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IN the last months, with renewed emphasis, many have been asking the following question: will this economic and financial crisis give rise to a fundamentally new geopolitical architecture? Many think it necessary; others, inevitable; some are sceptical. Maybe we should formulate it in a slightly different way. Can we expect changes in the international system structure that will improve the coordination of the international economy and, hopefully, will reduce the likelihood of major economic and financial crises?
In trying to draft an answer to this kind of question, what are our major points of reference and the likely obstacles? Such an understanding is essential if we do not want to be mere passive observers of events that affect us all. Therefore, let’s try to identify, in relatively broad terms and as objectively as possible, how we got here and what the main elements are of the present context that we must take into account.
Before I attempt to do just that, let me make it clear that this is no more than a personal reflection, a contribution to a necessary public debate on the current state of the world. Hopefully, it will help the general reader to make sense of what it is happening and encourage a reasoned debate. Certainly, no claim to any sort of irrefutable truth is made here. Others may have divergent opinions and perceptions, which may well be plausible and defensible. But that’s the nature of a public debate and that’s exactly how it should be.
Obviously, the backdrop against which this discussion has to take place is the current international crisis. I feel that we face here our first problem. In the public mind and most of the public media, the causes and culprits of the current situation seem to have been identified. Consequently, the solutions seem more or less obvious and governments feel the pressure to take actions that punish the guilty ones or, at least, prevent them from doing further harm. At the very least, they cannot be seen as being soft or hesitant. Let us keep a prudent distance from this battleground.
As it happens, the common narrative—greedy financiers on the loose—is quite superficial (even if there is some portion of truth in it). The causes are more complex than may appear at first sight; they involve wider social and economic sectors than is commonly acknowledged and the sought for solutions are not without their own problems either. This is more the case of a death by a thousand cuts than as the result of a single strike. So, a first word of caution: we may be hoping to find fast (and, if possible) easy solutions for problems which are still incompletely formulated, based on causality relationships that are poorly or insufficiently understood. If that’s the case—and I believe that, in some measure, it is—the discussion of possible paths from here requires that we re-frame our understanding of the sources and timing of the crisis.
Certainly, the crisis, in the precise guise it took, was not inevitable. It is surely arguable that some actions might have been taken (or avoided) that could have delayed its outset, or reduced its intensity. Those issues alone will keep historians occupied for a long time to come. But this situation was also a possible outcome of a long process of international economic growth increasingly marked, some would argue, by some unbalanced trade patterns and unsustainable national policies and strategies. To put it into a different perspective, we can see it also as the outcome of the actions of a multitude of economic agents that, within their respective frames of responsibility and scope for decision, were not necessarily behaving irrationally. We, in general, appear to have difficulties in grasping how complex the world (political) economy has become.
But let us concentrate on just a few factors whose combination seems to be the most important. They are: international flows of trade and capital and the underpinning structure of the world economy; the cost of money and the monetary policies of major economic actors; the regulation of the financial sector, at both the national and international levels; the housing bubble and the social policies, mostly in (but not restricted to) the US.
Without trying to go even further back, let us be reminded that since the 1980s the world economy went through a remarkable growth period. Looking back, it all may now seem only “natural”. But, let us not underestimate the stakes. To name but a few, this period is marked by the entry into the world economic and trade systems of Russia and China, previously centrally planned economies; by the progressive opening of India, a rather closed economy for most of its existence since independence; and by the increased integration of countries like Brazil or Indonesia, that seem to have achieved finally the political and economic stability required for them to play increasingly relevant global roles.
That is, albeit with different flavours and various levels of government intervention, we have witnessed the integration in the global capitalist system of more than half of the world’s population, in the time frame of one generation. As part of this process, the expansion of trade and foreign investment has boomed and contributed to a reduction in world poverty without historical precedent. But nothing in the history of the world or the expansion of capitalism could make us expect that such a profound shift could be made without setbacks or that crises were things of the past.
One of the distinctive features of the evolution of the world economy in this period has been the almost symbiotic relationship between the US (and the rich countries, in general) and China (replicated, at various levels, by other countries). It can be summarized, in very simplified form, as follows. The rich countries exported capital and technology to the rest of the world; the rest of the world provided mostly cheap labour and land. That allowed the production of cheap goods exported to the rich countries, whose consumers kept buying ever more—and saving ever less.
On their side, the exporting countries limited domestic consumption and accumulated foreign reserves. These were used mainly to buy American bonds, helping to keep the interest rates low. This was also the more or less explicit objective pursued by the Federal Reserve and most central banks across the world, as a tool to keep demand high and unemployment low. As long as the export platforms scattered around the world kept producing ever cheaper goods, central banks could hope that inflation could be kept in check. And as long as this arrangement could go on, consumer demand in the US would keep the steam and pull the world economy.
This process was never completely smooth. As could be expected, it was subject to cyclical contractions and not a few regional financial crises. But, those occasional disturbances apart, this arrangement suited almost everyone. It was in the interest of no one to risk triggering a crisis. Regardless of concerns about its long-term sustainability, it was to be enjoyed as long as it lasted.
This crisis has gained a particular dimension because it started in the US or, to use the cliché, because the growth engine of the world lost steam. The origin of the series of events that triggered the crisis starts in a policy domain that seems remote from our concerns. Since the Clinton administration the American government was promoting a policy of home acquisition aimed at socially and economically weaker sections of the population. That meant the concession of the so-called sub-prime loans. That is, high-risk housing credit, guaranteed—implicitly, at first, and, later, explicitly—by the state. Mortgage specialists were encouraged to lend to customers which usually would not be able to get loans from financial institutions.
The good intentions aside, that was a risky proposition. Risky loans guaranteed by the government invite ever more risky loans—and creative and highly leveraged financial instruments that rely, one way or the other, on that guarantee. Not too surprisingly, a housing bubble ensued (one that, note again, was not limited to the States). What was clear was that, as the more fragile sections of the population were becoming seriously indebted and dependent on ever decreasing real estate values, the risk of high default rates, if a contraction occurred, could not be ignored. But if the default rate could be kept within normal margins, the risk seemed manageable and relatively painless adjustments looked possible...
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José I. Duarte is a Macau-based economist. He is a lecturer in economics and writes regular columns on the local media on economic and policy issues.
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| Issue 6.4 |
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World Mutation or
Epochal Challenge?
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