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Economic crisis: Are we in good hands yet? April 1, 2009

Posted by diegozamuner in Uncategorized.
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by Diego A. Zamuner

As the whole world is being affected by the consequences of the worst financial crisis since the Great Crash of 1929, with many gloomy scenarios coming from each relevant economic institution in the world every other week, many questions arise. Why can’t economists -and the government they advise- find a solution to this huge mess? g20leaderswashington15nov08Why with many people being aware of the risks taken by financial institutions all over, the system did nothing to change in the first place? With a few hundred years of development of economic thought, so many star economists out there, and quite a few universities claiming to offer the best economic courses in the world, why do world leaders not manage to agree on a solution?

In a recent article, Dani Rodrik stands by economics while blaming economists. As he says, if the world economy tumbles off the edge of a precipice, it is because of partisan economists who did not do their job properly -i.e., that of informing decision-makers of the trade-offs each economic model usually implies-, not because alternative models do not actually exist in the economics theory. This seems right indeed… But who to listen to, then? And, above all, who should take the relevant decisions that should take us out of this mess?


Towards a new leadership…

The “laissez-faire” policy of the biggest economy in the world, coupled with the inaction of the global community – related to ideological reasons, of course, but also to the distribution of power in the global economic decision-making process – led us here. The need for a more reactive and heterogeneous leadership was therefore clear. And the G-20 (re)appeared stronger than ever… As Barry Eichengreen argues, “the G-20 has seized power from the G-7/8 as the steering committee for the world economy” in the aftermath of this crisis. It is indeed this club of 19 rich and emerging countries + the European Union -escorted by a few international institutions- which is leading the debate about the answers to the crisis that is undermining both the world of finance and the world’s real economy.

It is true that, due to the interdependence of financial systems and economies in general, this time the risk of recession is a global problem, which requires then a global answer. Thus, the answer could not be an automatic imposition from the leading economies of the world anymore. Global financial imbalances justify this since the G-7/8 would clearly not be in a position to finance its ambitions without appealing to the huge reserves held by Asian countries…

So it is already a pretty good thing that the thinking about the economic future of the world is not on the hands of the richest nations anymore, especially because traditional positions are giving way to less orthodox economic approaches.

But there are still a few issues about this informal organization taking the world’s reins. First of all, there is a legitimacy problem. Why is the G-20 attempting to take decisions that would affect the whole world? In order to answer this question it is important to first think of the alternatives.


A few alternatives…

First of all, there is the IMF, the classic international monetary firefighter. But even after the recent modest reforms of quotas and voting shares within the institution -only a first step as declared by its current Managing Director, Dominique Strauss Khan-, it is still dominated by the most advanced economies, which does not solve the legitimacy problem. Besides, though in a clear increasing trend thanks to its ongoing renewal, its image is still negatively affected by its recent mistakes, which undermines its credibility. Moreover, it does not ensure a particularly effective decision-making either.

There is also the United Nations model. Many, including the governments of Germany and France, suggested the creation of a global council on social and economic issues. The fact is that an Economic and Social Council already exists under the UN. It is politically irrelevant though, since it has no decision-making power. It would therefore be justifiable to think of creating a separate global body or reforming the current one. But given the UN’s very limited efficiency, would it be realistic to think this model could really work? Even with much fewer countries, the European Union does not manage to take decisions properly… how could it work with almost 200 countries? Moreover, it would take time to build a new or more performing global body, which is exactly what the world does not have right now if damages to the economy are to be minimized.


The case for a representative, yet effective, global body as a medium term objective

Of course, an inclusive global body would enjoy more legitimacy, but we also need effectiveness. That’s the whole idea behind representative democracy. Thus, we should agree on the need for a small group, such as the G-20 -even though 20 does not need to be THE number, and the current organization not to be definitive, as the Canadian Leaders-20 initiative attempts to show-, but then we should also bring into question the details of its composition.

For instance, what is Argentina doing at the G-20? Even as an Argentinean is hard to understand… And why the United Arab Emirates are not there? They have lots of money and oil after all… Many other important economies such as Thailand or Taiwan are not part of the current leading committee either. If the target is legitimacy, the G-20 could also adopt a logic of rotation according to constituencies in order to include more countries while keeping a small number of participants at the table. This would also avoid us repeating the same mistake -of letting only a few to be in charge of taking, or enforcing, decisions that affect us all- again. Thus, the substitution of the G-20 for the G-7/8 would go beyond the simple expansion of the world’s economic elite club to a few new members.


The need for a more focused G-20 in the short term

However, pragmatism imposes the acceptance of the G-20’s leadership under the current circumstances. We wouldn’t have much room for choice anyway. What is really important now is that its members eventually manage to reach an agreement on a relevant set of measures… and that everyone is determined to honor its engagements.

For this, it is important to take the lessons from the past and try to move away from any kind of dogmatism. This would imply that in the current search for a way out of this crisis first things should be tackled first: the main priority should be to get the world out of this mess. Difficult decisions about a much-needed regulation for the future should come later, so that our leaders can keep the focus on the most urgent issue: the way out of recession.

It would be more efficient, for instance, to discuss the details of how to make stimulus packages work since there is no certainty about their efficiency –i.e., which kind of measures to take in order to ensure the quickest way back to growth-. Moreover, innovative measures, such as alternative taxes intended to fund global action plans for the settlement of global issues, can more easily be taken in times of crisis… and the global community should definitively take advantage of this.

Unfortunately, it doesn’t look like the upcoming G-20 meeting will go in this way unless Obama’s current European tour manages to make some positions change. We can only hope that the world’s leaders -especially the European ones!- are determined to take us out of this mess as soon as possible instead of standing by any kind of dogmas. After all, the ones who will manage to improve the situation of their countries first will probably get huge political gains. Let’s see what they decide by the end of this week…

Although the fact that most of the emerging countries affiliated to the G-20 are there because of their growing relevance for the world’s economy does not really mean that the voice of the ones left behind by economic growth is being heard yet…

The G-7 economies still hold around 45% of IMF’s voting shares.

The Economic and Social Council is only a consultative body under the authority of the General Assembly.


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