Caught in global turmoil

The deeper the big economies fall, the more developing countries get pulled down into the abyss. Already, investments to developing countries are scaling back. Orders for commodities have suddenly slumped. Indeed, the Third World is facing a triple crisis of food, fuel and finance. The World Bank predicts that more than an additional one hundred million people will go hungry this year.

Moreover, we must face the fact that the global credit crunch is likely to go along with a global aid crash. So far, the promises of the G8 summit in Gleneagles in 2005 remain unfulfilled, though aid levels have risen. Kofi Annan, the former UN secretarygeneral, recently pointed to this fact. He said the developed world should not use the global financial crisis as an excuse to renege on their promises; the consequences would be too tough in developing countries.

The current crisis will lead to declining output, loss of jobs and instability in developing countries. The International Labour Organisation (ILO) expects some 20 million jobs to be lost worldwide – and most of them will be shed in developing countries.

At the Financing for Development Review Conference in Qatar in December, the UN launched its annual economic report. The document is entitled "World Economic Situation and Prospects 2009". According to it, world output will grow by a meagre one percent this year, compared with 2.5 % last year and rates of 3.5 % to four per cent in the preceding four years. According to this projection, output will decline by 0.5 % in advanced nations, and rise by 4.6 % in the developing and by 5.3 % in the transition economies.

The UN economists have also provided a more optimistic scenario. Factoring in fiscal stimulus of between 1.5% and 2% of gross domestic product (GDP) in the major economies and further interest-rate cuts, developed economies could post a 0.2 % rate of growth, and the developing world would surpass five per cent growth. It is obvious, however, that nobody knows how long the crisis will last and in what direction trends will show.

Given such great uncertainty, more pessimistic scenarios seem possible, to say the least. If confidence in the financial sector is not restored soon and the credit crunch continues for many more months, the rich world may fall into an economic depression. At the global level, the consequences would certainly mean that poor countries become unable to sustain their efforts to reduce poverty. Political stability itself may become threatened.

It is evident that the economic fate of poor countries depends on that of the rich economies. Policymakers in the rich world must rise to this responsibility, rather than merely focussing on their nations’ welfare. In the past, multilateral agencies have reduced poor countries’ policy space by imposing tough conditionalities. While it is becoming obvious that the sofar dominant free-market doctrines are obsolete, it is also clear that the governments of rich countries have more room for economic-policy manoeuvres than do those of poor countries.

A new international economic order

From the Bretton-Woods Institutions to the G8, from the G20 to the UN, a global consensus is emerging that humanity needs a new global financial and monetary architecture. A coordinated regulatory system must ensure that a crisis like the current one will not occur again. On top of that, the UN report "World Economic Situation and Prospects 2009" also calls for the provision of adequate liquidity internationally, an overhaul of the international reserve system and more inclusive global economic governance.

At the same time, it is obvious that rich-country governments are in the process of rebalancing the relationship of market and state. What they are doing to off-set the damage done by the credit crunch, is nothing but state intervention: they are pumping capital into banks, buying shares of distressed finance-sector businesses and designing huge stimulus packages to get their economies going again.

Incidentally, these trends add up to an indictment of the International Monetary Fund (IMF). After all, the cardinal remits at its inception was the management and coordination of the global financial system. No doubt, that system has failed. Even the rich nations are now calling for a new international economic order.

Way back in the 1970s, the developing countries, led by Tanzania, among others, called for such a new order. At the time, the acronym NIEO was used. The proposal was supported strongly by the UN. The developing countries were reeling under the weight of the commodity price slump and the oil price hikes that followed the Arab-Israeli war of 1973.

However, the governments of rich nations saw no need to rewrite Bretton Woods. The Third World countries, especially in Africa and Latin America, were told to modernise and allow the market to function. In essence, excessive state intervention was blamed for economic nonperformance of developing countries. Governments were told to get out of business.

It is worth remembering, however, that the rich countries themselves never subjected totally to the radical market doctrines propagated by the Fund. In spite of their anti-government rhetoric, US Presidents Ronald Reagan, George H. W. Bush and George W. Bush did not even try to balance the US budget. Moreover, the industrialised nations all have state-run social-security systems that do not simply result from market dynamics.

Policing the Third World

The World Bank and the IMF were given the task to "police" Third World economies, and they have held on religiously to this thinking. Poor countries had to accept tough conditionalities in order to access loans and/or grants.

The global financial architecture should have been re-crafted when fixed exchange rates were given up in 1971. The oil-price hikes in 1973/74 and again in 1979 made reform even more urgent. Instead, Keynesianism was allowed to die and the Chicago School of market fundamentalists was put in power. Everybody was made to read Milton Friedman, and the invincibility of market economics was extolled even beyond the stratosphere. In the 1990s, the fall of communism was the apex celebration of free-market liberalism, marking an end to state-led, centrally-managed economic thinking. Ironically, the World Bank and the IMF, the institutions that enforced this ideology in the Third World and the Transition Countries, are government-owned and government-controlled.

