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Africa: New Economic Crisis on the Way
AfricaFocus Bulletin
Oct 4 2011 (111004)
(Reposted from sources cited below)
Editor's Note
"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." - Martin Khor,
South Centre
So warns the latest version of the South Centre's Bulletin
(October 3), reporting on a conference which took place in
Geneva earlier this year. The Bulletin, containing an
introduction by South Centre director Martin Khor, selected
speeches, and a report on the conference deliberations,
provides a structural analysis of the "next economic
crisis." The conferees agreed that the crisis would
severely affect Africa and other developing regions as well
as the developed countries where the new crisis is now most
visible. The time to prepare is now, the conferees
stressed.
This AfricaFocus Bulletin contains the introductory essay
by Martin Khor and the speech by Charles Soludo, former
governor of the Central Bank of Nigeria. (Soludo is also
co-author, with Thandika Mkandawire, of Our Continent, Our
Future, a classic study of African development strategies
(http://www.africafocus.org/books/isbn.php?2869780745). The
full South Bulletin is available at http://www.southcentre.org (direct URL:
http://tinyurl.com/666a8pa).
For previous AfricaFocus Bulletins on economic issues, see
http://www.africafocus.org/econexp.php
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Bracing For A New Global Economic Crisis
By Martin Khor
Martin Khor is the Executive Director of the South Centre
South Bulletin, October 3, 2011
http://www.southcentre.org / direct URL:
http://tinyurl.com/666a8pa
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 US 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 (or 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:
- 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 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 25
May. Linked to this conference, the Centre also organised
an expert group meeting on financial policy issues on 24
May, and co-organised an NGO strategy meeting on 26 May.
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 Yilmaz 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 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 Akyuz 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.
In the rest of this issue of South Bulletin, the
presentations of some of the key speakers are published, as
well as a detailed report of the sessions of the
Conference.
Three Scenarios As South Faces the Next Global Crisis
Dr Charles Soludo, former Governor of the Central Bank of
Nigeria and a member of the South Centre Board, told the
Conference that developing countries must prepare now for
the next financial crisis. He also gave three scenarios of
how policy makers will respond to the crisis.
By Charles Soludo
South Bulletin, October 3, 2011
http://www.southcentre.org / direct URL:
http://tinyurl.com/666a8pa
I want to start exactly where Dr Reddy stopped. But just a
few clarifications. The overall focus of this session is on
developing countries. But within developing countries you
have a huge spectrum. There are the LICUS countries - the
Low Income Countries Under Stress. There are the Least
Developed Countries. And of course there are the emerging
markets. I think when we discuss them in terms of agendas
or how this crisis has affected them and the way forward we
need to keep this in mind - that they are different. For
some of them it could be the difference between day and
night.
Let me just summarize by saying that the key lesson for
developing countries is to prepare for the next crisis. And
therefore the discussions should really be about how do we
prepare the LICUS countries, the LDCs, the emerging markets
for the next crisis. And that's why I take from what both
Reddy and Akyüz said this morning. From all the scenarios
on both the capital flows and the commodity prices, this
boom can't continue. It will have to end sometime. And who
are the ones who are primary commodity exporters? We've
said it before, in my country, Nigeria, when the oil price
collapses, it may not collapse exactly for the same reasons
that it collapsed in the 1970s or early 80s but collapse
someday it may. And how do we prepare especially in light
of the fact that many of these countries today experiencing
boom are actually now involved in pro-cyclical fiscal
policies at times of boom and that's when they are also
accumulating huge debt and then when they are also involved
in expansionary policies which are unsustainable. My focus
is really on how do we prepare for the next crisis for
developing countries, least developed countries and so on.
If I look at the global financial turbulence and ask what
is the root of it, my own summary is that it just starts
from the tension that here we have an increasingly
globalized world and the problems we are facing, a large
chunk of these are global but the solutions have to be by
national governments. And this tension will always be
there. The fight for autonomy, for the sovereign nature of
states versus the problems that happen to be global with
cross-border consequences, contagion and so on.
The global financial crisis is simply a consequence of the
uncoordinated globalization - as a result of deficiencies
in the international institutional arrangements for crisis
detection, prevention, management and resolution. We don't
yet have it at that level for coordination. And so global
coordination failures happen to be at the heart of it. We
can get into the immediate causes of the crisis, about the
lax monetary policy and the lax financial regulations which
are part of booming credit, leveraging and the subprime
mortgages and how they spilled over into some other major
economies and of course the contagion around the world from
financial crisis to global economic crisis. But we have got
to keep an eye on the root cause of the problem, namely
that we have now a world where you have cross-border spillovers
that are very significant but we don't have a
coordinated mechanism to ensure orderly transition or where
a crisis erupts to ensure an orderly work-out. That's the
missing link in the whole globalization process both
institutionally and otherwise.
Many of the poor countries have some very nascent capital
markets that are just beginning to come up. The crisis led
to massive outflows and there was a collapse of many of the
stock markets in these very poor countries and they have
not recovered. So the wealth effect of the crisis in many
of these poor countries will be long lasting and I'm not
quite sure how you get them to go back into the capital
market and have development as well.
