What do we need to recover from the economic crisis? New Markets,
New States or New Economics?
Carla Guapo Costa
[email protected]
Paper prepared for the 7th Pan-European on International Relations
Conference
Stockholm, Sweden
9-11 September 2010
Abstract
There are some encouraging signs that the severe economic and financial crisis that hit
global economy might be starting to fade away. But, naturally, it has left its legacy,
namely an intense worldwide debate on ideas, on the reconfiguration of the kind of
economic and financial system that is supposed to perform the most efficient and
equitable way. From the end of the 1980’s, there was a widespread conviction that
markets were self-adjustable and that public intervention should only occur under very
specific conditions. However, the fact remains that markets have failed their prime
missions: to manage risk and to allocate capital in an efficient way. Actually, risk has
become paramount and the savings of millions of people are lost, all over the world, in
a context of increased globalization. In this context, we propose to discuss the new
premises public policies must fulfill, in a context of transnational organization of
economic activities, namely a new balance between states and markets.
Therefore, this paper proposes to reflect on the following issues:
. The capitalist system, in spite of suffering one of the most severe setbacks ever,
disposes of a substantial capacity to reinvent itself; thus, we need to determine what
are the conditions to that reinvention, with emphasis on world leadership, to define, in
a cooperative way, sustainable public policies, with counter-cyclical effects;
. To acknowledge that public policies to fight economic and financial crises should not
ignore the positive and negative externalities they produce. Post war economy has
been managed at state level, keeping away international economy. Globalization,
especially in the financial domain, has made that premise an impossible one to keep.
1
1. Financial upheavals in world economics history
The convulsions and riots of international monetary and financial system
are intrinsically linked to the evolution of international economic
relations. Therefore, the global economic crisis we are, still, currently
experiencing is not a recent phenomenon or a unique characteristic of
world economy, but, although with different specificities and dynamics, it
can be is found in the 17th and 18th centuries’ economy. One of the first
financial crisis in the history of modern age occurred in 1636. It was
known as the Tulip Bubble, causing the extraordinary growth and
subsequent fall in the price of varieties of tulips imported by the Dutch
economy. All this led to the rise and downfall of many economic agents of
the time. Later, in the 18th century, there was another bubble, which
would derive into a powerful and devastating financial crisis, created by
the speculative rising of the prices of stocks of South Sea Company, to
whom the British Government had granted a monopoly of trade in slaves
and gold at the time. When the stock prices fell to their real value,
investors were deeply affected by losses in property assets, and thousands
of people went bankrupt. And we might continue with several examples,
ranging from the successive Depressions which affected the North
American and European economic systems, since the end of the 19th
century until the early years of the 20th century. Naturally, we give a
special emphasis to the Great Depression of the 1930s, a truly global
economic depression, extensible to the whole of the world economy, with
devastating effects. Later on, and after the times of cheap money, in the
1960s and the 1970s, the years of 1980 brought the increase in
international interest rates and the financial strangulation of a number of
2
developing countries, in particular in Latin America. This chain of events
generated the famous external debt crisis, which has resulted in the failure
of payments to foreign creditors by several countries of the region,
namely Mexico and Argentina, which would, again, be affected by
disturbances in their financial systems, with the famous tequilla crisis, in
the early 1990s. This decade would still witness a new and devastating
currency and financial crisis that affected, in 1997 and 1998, some of the
most promising emerging economies, this time in the region of Southeast
Asia. This last event was, to a certain extent, not predictable, given the
extraordinary performance of the economies concerned, in terms of
economic growth and earnings in international trade. But, as recent
history as dramatically showed us, no one is immune to the occurrence of
crises, financial and economic ones, or its consequences. Naturally, the
effects of those crises have been substantially magnified by the deepening
of the globalization process, since contagion effects work in quicker and
greater intensity, given the commercial and economic integration that
characterizes contemporary global economy. Of course, this type of
phenomena reinforces the importance of the well functioning of financial
systems, and highlights some of its most vulnerable features. As Ferguson
(2009) puts it, the rise of money is, essentially, the rise of man.