The ideology did not work. The Structural Adjustment Programmes of the 1980s and 1990s exacerbated developing countries’ debt burden and absolute poverty. With unsustainable debt-to-export ratios, African economies had to be bailed out through the Heavily Indebted and Poor Country (HIPC) Initiative and lately, the Multilateral Debt Relief Initiative (MDRI).

It is true that the World Bank rediscovered a role for the state in the mid-1990s and the IMF seems to be acting in a less dogmatic fashion now than it did during the Asian Financial crisis ten years ago. However, more needs to happen. It is time for both institutions to revisit their Keynesian origins. Along with the other multilateral finance institutions, they are the agencies that must enable poor countries to fight the global crisis we are facing.

The current crisis started in the rich world, and the rich world is hard hit. It must not be forgotten, how ever, that, while the era of globalisation from the 1970s to the early 2000s produced worldwide economic growth, the benefits mainly accrued to 20 % of the world's population. A trans-global elite claims over 80 % of the total annual income. It includes most (but by no means all) people in North America, Western Europe and Japan, as well as sizeable minorities in many countries including large emerging markets such as China, India and Brazil.

In this context, it makes sense to redesign the international economic order. The current global convulsions are a rare opportunity to reform global governance in ways that address the systemic inequalities of the neo-liberal age. The rich world, not the poor countries, will have to shoulder the massive new debt burden that alone can allow humanity to escape the turmoil we are in.

The way forward for Africa

No doubt, public expenditure must boost demand in view of the global economic downturn. Spending on infrastructure on the one hand and social safety nets on the other are essential in rich and poor countries alike.

In Doha, Danny Leipziger, World Bank vice-president for poverty reduction, said: "The costs of investing both in social programmes and economic activities can seem daunting for many governments now short on cash, but the future cost of not taking action can be much higher than the savings from inaction." This statement implies a welcome deviation from the balanced-budget doctrine the World Bank was known for in the 1990s. The Bank acknowledges today that protecting the poor and vulnerable while at the same time removing constraints to economic growth and productivity would be a priority to overcome the financial crisis and resume sustained growth.

In this context, it is possible to set an agenda for African governments in this time of crisis.
– African governments must be part of the global effort to stem the crisis. Even though Africa bears no responsibility for bringing about the crisis, it needs to stay in the course of reforms. It is in this vein that Africa should not find itself out of any multilateral effort to recraft the global financial architecture. At the last G20 meeting, only South Africa appeared as observer. This is not acceptable.
– In this context, African governments must insist on all aid pledges being met. These are the funds they need to stimulate their own economies, and thereby the world economy.
– African governments must not slow down reforms, even if there may be incentives for doing so. Some interventionist policies look politically rewarding, but are likely to prove economically suicidal. Financial-sector reforms that make banks more transparent and accountable may be difficult to implement, but they will help to avoid knock-on effects of the global financial crisis.
– In spite of temporary deficit spending, the goal of macroeconomic stability remains important in the long run. Otherwise, domestic problems are likely to exacerbate the effects of the global crisis. It must be remembered that prudent macroeconomics helped to bring about growth in past years and that African countries are in a weaker position than the rich nations to raise money for deficit spending. Most African governments cannot afford major stimulus programmes, so they must insist on rich-world programmes supporting their economies too.
– Some African countries may have the means to undertake a modest fiscal stimulus to keep growth from falling too fast, but that should be done in such a way that government spending does not crowd out private spending.
– Generally speaking, slower growth will result in declining fiscal revenues, which, in turn, will put pressure on public expenditure. In this context, it will be essential to spend public money intelligently. Untargeted subsidies, for instance, could be removed in favour of subsidies that directly benefit the poor. Government spending that enhances productivity should be maintained.
– Utility reform and adequate policies on infrastructure will become critical as declining public revenues put pressure on loss-making public utilities. Reforms that protect spending on infrastructure operations and maintenance will cushion the fall in growth and leave the economy better able to take advantage of the rebound of the global economy, when it occurs. With better infrastructure it is estimated that Africa could increase growth by at least two percent and raise productivity by 40 %. It was a good sign that the AU summit in Addis Ababa focussed attention on infrastructure issues.
– African governments must continue to cooperate with multilateral and bilateral donors on improving accountability and transparency in the use of their domestic resources (especially income from natural resources) as well as demonstrate the effectiveness of development aid. But within this setting, they must demand increased policy space and assume a more assertive role in policy-making. They must insist on flexibility from donordriven policies.
– African governments must bear in mind that aid works best if it complements international trade. They should therefore avoid insipid protectionism, but, at the same time, insulate their economies from dumping.