Commentary
Two interesting ideas:- this financial melt down is the first truly global event that affects everyone in the world regardless of the country and region, and
- the diffusion of geopolitical power from the ideologically conservative free-market developed economies of the West to the ideologically liberal socialist developing economies of the South.
The End of History and the Last Man, by Francis Fukuyama, postulated the triumph of liberal democracy over other forms of political discourse. Is it fair to postulate the demise of free-market economy after the financial meltdown? If anything, it proves only the need for government regulation and supervision of economic activities. This has been the purpose of government since the invention of politics. The only proof is the demise of conservative lassaiz-faire political economy favored by the rich and powerful nations of the west, such as UK and US. With the collapse of the financial structure, or lack of structure, it is clear that government directed economic activities are not only desirable, but necessary. It is not whether to have government direction or not; it is a matter of the magnitude and nature of government involvement. The end of the Cold War proved not the evil of a government directed economy as asserted by right wing ideologues. It only proved the evil of totalitarianism, of a government who grew arrogant in its abilities. A middle road of government directed free market economy is and has been the best road map for lasting shared prosperity since the beginning of a political economy under an enlightened monarch, or a working democracy, or the New Deal, and it will be evident in the near future under President Obama's aggressive intervention and his re-invention of America.
China's government directed economic recovery is already underway because there was a head start of six months, due to the election. There is no reason to think America would be too far behind.
The fundamental question is whether the changes in policy will have traction in the partisan political environment of the US, and the nationalistic environment of the world.
Excerpts
What began as a reversal of the real estate market in the United States has spun out of control with extraordinary global implications.The world's financial and banking systems have had a near meltdown; entire economies have been swamped; trillions of dollars worth of assets have evaporated; and millions of people from Windsor to Wuhan have lost their jobs. Governments have collapsed, tent cities have sprung up for foreclosed families, senior executives now work as janitors, once-mighty financial institutions have been humbled, investors devastated, consumers terrified and governments bewildered.
Financial analysts are confused and uncertain about what is happening. Yesterday was actually a good day. The Dow Jones ended up 9% on the week, the TSX was up 9.3% - it was the best performance for North American markets since November.
But, when you step back from the daily rash of economic news, you can see the current economic crisis is giving birth to a new perilous era. An era of protectionism, failed states and new wars. An era that has such diverse consequences as dealing a blow to Scottish nationalism, hampering al-Qaeda buying weapons and causing the deaths of millions of children.
"This crisis is the first truly universal one in the history of humanity," Michel Camdessus, a former managing director of the International Monetary Fund, told an Asian Development Bank forum in Manila this week.
"No country escapes from it. It has not yet bottomed out."
When finance ministers and central bankers from 20 countries arrive today by helicopter at a grand old British country house hotel set in the rolling woodlands of West Sussex, they will seek to rebuild the world's economic system.
Under intense security and surrounded by the opulence of a luxury resort that boasts 260 varieties of rhododendrons, camellias and azaleas in its gardens, officials from the Group of 20 industrialized and developing countries will try to extinguish the most virulent economic crisis since the Great Depression.
Some observers compare this weekend's meeting at the South Lodge Hotel, just outside the tiny village of Lower Beeding, to the Bretton Woods summit of July, 1944, when delegates from 44 Allied nations got together in New Hampshire, to reshape the world's post-Second World War economy.
The simple fact it is the G20, not the Group of Eight, that is trying to resolve the crisis acknowledges the change that has rocked the world. For the first time, some of the fastest-growing and emerging market economies - not just the United States, Canada, Japan and Europe - have seats at the table.
"The old days of the G8 are gone," says Jim Fisher, vice-dean of the Rotman School of Management at the University of Toronto. "The G8 sort of feels like the York Club or something - a place where you go and see everybody who used to be powerful having lunch together."
The rules of the game have changed and the most basic questions of world politics are open for debate.
The economic crisis is transforming, or at least challenging, everything, from U.S.-China relations to the unity of the European Union. It has shattered faith in economic liberalism that served as the political and economic model for much of the world for the past 30 years - and there is no obvious alternative waiting in the wings.
Even something as wistful as talk of Scottish independence has been transformed by the crisis. Dreams of using Scotland's oil wealth, to create an "arc of prosperity" from Scotland to Iceland and Scandinavia now sound like a nightmare, with Iceland wallowing in bankruptcy and the Royal Bank of Scotland, formerly the world's fifth-largest bank, registering the biggest loss - US$39-billion - in British history.
"The crisis may be changing, in a fundamental manner, the global geopolitical landscape," Shyam Saran, India's former foreign minister, said recently in a lecture in New Delhi.
"The Western dominance of the global financial markets and the global economy as a whole has been shaken to the core. It is possible that New York and London may no longer regain their undisputed status as the central financial markets of the world."
Developing countries are openly questioning the magic of the marketplace, but the biggest fear remains a backlash against globalization.
Welfare for Wall Street and rapidly rising unemployment figures make it difficult to argue the world should not turn its back on free trade.
"The fact is protectionism is creeping in," says Colin Robertson, a Canadian career diplomat who just completed a major Canada-U.S. research project for Carleton University's Norman Paterson School of International Affairs. "What, after all, is a bailout? This already contravenes the agreed-upon rules. Subsidy will become the new tariff."
"We are going to go back before we go forward," agrees Mr. Fisher. "Right now people are going to protect themselves. The near-term inclination will definitely be to put your arms up and say, ‘No. We have to keep jobs at home.' It is natural and inevitable, but I don't think it will be sustainable.
"Eventually, we will see there were enormous benefits for everyone in the world when we had global trade. When you look at it, you see the last 20 years as years of outsourcing and off-shoring in North America, and yet employment stayed high and productivity grew and our standard of living grew. And you also had these two huge population areas of the world [China and India] which moved hundreds of millions of people from poverty to become consumers. The total world impact of all this globalism in world trade was just so profoundly positive."
