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24.10.2008 International

In Search Of A New International Econ. Order

By Dr Vladimir Antwi-Danso -

The recent US economic or financial meltdown has taken on global dimensions and has sent shivers down the spine of all governments.

The US quickly sought Congressional approval for state intervention to the tune of $700 billion.

 In our two earlier pieces on the subject matter we told of how the whole world is to be affected by the global credit crunch.

Banks in several countries have been affected, and states are rallying round to ensure that the depression does not bite that much. Billions of dollars have been lost in market value. The situation in many countries is said to be volatile indeed.

In Russia, stock value loss is estimated at 70%.  Stock markets are tumbling hard and fast. In Russia, China, Japan, Europe, Latin America, and virtually everywhere, governments are pumping more monies for lending purposes.

If banks like J.P Morgan and Citigroups are crying for liquidity, then you should appreciate the enormity of the credit squeeze that every other bank is facing. The fact is that no bank is ready to lend to the other.

Russia hopes to rely on a windfall of about $500 billion made from high oil prices to cushion her economy.

China is having a lot of current account surpluses and is behaving as though her economy would not be affected by the credit crunch. But as shall be shown presently, the Chinese economy is not immune from the 'crash'.

Already, its year on year growth rate for the third quarter has dropped to nine percent (down from 11.8% in 2007), the lowest in five years.

While politicians are seeking makeshift measures to stem the tide of recession, academicians and other commentators are looking, not only for the causes for the meltdown, they are also looking for answers.

Richard Portes, a Professor of Economics at the London School of Business, Peter Schiff of Euro-Pacific Capital, and Professor Paul Krugman, the recently crowned Nobel Laureate in Economics, have blamed the belief in unregulated market as the cause of the meltdown.

 The policy of low interest rates, excess spending (credit), unregulated lending, consumerism, and high consumption with less savings, according to them, have all accounted for this mess.

They are all calling for a globalised coordinated regulatory system to ensure the non-occurrence of such in the future. This is needed because the clock of globalization cannot be unwound. This fact seems to have dawned deeply on world leaders.

We noted in our last piece how President Sarkozy of France quickly assembled his colleagues in Paris to discuss the issue.

Thereafter, the EU has also met in Brussels (October 16, 2008) and decided to set up a 'Financial Cell', whose basic remit would be to regulate international finance in Europe.  Paul Krugman seems to have endorsed this measure, when he claimed that 'Europe has gotten it right'.

Latin American Finance Ministers and their Heads of Government and State also met. The World Bank and the International Monetary Fund (IMF) have also met.

The UN is feverishly discussing the issue. It seems clear that all are of one accord: re-crafting of the global financial architecture! Indeed, at the EU meeting on this issue recently, it was noted that there was the need for a 'rewriting of Bretton Woods'.

 President Bush has also called for an international conference to reconsider the current global financial structure. He stressed that he was prepared 'to host' such a conference, in which he expected both developed and developing nations alike to arrive at a consensus.

This is as great and very interesting as it is important.

The developed countries seem now to be calling for a new international economic order. Way back in the 1970s the developing countries, led strongly by Tanzania, called for a similar order to be established. It became known by the acronym NIEO. It was supported strongly by the UN.

The developing countries were reeling under the weight of the commodity price slump and the oil price hikes following the Arab-Israeli war of 1973. Nobody from the developed world at that time felt that there was any need to rewrite Bretton Woods.

The Third World countries, especially in Africa and Latin America, were told to eschew neo-patrimonialism and allow the market to function.

 In essence, too much state intervention in the market was to blame for economic non-performance in developing countries.

Governments must get out of business! Incidentally, both the World Bank and the IMF, tasked primarily to 'police' Third World economies, have held on religiously to this thinking and have always made it a conditionality for accessing loans and/or grants.

 The UN was helpless at the time.

What it could do was to introduce a price stabilization mechanism for export goods from developing countries, through the UNCTAD. Today, the stakes have changed. The developed countries are being hard hit. Indeed, if something is not done now, the worse can happen.

The US debt is estimated to be around ten trillion dollars. Hardly will anybody buy US bonds. Governments elsewhere are stampeding to salvage their economies from total collapse.

For us in the Third World, we have no choice but to allow for a rewriting of Bretton Woods, for, the more the heavier economies fall, the deeper we slip down the abyss. Already, investments to developing countries are scaling back.

Orders for commodities have suddenly slumped. A typical example is that of Argentine beef, whose orders from Europe are noted to have scaled back 40 per cent. Chinese companies that export to the US market (especially toys and clothing) have had to close down.

So all companies and products that will have low elasticities of price demand on US and European markets will also either scale back production or close down. Brazil, Canada, and other countries have lowered imports from China. Indeed, for the Third World there is a triple crisis: food, fuel, and financial.

The World Bank predicts that more than one hundred million people would go hungry in 2009.

 We must also note that global credit crunch means global aid crash. Since the G-8 meeting in Gleneagles, Scotland, none of the promises made has been fulfilled.

The former UN Secretary-General, Mr. Kofi Annan, recently made reference to this fact and warned that, the developed world should not use the global financial crisis as an excuse to renege on their promises; the consequences would be too bad for the developing countries.

 Even though oil prices are coming down gradually, it is 'not yet Uhuru!' According to the International Labour Organization, the global fallout in terms of job losses from the current crisis will be in the region of 20 million. And most of this figure will be in the developing countries.

The worse is that nobody seems to know how long and in what direction the crisis will be.

Testifying before the House Budget Committee, the Chairman of the Federal Reserves Bank, Ben Bernanke, hinted about the possibility of new packages to engineer some stimulus.

Indeed, by 1971 when the fixed-but-adjustable exchange rate regime of the Bretton Woods system effectively died the IMF should have died with it. Under that dispensation the IMF was expected to have owned about 50 per cent of global liquidity, with the US dollar being the currency of last resort. 

The IMF has since then never owned more than two per cent of world liquidity.

When the US withdrew its currency in 1971 and the oil price hikes in 1973/74 and again in 1979 followed, there was the need to have re-crafted the global financial architecture.

Rather, we allowed Keynesianism to die and the Chicago School of 'Marketists' to dictate to the world. Everybody was made to read Milton Friedman and the invincibility of market economics was extolled even beyond the stratosphere.

The fall of communism was the apex celebration of liberalism as it marked the end of state-led, centrally-managed economic thinking.

The crisis on our hands today is a wake-up call for all to consider the approach often tabled but ignominiously ignored, i.e., that the state and the market must find accommodation in economic governance.

What the various states are doing to off-set the damage done by the credit crunch, (i.e., pumping money to buy shares in or buy out distressed banks and companies), is nothing but state intervention.

Indeed, the time has come for a re-crafting of the global financial architecture and the developing countries should seize the opportunity to influence the kind of structure that may have to be put in place.