now faced by the global community can perhaps be summed up in one word: imbalances. Imbalances in food, energy, housing and financial markets were allowed to grow during a sustained economic boom, becoming increasingly interdependent. These mounting imbalances generated a level of economic fragility which eventually shattered with the collapse of Lehman Brothers in September 2008. But despite the massive amount of public resources that have been mobilised to deal with the resulting collapse, the underlying forces have been left untouched in the aftermath of the crisis. They remain a toxic threat to stable and inclusive growth and the sustainability of the recovery.

Some emerging and developing countries have demonstrated relative resilience to the impact of the crisis. This is not just an accident; in several cases, it is the result of strategic actions and policies on the part of governments. The use of reserve holdings and massive economic stimulus packages, which in China’s case amounted to 7 per cent of GDP, helped stave off a full-blown depression. It also propelled the state back into the driving seat of economic management, with industrial, macroeconomic and selective trade policies helping to shore up against widespread market collapse.

Acid test

The crisis has acted as a watershed, revealing new economic powers and exposing weaker ones. It is now clear, if ever there was any doubt, that in economic terms we are living in a multi-polar world, with new and emerging sources of trade, investment, and even aid. But there have also been other structural shifts in the past 10 years, most significantly involving surplus and deficit countries and regions. The pattern of global demand and output has proved deeply destabilising and should not be resumed.

UNCTAD’s Trade and Development Report 2010 makes it clear that dramatic declines in public spending through deficit reductions and tighter monetary policy could have disastrous consequences for recovery, and precipitate a double dip. Moreover, the large public deficits are the result of governments responding to corporate and market failure; banks and bondholders should now show patience with the unwinding of the resulting sovereign debt.

At the multilateral level, there has been little enthusiasm for changing the pre-crisis business model. Efforts at the national level have encountered opposition and a lowering of ambition, and collectively the G20 have shied away from radical change. Indeed, politicians and business lobbies still seem committed to the pre-crisis agenda of a shrinking state, the privatisation of public services, and a tough stance on large deficits.
Elsewhere, imbalances in areas such as food are also a source of serious concern. We seem unable to comprehend the suffering of 1 in 6 of the world’s population facing acute hunger, let alone the potential political and social insecurity confronting governments in those countries where household expenditure on food has risen to nearly three quarters of household budgets.

The deregulation of commodities trading in the 1990s and the development of complex derivative products led to the increasing financialisation of commodities and the development of food as a new asset class in its own right. Whilst this provided some new hedging opportunities and price intelligence, its aggregate effect has been to increase instability in food commodities markets, distort prices through market herd behaviour, and increase the opacity of markets. In recent weeks speculation has been on the rise again. Wheat prices increased by 50 per cent in August, and although they have since fallen back, the increase nonetheless suggests that a 2008-style food crisis is not out of the question in the foreseeable future.

The economic crisis has represented a further transfer of wealth, as private debt was exchanged for public debt. Yet it is taxpayers and household savers who are ultimately punished by having to finance corporate bailouts and endure public-sector cuts. The ultra-mobile super-rich have so far been able to protect their private affluence because of the inaction of governments and the G20 over income tax avoidance, or damaging currency speculation, such as the so-called ‘carry trade’. It is time to close the tax havens and put a stop to the abuses of the privileges of wealth. This needs to be done in a coherent fashion to avoid arbitrage between tax jurisdictions, and the UN has made proposals on this in its report on the financial and economic crisis.


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