A major point to be made is that for developing countries
especially for the poor ones who had absolutely nothing to
do with the crisis, they just woke up one morning and faced
something like a tsunami coming from somewhere. They had
done all the right things they were asked to do and they
were making progress. And then they wake up one morning and
they see their capital market collapse, and they see the
commodity prices collapse temporarily before resuming. They
had the first immediate balance of payment shocks and they
had to go into distress borrowing, accumulating new debt
and so on. Of course they don't have the fiscal space to
have the kind of stimulus packages undertaken in much of
the Western world. And therefore they have to resort to
either external borrowing or going back again to central
bank financing of deficits with all the consequences. So
these countries are really in a very bad shape. For several
of them it will take quite a while for them to get out of
this.
There's no shortage of proposals on what to do. Everyone
has their own litany of "if only we did this the world
would become a great place" -- the G20, the UN, the
multilaterals, the NGOs, every institution has got a set of
proposals on what needs to be done. And especially in the
areas of financial sector regulation and for developing
countries the whole question of whether to design or not
counter-cyclical macroprudential regulation or guidelines.
For developing countries, I urge them to carefully study
many of these ideas and see which ones make sense, which
ones can be implemented and which ones you can't within the
political boundaries.
I said the whole crisis was triggered because of either
incomplete or imperfect coordination failures at a global
level. I think it's very serious. If the coordination does
not take place, we are in for another crisis. Maybe the
world needs to go through even a more severe recession to a
depression for us to be forced to the new realities that
we're in to be able to think out of the box, and to act on
them.
I see three scenarios in terms of the next crisis -- what
may eventually evolve. One scenario is that the world will
either voluntarily or be forced into a more aggressive
coordination -- an economic governance coordination -- of
the type proposed in the Stiglitz report for a Global
Economic Coordination Council or a WTO-type binding
commitments and rules in respect of international banking,
capital flows and macroeconomic coordination. This will
require more active governance of the international system,
to coordinate the provision of international public goods
including economic and financial stability. This may be a
WTO-type mechanism to regulate global finance and applying
sanctions when necessary. Within this you can also have the
sovereign debt tribunal or independent panel. Without the
enforceable sanctions for bad behavior, how can you
coordinate and enforce compliance of the systemically
important countries?
Number two is to leave things as they are. There may be a
listing of international best practices and standards. We
just tell them what is good and then let each country take
which one it likes and does and leave things as they are.
Perhaps again there may be international regulation only
for systemically important global financial institutions
with cross-border effects. Control and regulate only ones
that have cross-border effects, and things will be OK. In
addition, some of us believe, that in addition to this if
this is the interim step, to design a compensatory
contingency financing to be funded by what we call a
globalization tax. There ought to be a pool of funds, at
the IMF or whatever the institution is, even if we would
have created a new one where this pool will be. And this
pool will make mandatory transfers for the LDCs and LICUS
countries in particular in a form like a Marshall Plan. To
pull them up and participate in a world of unequal economic
powers but where everyone is required to compete under the
same rules. The globalization tax might be taxing capital
flows but the tax revenue doesn't get to the individual
countries. It gets into a centralized pool. And that is to
make globalization work or fairer.
It could also provide international liquidity to countries
with sound economic and financial management but are hit by
unanticipated external shocks. We can have some thoughts
about what this kind of fund or pool would do but I think
the world needs a pool that is mandatory in terms of
transfers but that does not necessarily depend on the
benevolence or kind-heartedness of somebody sitting there
in a world where the laxity in the US could bring so much
rain in Nigeria or Chad or in Eritrea in one morning, and
with no consequences and they just bail themselves out and
those other ones can perish. I think we need something -- a
mechanism that ought to be in place and that fund would
have to be it.
The third scenario is to just continue to muddle through.
There will be more talk about reforms and see whatever
comes out of it, which is what is going on now mostly.
There is a dominant mindset that somehow things will fall
in place. I don't know. Maybe they will fall in place or
maybe they will fall in pieces.
But if we just adopt Option 3, I think we will be facing a
race to the bottom because each country then as a sovereign
nation would start preparing for the next crisis by itself
and one of the ways they do it is to self-insure. Most
developing countries would start accumulating reserves.
Because we know what happened the last time in Nigeria, we
lost $15 billion in about a month in outflows. When the
crisis hit, the hot money had to leave quickly from the
capital market - $15 billion in one month. Of course that
crashed the exchange rate, that led to liquidity crises in
several banks, so on and so forth. So to self-insure,
countries accumulate reserves, and this will lead to a race
to the bottom as it were. We'll be tightening regulation,
mainstream risk management while emphasizing development,
rethink the abandonment of development banking, how to make
it work, to channel long-term funds, pension funds and so
on to development projects. We will mainstream regional
cooperation. We have a lot to learn from each other,
especially through South-South exchanges. I want to commend
the work that the South Centre is doing and I think we need
more of this kind of cooperation and of course also skills
transfer especially to our policy makers. Build skills,
network better because in the end I believe for the LICUS,
LDCs and the emerging markets, they have to stand in a
united way.
AfricaFocus Bulletin is an independent electronic
publication providing reposted commentary and analysis on
African issues, with a particular focus on U.S. and
international policies. AfricaFocus Bulletin is edited by
William Minter.
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