15 Feb, 2012

Financial Markets A “Systemic Threat” To Global Economic Stability – UNCTAD Chief

Imtiaz Muqbil

Bangkok – Dr Supachai Panitchapakdi is not very well-known to most people in travel & tourism, except perhaps to my readers in Thailand. The 65-year-old former Thai Deputy Prime Minister and Commerce Minister was closely involved in rebuilding the devastated Thai economy in the wake of 1997 currency attack by the Jewish market speculator George Soros. Today, the Netherlands School of Economics-educated Dr Supachai has a far more formidable task – helping to rebuild the global economy in the wake of a nearly identical crisis caused by another set of out-of-control and largely unaccountable financial terrorists.

Since 2005, Dr Supachai has been Director-General of the UN Conference on Trade & Development (UNCTAD), a global body that largely reflects the views of the developing countries. Drawing upon his unparalleled experience with the Thai economy, Dr Supachai has for years been following UNCTAD’s lead in sounding early warnings about the perilous state of the global economy. He did so frequently during his first four-year term and again in 2009, when he began his second four-year term as head of UNCTAD. Only problem was: Nobody listened to him. They were too busy listening to the World Bank, the International Monetary Fund, and other international institutions dominated by Western neoliberal economists with links to Goldman Sachs and Lehman Brothers. After all, what do the Asians know?

Well, the chickens came home to roost. Now coming to the end of his second four-year term, and with nothing to lose, Dr Supachai has issued another report that reminds the world about the consequences of UNCTAD’s unheeded warnings, and calls for “a true break” from the thinking that has shaped the global economy over the past 30 years. What the world needs, he says, is a reformed system that bids goodbye to finance-led globalisation and replaces it with development-led globalisation that allows for more stable and inclusive economic progress. In other words, Globalisation Version 1 has failed and Globalisation V2 is needed.

His report,  effectively a draft blueprint for a new world economic order written from the perspective of a developing world economist, unequivocally states, “Financial markets and institutions have become the masters rather than the servants of the real economy, distorting trade and investment, heightening levels of inequality, and posing a systemic threat to economic stability.” Global policy makers now ignore that stark warning at their peril.

Released on February 7, 2012, the report is intended for presentation to UNCTAD’s upcoming quadrennial conference to be held in Doha, Qatar, from 21 to 26 April. With its theme and central message appropriately reflected in its title, “Development-led Globalization: Towards Sustainable and Inclusive Development Paths,” (download by clicking on the title) the report contends that “neither muddling through nor a return to business as usual will get things back on track”. It says, “Finance needs to get back to the business of providing security for people’s savings and mobilizing resources for productive investment. Reforms are also needed to replace unruly and procyclical capital flows with predictable and long-term development finance, to regain stability in currency markets and to support expansionary macroeconomic adjustments. Surveillance and regulation will need to be strengthened at all levels.”

Anyone reading through the report will be horrified at how badly things went wrong and, even worse, how it was allowed to happen and why no-one has been held accountable. Dr Supachai minces no words in talking about “the growing influence of financial markets in bending public policy and resources to their own needs and interests.” He says there are “alarming signs of a reversion to ‘business as usual’.” The countries and the people most affected by the crisis were those who had the least say in creating it – “the number of people living in extreme poverty jumped by between 50 and 100 million” which in turn has led to “a sharp rise in income and wealth inequality.” Over the last 30 years, Dr Supachai writes, finance-driven globalisation “has given rise to uneven and unstable growth in both developed and developing economies, around a slowing global trend, severe macroeconomic imbalances including sluggish investment, periodic consumption booms, declining savings rates, exchange rate misalignments and current account imbalances.”

He offers four key lessons:

1) Leaving markets to regulate themselves is both ineffectual and costly. Bailing out financial institutions has already run into trillions of dollars, and despite unprecedented fiscal and monetary responses, the global economy experienced its first contraction since the Great Depression.

2) When a large number of economies collapse so dramatically, there must have been underlying weaknesses and fragilities missed or ignored by policymakers prior to the crisis. No one doubts the creative impulse of market forces, but the private pursuit of short-term gain can sometimes result in insufficient productive investment and concentrate the rewards with the favoured few.

3) When things do fall apart, the state remains the only institution capable of mobilizing the resources needed to confront large and systemic threats. Since the state is pivotal to establishing an inclusive social contract and strengthening participatory politics, it is both imprudent and unrealistic to reduce or bypass its role in managing economic development and change.

4) In an interdependent world, countries cannot be expected to tackle destabilizing threats and imbalances on their own. And yet, to date, effective rebalancing strategies have not materialized at the multilateral level.

Dr Supachai rebuts claims that the economic crisis could not have been predicted or that it was the “unintended consequence” of well-intentioned policies, as the World Economic Forum is now trying to spin. Indeed, he notes that UNCTAD’s warnings pre-date his tenure. “Since the early 1990s, against the grain of conventional economic wisdom, UNCTAD has been arguing that the risks from the premature liberalization of trade and capital flows are significant, that the benefits are not simply there for the taking, and that a more pragmatic approach to development strategy is essential. In 1993 UNCTAD warned of an emerging financial crisis in Mexico, in 1995 we flagged the systemic risk from growing derivatives markets, and in 1997 we were not only alert to the dangers of rapid financial liberalization in East Asia but also suggested that a combination of repeated shocks and growing inequalities could produce a backlash against globalization.”

UNCTAD, he stresses, has “consistently argued that, in the face of large and unruly capital movements, neither fixed nor flexible exchange rates can provide the macroeconomic stability needed to secure strong growth, and that capital controls should be a permanent part of the policy toolkit. We have warned that an undue emphasis on inflation targeting would likely fuel damaging boom-and-bust cycles, particularly in developing countries, arguing instead for greater fiscal space and a more balanced approach to demand management. Throughout the past decades, we have been warning that the build-up of private and public sector debt was feeding unsustainable imbalances at the household, national and global level, and that “bailouts” were neither an effective nor a desirable solution. In 2008, we argued that the financialization of markets of strategic interest to developing countries had reached dangerous levels, and that it had become a more significant influence on trade and development than real economic fundamentals.”

Today, Dr Supachai contends, “Financial and other resources should be channelled towards the right kinds of productive activities. Industrial development remains a priority for many developing countries…but a wider sectoral approach, including a focus on the primary sector in many least developed countries, is needed to ensure that measures to diversify economic activity are consistent with job creation, the security of food and energy supplies, and effective responses to the climate challenge”. An era of more active involvement is needed, he adds, that will “allow governments – particularly, but not only in developing countries – to correct market failures, promote collaboration among enterprises in areas of long-term investment, manage integration with the global economy and ensure that the rewards from doing so are evenly shared”.

“This time around,” Dr. Supachai writes in the preface, “rebalancing will need a global new deal that can ‘lift all boats’ in developed and developing countries alike. It is a basic truth that people everywhere want the same thing: a decent job, a secure home, a safe environment, a better future for their children and a government that listens to and responds to their concerns. UNCTAD has consistently suggested a battery of policy measures and institutional reforms at the national and international level to support rising living standards in developing countries, build their resilience to external shocks and help them pursue a balanced integration with the global economy.”

This “battery of measures” is what the latest report is all about.