Global crisis: Challenges to re-setting the global economy

Financial contagion channel
The ninth transmission channel has been financial contagion. Apart from the negative impact on our trade (exports and imports of goods and services) this has had the most damaging negative effects.  As readers would recall this contagion has mainly centred on the spillover effects of the collapse of the CL Financial Group of Trinidad and Tobago and the Stanford Financial Group based in Antigua.  The Stanford Group was charged by the United States authorities for operating a Ponzi-type scheme involving over US$8billion.

The CL Financial Group was at the time the largest trans-regional financial enterprise in Caricom.  Across the region it had hundreds of thousands of policyholders, depositors, investors, creditors, suppliers and employees.  As a group the company held 70 subsidiary operations located in 32 countries.  Its assets were mainly in finance, real estate, energy, manufacturing, forestry, communications and various services.  Guyana was severely impacted by its collapse, particularly policyholders and businesses dealing with Clico.

Outside of this, the commercial deposit-banking sector in Guyana has been only moderately impacted by the global crisis, as its exposure to the global financial crisis and credit crunch has been limited.

The irregular economy
Finally, because the irregular or underground sector in Guyana remains large, one has to take it into account as a potential transmission channel.  After all the sector includes a heavy mixture of tax evasion, capital flight, money laundering, corruption and other activities linked to organized criminal enterprises.  These informally interact with the legal and formal economic activities of Guyana in a significant way.  Most, if not all of these activities are mediated through the formal legal financial institutions in Guyana and through these the formal international financial sector with which they deal.  If the latter were impacted by the global crisis as we know it to have been, this would have been transmitted back to our irregular and then to our regular economy.

Turing to the present global financial and economic crisis, we can safely say that, in all its manifestations, it is comfortably the worst crisis that has befallen the global economy since the Great Depression of the 1930s.  Immediately prior to the emergence of the crisis, however, it would be fair to say that the explosive expansion of globalization and its financialisation had reached unparalleled levels. Indeed one can confidently assert that, at the time, the forces of globalization and liberalization seemed literally unstoppable. However, today the international economy faces several fundamental challenges.

The first of these is how to re-set the global economy on a course of continued explosive growth.  Secondly, how to prevent (and/or contain) deviant financial behaviours (herding, greed, fraud, excessive risk-taking, over-speculation and so on) which are associated with unregulated markets (real and financial) at both the national and international levels from continuing.

The third challenge is how to promote cooperation, solidarity, and collaboration across countries and regions as the main drivers of the processes of globalization, instead of the ‘beggar thy neighbour‘ approaches to international financial and economic relations which are all too frequent today.

Fourthly, how to ensure that both the benefits and the costs of globalization are fairly and justly distributed between nations and social groups according to their capacities and needs. In this sense therefore, globalization has to be treated as a public good, which should be available for public and not solely private appropriation.

The fifth challenge is how to ensure continuity in global growth and development and the minimization of interruptions to the processes of globalization and breakdowns of the global regulatory, monetary and oversight institutions.  By consensus these institutions are in dire need of fundamental reform. At present the G20 Group of Nations has emerged as the de facto global organization responsible for guiding this reform.

G20 financial and fiscal challenges
Presently the G20 faces many challenges, which we will investigate in some detail in forthcoming articles.  For the time being, readers should note that at the level of monetary and financial oversight these challenges include 1) reforming the structure, operations, financing, and control of the Bretton Woods Twins (the International Monetary Fund and the World  Bank);  2) fixing the accounting, legal, and reporting regulations governing the operations of private national and transnational financial firms; 3)  deleveraging those financial institutions in need, including the removal of extensively-held toxic assets still in the portfolio of large private financial institutions,  especially commercial banks in the United States and Europe.   Thus as we come to the end of 2011 as many as 840-odd banks in the United States are classed as “problem banks.”  And finally, 4) halting the rapid, unrestrained, and unregulated securitization and ‘financialisation‘ of commodity and carbon credits markets, as these have posed special threats to the stability of the global financial system because they encourage massive short-term speculative capital flows and currency over-speculation.

At the level of fiscal and macroeconomic oversight, the coordinated easing of monetary measures introduced by central banks at the outset of the crisis, together with substantial support stimulus packages had no doubt temporarily halted the downward and seemingly out-of-control spiral of economic collapse, thereby restoring some element of global stability.  Beyond a doubt this was indeed a notable area of success for the G20.   Regrettably however, a few months later the recovery has palpably stalled and the issues of more monetary easing and further support stimulus packages have become critical.  A double-dip to the Great Recession is now a real, and not a far-fetched threat to global recovery and progress, as it seemed only a year ago.

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