Friday, February 24, 2012

Economy: UN Carps At Finance-Driven Globalization

By Jaya Ramachandran
Courtesy IDN-InDepth NewsReport

GENEVA (IDN) - A top United Nations official has strongly criticised the dominant pattern of international economic relations during the past three decades. In his preface to the Trade and Development Report, UNCTAD Secretary-General Supachai Panitchpakdi also finds fault with the International Monetary Fund (IMF) and the World Bank.

"Financial markets and institutions have become the masters rather than the servants of the real economy, distorting trade and investment, heightening levels of inequality, and posing a systemic threat to economic stability," says Supachai, a Thai national.

He served as Director-General of the World Trade Organization (WTO) before being appointed as the Secretary-General of the UNCTAD – UN Conference on Trade and Development – which functions as "a forum for intergovernmental deliberations, supported by discussions with experts and exchanges of experience, aimed at consensus building".

Supachai has chosen the term 'finance-driven globalization' (FDG) to underline that "financial deregulation, concerted moves to open up the capital account, and rapidly rising international capital flows have been the main forces shaping global economic integration since the breakdown of the Bretton Woods system".

The Trade and Development Report will be presented to the thirteenth session of the United Nations Conference on Trade and Development (UNCTAD XIII) at Doha, Qatar, April 21-26, 2012, which will focus on 'Development-centred globalization: Towards inclusive and sustainable growth and development'.

Looking back at his report to XII, Supachai says that he underestimated the seriousness of the global imbalances, and adds: "(But) I warned that, despite an unprecedented global boom over the previous five years, significant risks and vulnerabilities threatened growth prospects and could undermine moves towards a more equitable and effective global partnership for development."

In particular, he argued that "putting liberalized markets and flexible prices at centre stage has proved to be insufficient in the light of the complex challenges that the new generation of globalization poses."

Costly Bailouts

Supachai pleads for drawing lessons from the persistent crisis:

- Leaving markets to regulate themselves is both ineffectual and costly. This is evidenced by the fact that bailing out financial institutions has already run into trillions of dollars, and despite unprecedented fiscal and monetary responses, the global economy experienced its first contraction since the Great Depression.

Subsequently, an estimated 10 per cent of global output was lost between 2008 and 2010, and tens of millions of jobs were destroyed; according to estimates by the International Labour Organization (ILO) 200 million people are currently unemployed worldwide. The impact was felt even in those communities that had seen few benefits during the boom years: due to the crisis, the number of people living in extreme poverty jumped by between 50 and 100 million.

A second lesson, the UNCTAD Secretary-General says, is that when a large number of economies collapse so dramatically, there must have been underlying weaknesses and fragilities missed or ignored by policymakers prior to the crisis.

Supachai does not doubt the so-called creative impulse of market forces, but he points out that "the private pursuit of short-term gain can sometimes result in insufficient productive investment and concentrate the rewards with the favoured few."

The risks, he says, are particularly pronounced when financial markets detach themselves from the real economy, tying wealth creation to the rapid accumulation of debt and rising asset prices rather than to steady productivity improvements and increasing incomes, and channelling innovation to financial engineering rather than to technological progress. Such a growth strategy is likely to be neither stable nor fair," argues Supachai.

State is pivotal

A third lesson, he points out, is that when things do fall apart, the state remains the only institution capable of mobilizing the resources needed to confront large and systemic threats.

"The idea that the nation state had somehow outlived its usefulness in a borderless world was never very serious. Since the state is pivotal to establishing an inclusive social contract and strengthening participatory politics, it is both imprudent and unrealistic to reduce or bypass its role in managing economic development and change," he states.

He adds: The more worrying trend in recent years has been the growing influence of financial markets in bending public policy and resources to their own needs and interests – leading a former IMF chief economist to warn of a "quiet coup" – including in the post-crisis period."

Even as a tentative recovery has set in, the imbalances that arose during the previous boom, particularly in advanced countries, have proved very difficult to overcome, says the UNCTAD Secretary-General.

"The private debt overhang remains a drag in many countries, while the combined effect of financial bailouts and recession has led to rising public deficits, triggering sovereign debt crises in some countries and stalling the recovery in others. Everywhere, employment creation has lagged behind, raising the threat of jobless growth and the spectre of protectionist responses," he adds.

This leads to a fourth lesson from the crisis, namely that in an interdependent world, countries cannot be expected to tackle destabilizing threats and imbalances on their own. And yet, to date, effective rebalancing strategies have not materialized at the multilateral level, says Supachai.

This is underscored by the fact that the initial reaction to the food and financial crises was swift, with significant resources committed on both fronts, along with improved policy coordination; and protectionist responses have so far been kept in check.

But the reforms required to prevent a repetition of the crisis have proved elusive. In the resulting interregnum, the burden of adjustment has been shifted onto overstretched public and household finances, with growing threats to the social peace and stability.

Global non-governance

"Neither IMF nor the World Bank, having abandoned their original raison d’ĂȘtre to the siren calls of unregulated financial markets, have been able to forge a vision of a post- crisis world economy consistent with changed economic and political realities," avers Supachai.

"This failure points to a wider hiatus in global governance," he says and cites examples:

The Doha Development Round (DDA) is fast approaching its tenth anniversary, and its completion – as initially conceived – is still to happen. Progress on reducing greenhouse gas emissions has stalled following the failure to reach a comprehensive deal in Copenhagen.

Finally, even before the latest crisis, keeping the Millennium Development Goals on track was a struggle: their achievement by 2015 is now only a distant possibility. It is telling that even a small proportion of the resources used to save financial institutions deemed "too big to fail" could never be found in better economic times for social and economic development, infrastructure-building and social welfare, or to address environmental challenges. [IDN-InDepthNews – February 23, 2012]

2012 IDN-InDepthNews | Analysis That Matters

Picture: UNCTAD Secretary-General Supachai Panitchpakdi | Credit: Wikimedia Commons