It may be too early to determine the long-term global consequences of the economic crisis, but you can still glimpse some ramifications before the dust settles.
There may be more failed and failing states and more radical movements in a world littered with new conflict zones.
Economic collapses have already touched Brazil, Hungary, Iceland, Indonesia, Pakistan, Russia, the Baltic republics and Central Asia.
Anger has spilled out onto the streets of Europe, with anti-government riots in Lithuania, Bulgaria, Latvia and Greece.
There was a rash of wildcat strikes in Britain by workers who claimed they were denied construction jobs by contractors who used cheaper foreign workers. If unemployment continues to rise, France fears a return to burned-out cars, masked youths and arson attacks in its industrial suburbs.
Even the Taliban and al-Qaeda are affected.
Last week a Turkish group, Seyfulkahar al-Muhaciri, that recruits fighters and supports the Taliban, complained on its Web site the global economic crisis has harmed its fundraising, driving down donations, just as the costs of ammunition and weapons are skyrocketing on the black market.
In a world that has never before been so interdependent, the global economic crisis now threatens to become a social crisis in many countries.
The pace of decline has been breathtaking.
The U.S. economy has lost 3.2% of its jobs – 4.4 million – since December, 2007, and unemployment has reached its highest level in a quarter-century. Figures for Canada released yesterday show unemployment rose to 7.7% in February (from 7.2% in January) and analysts expect it to exceed 10% before year end.
This week, the Asian Development Bank published a report that estimates the value of global financial assets, including stocks, bonds and currencies, fell by more than US$5-trillion in 2008. That is almost equivalent to a year's worth of the entire world's gross domestic product.
"The loss of financial wealth is enormous, and the consequences for the economies of the world will unfortunately be commensurate," said Claudio Loser, a former IMF director and author of the report.
Meanwhile, the World Bank predicts the global economy is likely to shrink for the first time since the Second World War and the International Labour Organization estimates 50 million jobs may be lost globally.
Hardest hit are the poor.
The IMF estimates the global economic crisis will cost developing countries at least $1-trillion in lost growth.
Tighter credit conditions and weaker growth will cut government revenues, severely limiting the developing world's ability to invest in education or health care.
Companies, consumers and countries will struggle to pay off loans and developing nations will be unable to adopt stimulus packages to prod their economies toward recovery.
Meanwhile, they will be further ravaged by slumps in commodity prices, caused by worldwide production cutbacks.
The World Bank estimates 53 million people will be pushed back into poverty, joining up to 155 million who now live on less than US$2 a day.
Even more chilling is a World Bank prediction that 2.8 million children will die between now and 2015, as infant mortality rates soar because of the economic crisis.
"Social costs on this scale should raise serious concerns about political stability in the most affected countries," says Dominique Strauss-Kahn, the IMF's managing director.
The IMF says it already needs to double its lending capacity to US$500-billion to prevent the collapse of 16 developing countries, including Pakistan, an unstable, nuclear-armed regional superpower that is already under attack by Islamist extremists. And the World Bank is calling for developed countries to pledge 0.7% of their stimulus spending to create a special "vulnerability fund" to assist poorer countries.
"After hitting the industrial countries and then emerging markets, a third wave of the global financial crisis is now hitting the world's poorest and most vulnerable countries, and hitting them hard," warns Mr. Strauss-Kahn.
In its wake, the world crisis is leaving frightened, confused and angry people in every corner.
"Economic dislocation always has political consequences, and global crises have geopolitical consequences," says Ron Smith, professor of applied economics, at the University of London.
"The initial collateral damage from the credit crunch includes faith in free markets. [But] the political centre of gravity could shift as more conservative politicians are displaced or reverse their policy on state intervention."
The very way the world does business is being transformed.
Fading industries, like North America's automakers, are being pushed to the brink of extinction, while key sectors in manufacturing, financial services and retail are struggling with massive layoffs that may forever change the face of the labour force. Older workers are likely to be hit hardest, forcing earlier-than-planned retirements, and reducing overall productivity and earnings.
"The coming recession might well mark the beginning of an era of permanently higher taxes and slower economic growth in rich countries. And it will hasten a fiscal crisis in entitlement programs," predicts Jagadeesh Gokhale, a senior fellow at the Cato Institute.
Even the sense of solidarity within the European Union - between east and west, rich and poor, new and old - is under strain
"I'm convinced Eastern Europe is the canary in the mine," says Mr. Robertson. "You have to remember we basically fought two World Wars and a Cold War to try and reintegrate them back into Europe. Yet they are in pretty desperate shape and I don't see Old Europe coming to the aid of New Europe."
"New Europe is very fragile. It is not quite 20 years old. We had a full spring in the interwar period (1918-1939) which didn't last much longer either," he adds.
Now that the United States has had its sense of strength and invulnerability shaken, we may also be heading for a more diffused and diversified international order.
"Much of the rest of the world sees the current global financial crisis simultaneously as: a) America's fault; b) a very big deal and c) worthy of a rethinking of the basic assumptions of U.S.-style capitalism. But the United States doesn't appear to recognize how much anger and blame is being cast its way," says Douglas Rediker, a former investment banker who is now director of the Global Strategic Finance Initiative at the New America Foundation in Washington.
"The financial crisis created an ideological deficit, where even our closest allies in Europe, not to mention other countries with whom our relationship is more complex, like Russia, China and the Gulf states, are re-thinking the balance between social values and market-based economies" he adds.
"[It has] opened the door for others to question not only whether the United States is up to the task of driving and policing the world's financial systems. Perhaps it also extends to a broader question about U.S. leadership, international alliances and the world order."
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