Colombo, Economy

G- 20 and the World Economic Crisis

All appear bleak in the global economy as Group of 20 leaders gathered in London on Thursday, April 1, 2009. The financial crisis that began in last September has morphed into a severe global recession and it would turn into the worst downturn since the World War 2. OECD chief economist Klaus Schmidt-Hebbel observed that “the world economy is in the midst of its deepest and most synchronized recession in our lifetimes, caused by a global financial crisis and deepened by a collapse in world trade”. The World Bank forecasts contraction of 1.7 per cent in the global economy this year. According to the International Monetary Fund, the global economy will contract this year by between 0.5 and 1 percent. Unemployment in OECD countries would hit 10 per cent this year as their economies would experience 4. 3 per cent shrink this year. The impact of the global crisis would be disastrous for poor countries. World Bank President Robert Zoellick said that this decline would have a devastating impact on the world’s poorest countries. “These events could next become a human and a social crisis, with political implications.”

It is clear that there is something fundamentally wrong in the present global system. British Prime Minister Gordon Brown lamented: “Free markets became worshipped as a god but that god was false.” And, we need to remember that this ‘false god’ was a creation of Anglo-American capitalism in the past two decades or so. Deregulated financial markets led to the housing bubble and ‘sub-prime’ crisis and also it allowed U.S. consumers to go into debt to compensate for stagnating or falling real wages until the recession began in December 2007. NINJA loans have created what Herman Minsky has called ponzi borrowers who can repay neither the interest nor the original loan. With the bubble burst, many big financial companies either fell or submitted for bankruptcy. No doubt, there is a dire and urgent need for major international actors to counter this downward spiral, but they have so far failed miserably to agree on corrective measures since they are guided by narrow nationalist and class interests. Can they agree on decisive cleaning up of toxic assets? Can they reverse the process of contraction of world trade that according to WTO would shrink by 9 percent this year–the worst drop in 80 years? Can they revamp current international reserve currency system taking into account new world power configurations? These are big issues! And it appears that G-20 leaders would disagree on many issues.

While Anglo-American governments are pressing for a greater government stimuli to lift the world economy by bailing out big capitalist enterprises including senile financial companies, France and Germany stand for strict regulatory mechanism to tame the financial system that has been under the dominance of Anglo-American banks and financial houses. President Sarkozy warned that ‘if the deliverables are not there, I won’t sign the communiqué.’ China and Russia seek an introduction of major changes into global financial architecture. “We cannot turn our work into just a set of narrow solutions –add some money here, extend something’s function there, and say everything’s fine… I believe that this approach is wrong. We need an entirely new construction”, Russian President Medvedev informed. The Governor of China’s central bank, Zhou Xiaochuan, , has proposed to create a super-sovereign reserve currency in reforming the international monetary system. Joseph Stiglitz has also called for new global reserve system to replace the US dollar as the world reserve currency. At the time of writing, all indications are that G-20 leaders will return home without entering into an agreement on any of these issues. The Economist, the mouthpiece of Anglo-American capitalism has warned in advance that the task of G-20 should not include any fundamental deviation from the deregulated market system. “The first task for the leaders of the Group of 20, who will meet in London on April 2nd, will be to do no harm. Don’t fall out over whether Germany and China are spending enough public money to get the world economy going. Let’s not have a row over how to run the IMF. And spare us a tirade against “market fundamentalism”.

The current global crisis has once again proved that capitalist system is inherently crisis-driven and its so-called in-built self-correcting mechanisms that include periodical crisis make the life of all, especially low-income earners miserable. However, we should not underestimate the great resilience of the capitalist system that it oftentimes achieves through hurting the poor and marginalized strata of the world population by making them pay for the crisis. My taxi driver from Dublin International Airport to Maples House Hotel last month put it very clearly: “they want us to pay for the crisis that was created by them”. At least G-20 leaders would be in agreement on this issue.

Writer teaches political economy at the University of Peradeniya
Email: [email protected]