2. The importance of financial systems on economic systems
One of the most impressive features of the world economy in recent
decades has been the galloping importance of value added generated by
the financial sector to economic activity, in virtually all economies,
especially, of course, for most developed economies and the so-called
emerging economies. In 1947, the total value added by the financial sector
3
to North American Gross domestic Product (GDP) was 2.3%; in 2005, this
contribution amounted to almost 8%, outpacing 9% of GDP in the British
economy (Ferguson, 2009).
In 2007, the total value of financial assets reached, worldwide, 196
trillion dollars, an increase of 18% against the previous year, which
represents the astonishing proportion of 359% of world GDP (it had
achieved 345% in 2006 (MGI, 2008). Reflecting the growth of the financial
dimension in the face of the real economy, it is noteworthy that in 2000,
only 11 markets showed a weight of the financial sector in GDP exceeding
350%, while, in 2007, 25 markets register an identical behavior in
emerging economies. The Chinese financial market exceeded those of
countries like the United Kingdom, France or Germany, occupying, in
2007, the third position in the world, after the USA and Japan (MGI, 2008).
In the past 25 years, the intensification of financial globalization
contributed substantially to reduce the differences between traditional
developed markets and the emerging ones, as China became the banker of
America (Ferguson, 2009). This implies an important historic change.
The fundamental issue is that the financial activity became the brain
of market economy, and, like all brains, is more prone to illness, angered
oscillations of humor, or acute sensibility to panic behavior (Kindlberger
and Aliber, 2005). Therefore, the history of global finance, practically since
1980, has been a history of financial crises, considerably costly to
taxpayers and for the economy as a whole.
In fact, the empirical evidence and studies available show that the
financial system presents a growing fragility. Eichengreen and Brodo
(2002) identify 139 financial crises between 1973 and 1997, and 44 of
them occurred in high-income countries, against a total of only 38 crises of
4
this kind between 1945 and 1971. The authors conclude that crises have a
probability of occurrence twice than those that happened before 1914.
Indeed, as Wolf (2008) puts it, the financial system acts as a major
driver in market economies, sophisticated, globalised and dynamic. It
enables the transfer of resources between economic agents, allowing
certain dynamic agents, without resources, to undertake and launch new
business with funds provided by other agents. From this perspective, the
financial system is supposed to perform in order to distribute wealth,
affording individuals greater freedom and security. Of course, the more
flexible the financial system is, the greater the effectiveness of their
economy, because it there will be a swift transfer of resources from those
who have them, but cannot (or won’t) develop productive tasks, to
creative, dynamic agents, but who have no funding for their projects.
The main problem is that financial systems are based, in practice, on
a set of promises, which, by their very own nature, may not be fulfilled.
And, more important, the recipients of these promises are aware that they
may not be accomplished. Indeed, financial transactions are, in essence, a
set of promises that economic operators mutually make to one another.
This feature makes the financial systems more vulnerable to changing
expectations about an uncertain future, and this uncertainty tends to be
greater when it implies crossing frontiers, meaning that those promises or
commitments involve agents of different nationalities.
In this context, the role of Government is of fundamental
importance, since it represents the foundations of any sophisticated
financial system, the basis on which lies the pyramid of promises (Wolf,
2008).
5
Contrary to what might be thought, the challenges to regulate the
functioning of the financial system profoundly affect the performance of
the economies, especially in a context of deep economic integration.
Nowadays, much of the academic work in the area, associates the
economic development to the health of the financial system. Pointing to
the emergency of various crises, several distinguished economists have
advocated limits on the financial integration, ranging from the most
skeptic ones on the benefits of globalization, such as Joseph Stiglitz (2006),
to the most dramatic liberals, such as Jagdish Bhagwati (2007). In fact,
while almost all economists recognize the benefits of free trade, the same
does not apply to financial liberalization.
To act in an informed way, you need to get a greater understanding
of the benefits and risks of global financial systems. In fact, we cannot find
any productive sector that can, in general, independently, affect the
economy as a whole. However, the impact of financial crises lies on the
entire economic activity, and often, given the level of integration, on
several economies, simultaneously (Minsky, 2008). And to be aware of
these impacts is necessary to deal both with the microeconomics of
finance, and the macroeconomics of exchange, monetary and budgetary
policies (Wolf, 2008).
