Global Economic Crisis: Will the post-crisis world order be inclusive?
Global Economic Crisis: Will the post-crisis world order be inclusive?
Prof. Louka Katseli, development economist, currently State MP of the Hellenic Parliament, commented on the General Conference Report from a political point of view. Her presentation focused on the impact effects of the current financial crisis on emerging economies and developing countries as well as on the prospects for the pursuit of greater coherence in development policy and greater inclusiveness in global governance .
L. Katseli structured her presentation around the following set of questions:
1. What is the impact of the financial crisis on global economic activity, cohesion, inequality and poverty?
2. How relevant is the policy-coherence agenda for a sustainable recovery?
3. Can the crisis become an opportunity for the pursuit of policy coherence and the reform of global governance?
What impact will the financial crisis have on global economic activity, cohesion, inequality and poverty?
L. Katseli pointed out that the financial crisis is likely to batter growth in both advanced and developing economies for two or more years and that global economic activity is expected to contract in 2009 for the first time in 60 years. According to the IMF , global GDP is estimated to have fallen by an unprecedented 5% in the fourth quarter (annualized) of 2008 led by advanced economies which contracted by around 7%. GDP declined in the fourth quarter by around 6% in both the US and the euro area, while it plummeted at a post-war record rate of 13% in Japan. In addition, global growth dropped significantly. Across a broad swath of emerging economies external demand weakened, financial constraints have risen and commodity prices have plunged.
L. Katseli argued that growth in developing counties will be impeded by renewed financial constraints, lower commodity prices and terms of trade deterioration, weak external demand and associated spillovers to domestic demand. In addition, the effects of the crisis will likely exacerbate both inter-and intra-country inequality as well as poverty in many developing countries while aid allocations are likely to slow down. The channels of transmission vary across countries :
* Among emerging countries, Central and Eastern Europe (CEE) and the Commonwealth of Independent States are being the most adversely affected. Several countries are facing a sharp contraction in capital inflows, with those suffering the greatest damage having sizeable fiscal or external deficits (Baltic countries, Hungary, Croatia, Romania and Bulgaria)
* In Latin America, tight financial conditions and weaker external demand are expected to lower growth in the region. Growth in Brazil is already decelerating sharply and Mexico is projected to enter a recession
* Emerging Asia is being hurt through its reliance on manufacturing exports: IT exports are collapsing and growth in China is also slowing down.
* In Africa, growth has slowed down but more modestly than in other regions. It is expected to be moderate particularly in commodity exporting countries, while several countries are experiencing reduced demand for their exports, lower remittances, and FDI flows. Aid flows are also under threat.
* In the Middle East, the effects of the financial crisis are more limited so far. Despite the drop in oil prices, government spending is largely being sustained to cushion the toll on economic activity.
How relevant is the policy-coherence agenda for a sustainable recovery?
L. Katseli argued that the current financial crisis has highlighted once again the importance of interdependence across various policy domains , including debt , trade, migration, security , energy and development and that the crisis and its negative effects put policy coherence back on the policy agenda. She defined policy coherence as “the pursuit of development objectives through the systematic promotion of mutually reinforcing policy actions on the part of both OECD and developing countries” .
She offered five realisations that could facilitate greater policy coherence and pave the way for new strategic alliances and global institutional reforms:
1. The deeply intrinsic belief in the auto or self regulation of markets has been shattered. The financial crisis and its denouement have demonstrated the importance of state institutions for market stability and social protection as well as the need to combine market and political institutions to serve the public interest. Exclusive reliance on markets to allocate resources and promote development can lead to instability, inequality and extreme poverty. Proactive regulation, capacity building, employment and income redistribution policies are needed to mitigate the adverse effects of the functioning of markets; these are important aspects of public policy. This realisation has always been at the centre of development thinking and comes back with full force today even in conservative circles.
2. The growing importance of sensible global demand management and of addressing effectively global imbalances. Global imbalances have been shown to fuel the global crisis; their correction requires policy coordination and greater policy coherence. Main actors, including Japan, China, the emerging economies and developing countries need to engage in policy dialogue to resolve differences, to coordinate macroeconomic management and to pursue more coherent policies at the global level.
3. There is an emerging consensus that the distribution of income inside the countries and worldwide must shift towards less concentration at the top, supporting a broad based expansion of consumer demand. The crisis has demonstrated the dangers of excessive inequality for the stability and viability of market economies; this has led to an unprecedented call for sensible pay-schemes and appropriate redistributive policies.
4. The need for greater policy coherence. There is by now a broad -based consensus which was absent a few years ago, regarding the interdependence of financial markets and the real economy that spans debt, trade, migration, development ,security and environmental considerations. This calls for both national and international institutional reforms that would facilitate the promotion of policy coherence .
5. Global risks need to be managed on a global level by international institutions. Financial instability has given rise to risks that need to be addressed through collective action on a global level.
“If we were to pursue a global policy coherence agenda, we need to identify and address cases of incoherence, to create and strengthen institutional mechanisms that facilitate policy coordination ,to provide incentives for the systematic promotion of mutually reinforcing policies and to ensure credibility and predictability in national and international economic systems; more importantly, we need global governance reform that would give voice to all main actors and would bring around the table those stakeholders that have more to gain from the pursuit of policy coherence , namely the emerging economies and the developing countries” L. Katseli concluded.
Can the crisis become an opportunity for the pursuit of policy coherence and the reform of global governance?
In view of the fact that both emerging economies and developing countries have been hit by a crisis which originated in the unregulated financial markets of advanced countries, it would be to the advantage of these countries to rekindle old alliances which have been disrupted for the last 20 years and to promote policy coherence and a win-win global governance reform agenda.
L. Katseli stressed the need for leadership in promoting global governance reform and noted the lack of a common agenda by developing countries. She stressed that global governance reform is needed to fill institutional gaps and to enhance the voice and representation of emerging economies and developing countries in international organizations. She supported the 1998 proposal by the UN and its Committee for Development Policy to create a World Financial Organization (WFO) that would mitigate micro-prudential risks, provide oversight and coordinate regulation in financial markets as well as a UN Sustainable Development and Security Council to oversee human security and sustainable development policies at the global level. She also called for the regional representation of developing countries in an enlarged G20 on a rotation basis as well as for the reform of the IMF and the World Bank’s voting and governance structures to ensure adequate representation of emerging and developing countries’ interests in policy making.
In summary, she highlighted the need for leadership to promote international coordination of economic and development policies , to fill institutional gaps and to mobilize and involve key players and social partners in the pursuit of a more democratic and inclusive global governance reform. Such an agenda could provide a rallying point for development studies and development policy makers.
L. Katseli concluded by saying: “the post-crisis institutional architecture will influence the sustainability and inclusiveness of the post-crisis world order and will shape future policies and development outcomes. It is a pity that these issues are not discussed more widely in academic and policy fora”