As Kindleberger and Aliber (2005) put it, the anatomy of a typical
financial crisis is relatively simple: it starts with the liberalization of
financial markets and the economy as a whole, including, of course, the
capital movements, maintaining stable exchange rates; then, it erupts a
currency crisis, triggered by attempts of central banks supporting home
currencies, as they are facing massive and sustained attacks from
speculators. Finally, the exchange rate crisis becomes a financial crisis,
6
when the amount of reserves held by central banks is no longer sufficient
to resist attacks; exchange rates end up floating freely, leading to a very
significant increase in liabilities denominated in foreign currency.
Throughout this process, several factors have a decisive importance
in the spread of crisis and the devastation of its impacts, particularly the
increased freedom of movements of capital, which leads, in addition, to
the intensification of speculative movements and, consequently, to global
macroeconomic imbalances.
3. The current crisis: origins and dynamics
In what concerns the current crisis, many analysts were, at first,
unable to get a global picture of the nature of the crisis. The core of the
analysis was almost exclusively focused on market regulation and
supervision of financial institutions, ignoring fundamental macroeconomic
causes of the crisis.
The main assumptions pointed to the fact that the subprime lending
crisis was due to an ill-functioning or even absence, of regulatory
mechanisms, not of the banking sector, but of parabanking one, which
grew from 1990s onwards by the performing of operations increasingly
risky, on behalf of greater profitability. And, indeed, the increasing
complexity of financial systems made it very difficult to supervising
institutions, in particular central banks, facing a never ending innovation
flow in financial markets.
On the other hand, economic theory tells us that the measures for
most economic crises, particularly downturns and/or depressions, always
involve a reduction in interest rates and budgetary expansion in the form
of additional public consumption or lower taxes. But the 2008 recession is
7
different, because it is not due only to a break in demand or high energy
prices. In fact, oil prices and other commodities were notoriously high at
the 2008 summer, before commencing a sustained decline (Shiller, 2008;
Akerlof and Shiller, 2008; Krugman, 2008).
The problems in the financial sector are not new, of course, but,
unlike earlier times, have now a significant economic impact, and the
collapse of the financial system is to involve the economy as a whole.
And, to a large extent that is caused by the fact that the features of
the financial system have changed substantially. The architects of this new
financial alchemy discovered new ways to make debts, securitizing, and
dividing them.
The 1990s brought about the consolidation of the US economy as
the first and most competitive economy in the world, related, amongst
other factors, to the profit generation potential of sophisticated
companies engaged in new information and communications technologies
industries, the so-called dot.com. Apparently, the phases of stagnation in
economic growth were definitively overcome. And, among other
consequences, optimism helped, of course, to the valuation of shares of
those entities listed on the stock exchange. And as the prices of equities
increased, they nurtured a self feeding contagion effect, and a growing
number of funds targeted market actions, leading to the continuous rise in
prices of same. The bubble seemed to grow indefinitely.
But, of course, there is a limit. As History had demonstrated on
several occasions, bubbles inevitably implode, dragging on to recession
apparently sound economies. The Federal Reserve attempted to solve the
problem quickly, putting into practice an expansionary monetary policy,
8
which led to the sharp fall in interest rates, yielding a dynamic recovery of
the US economy, except for unemployment levels.
The fall in interest rates (for historically low values) was a powerful
incentive to the disregard of North Americans Treasury Securities,
revealing the need for new investments. But on the other hand, such low
fees facilitated loans from banks and other financial institutions, grabbing
the top savings of Asian and OPEC countries. Thus, investors began to
redirect their interest to real estate assets, which had become very
attractive.
And it all starts again, the principle of bubble inflation, now with
another object. Families wishing to acquire a house, a real estate
property, approach the financial system. It swiftly offers them the means
necessary to accomplish their desire, generating a mortgage, which would
be sold to other investors.
In the beginning, these loans were only granted to solvable, prime
households, whom would stick to their commitments. But as house prices
rose, the official titles became less attractive and reduced interest rates
were flooding the easy credit market. The real estate business has become
increasingly attractive, since there were many investors wanting to buy
mortgages households and an increasing number of families wishing to
acquire a house.
Apparently, the risk was very low, because, in the absence of
compliance by households, the real estate asset served as guarantee, an
increasingly valuable one, because prices kept on rising. And the principles
of prudence and balanced management have been completely
abandoned, in the face of immediate and substantial gains. On the one
hand, the irrational exuberance of households, who precipitated into new
9
investments, not minding resultant obligations. On the other hand, there
has been a great change in practices of lending money, facilitated also by
the multiplication of new financial instruments. Purchasers were granted
loans not requiring any initial payment, with monthly accounts above its
potential of solvency, should the interest rates raise. Many of these
questionable loans received the name of subprime lending, baptizing the
crisis.
In practice, the major innovation throughout the process that
generated the financial crisis was the securitization of mortgages, through
the constitution of a pool of mortgages and the possibility of sale to
investors of part of the payments received by debtors. Until the big
bubble, the securitization was limited to the so-called prime mortgages,
that is loans whose beneficiaries had sufficient income to support the
payment of mortgages. While prices of houses followed an upward trend,
everything seemed to go well, there were few payment failures and funds
continued to flow to the real estate market. And monetary policy
contributed to feed the cycle, in a benign neglect mood, not interfering on
the functioning of the entire system.
To sum up, the exotic financial products made the market much
more exciting, and, best of all, they did not need to be sustained by real,
physical assets. As Akerlof and Shiller (2009) claim, this would imply a
curious financial alchemy scheme, some form of exorcising the inherent
risk.
But everything has its limits, even creativity. Demand for these
exotic products has decreased and the credit crisis erupted, enlightening,
among other things, the complexity and lack of transparency in the
functioning of the financial system, North American and worldwide, which
10
evolved into multiple and often mysterious, institutions and financial
products that worked on the fringes of regulations applied to traditional
financial system.
4. Public policies to fight crisis: the challenges of international agenda
The world economy went through the years of 2008-2010 with more
uncertainty and anxiety than at any time in recent memory. Developed
countries faced the worst period of economic contraction since the Great
Depression of the 1930s.
As we testified earlier, there were a number of factors in the
dynamics of international economic relations, which enjoyed a specific
context for the amplification of its effects, with an emphasis on
liberalization, virtually without restrictions, of capital movements
worldwide (as the paradigm of financial globalization).
In this context, the combination of a strong international demand for
alleged secure assets, such as securities, largely related to the
accumulation of current surplus in emerging economies and oil exporting
countries, with an environment of perverse economic incentives and a
poor adjustment, led to the explosive situation that is being expressed.
In the beginning, the blocking of the financial system, derived from
the subprime lending crisis, was seen primarily as an EU-US phenomenon.
However, it soon became evident that economic growth was slowing
down substantially in all regions of the globe, the decoupling hypothesis
being definitively rejected in September 2008. There was a worldwide
impact, on several economies, of different levels of economic
development and located at various points of the globe.
11
The emerging markets were immediately affected by increased risk
aversion and the sudden stop of the inflows of capital, having been
particularly intense shock for importing countries, notably in Central and
Eastern Europe. This exacerbated existing imbalances and called for
assistance from the International Monetary Fund. Net capital flows to
emerging economies started to descend abruptly at the end of 2008,
representing a drop of 82% compared to 2007 (IMF, 2009). Once again,
the high volatility of international capital flows proved to be a powerful
factor in spreading the crisis, making it intrinsically global.
International trade was also revealed as an important channel for
transmitting the crisis, especially for the countries of the Far East, whose
exports to North America and Europe represented approximately 12% of
GDP (WTO, 2008). Trade worked pretty well, not just as a vector of
contagion, but as an accelerator of product break, since several Asian
countries have recorded a decline in their exports of over 10% in one year
(WTO, 2008).
The most worrying case should be, of course, the Chinese economy,
since developments in China may cause deeper and lasting consequences
in a broader political context. China is a country with huge hidden
divisions and tensions, which may emerge and result in open conflict in
difficult economic times, since the deceleration of economic growth of its
partners in the global economy will have serious repercussions on Chinese
economic growth, acknowledged to be some kind of external demand
addict.
In fact, as Rodrik (2009) puts it, historical experience shows that
democracies have some kind of supremacy over authoritarian regimes
when the ability to manage adverse side-effects of crises is at stake.
12
Whatever the response of Chinese leaders, future generations may
remember 2009, and especially 2010, not so much as the year of the
global financial and economic crisis, but as the year of significant and
paramount changes in Chinese economy and society.
In addition to the specificities of the mechanisms of transmission,
this crisis has also made it clear that, in spite of regional integration and
the emergence of new economic powers, the global economy is not strong
enough to tackle this type of events.
Another important aspect concerns the consequences of this crisis
and the measures being undertaken for its resolution on the process of
globalization as a whole. In this context, the type of political measures
that have been provided by national economies and international
institutions is crucial. Among those, we convey particular importance to
the issues triggered by the interventions of the Government in economic
activity. In all countries affected by the crisis, public participation in the
private sector has increased substantially in 2008 and 2009: from the 50
largest banks in the USA and the EU, 23 and 15, respectively, received
public capital injections, which means that taxpayers are supporting banks
that represented, before the crisis erupted, 76% and 40% of the market
capitalization (IMF, 2009).
Other sectors, with special focus on the automotive and insurance
industries, also received public assistance, which will eventually affect the
behavior of companies who used to perform as global players. In fact, we
believe this crisis is to challenge the customary practices of global
enterprises, which in the past 25 years decided their localization options
according to the costs and qualifications of the labor factor or some local,
cheap, factor availability.
13
Such events have demonstrated that not only the supervisory and
regulatory institutions are inadequate for the transnational model of
performance of economic agents, but also that national Governments
were still the only ones with the budgetary resources needed to rescue
the financial institutions. The big problem, as Pisany-Ferry and Santos
(2009) put it, is that the public intervention could help transform former
global organizations in some kind of national champions.
And, finally, the national responses to the crisis may lead to a
process of financial and economic fragmentation, guided by the
implementation of a set of protectionist practices. Consensus is that, in
several countries, Governments are asking banks to concentrate resources
in domestic firms and consumers, while credit continues to be strongly
scarce on external markets. The problem is that companies from emerging
countries and least developed countries depend to a large extent of
external credit to finance their activities. Therefore, these sorts of
procedures can turn them extremely vulnerable to the so called financial
protectionism. In fact, despite the commitment of the G-20, at its meeting
in November 2008, to discourage protectionism, tariffs and other kind of
trade obstacles have increased steadily in several countries, on all
continents. The big challenge is that businesses can be global, but
governance (and, in particular, tax revenue) continues to be local.
At this stage it is premature to say whether these changes are only
short-term reactions to a significant shock or, instead, they represent
somewhat new worrying trends in international economic relations. At
least, we certify that the balance between political and economic forces
has changed considerably. If government intervention in economic activity
14
was strongly discouraged in the glowing times of the global economy, the
winds blow, at present time, clearly, in the opposite direction.
However, as Rodrik (2008) puts it, those that predict for the death of
the capitalist system have to deal with an historically important fact:
capitalism has an, almost, unlimited capacity of reinvent itself, and its
flexibility has allowed it, as time goes by, to overcome crisis periods and to
survive the criticisms that have been raised.
The real question is not, thus, whether capitalism will survive, but if
world leaders will be able to demonstrate the leadership skills that are
necessary to bring the capitalist system to its next phase.
The evidence suggests that regulatory and supervisory frameworks
are only a part of the necessary response to the crisis, and it relates the
upheavals of financial systems and their implications for the global
economy with the history of capitalism over the past 150 years. In the
early 20th century, capitalism was ruled by a liberal vision, which strongly
limited the intervention of public institutions in economic activity.
After the global liberal capitalism of the second half of the 19th
century, the new regimes that have emerged from the classic pre-1914
order took a wrong direction; they ignored the potential benefits of
globalization, giving rise to autarkic and, in several cases, non democratic
regimes. This began to change as societies were becoming more
democratic, and with the emergence of trade unions and other groups,
which mobilized themselves against the abuses of wild capitalism. The
anti-competition policies began appearing in the US, and the relevance
and usefulness of monetary and budgetary policies have become widely
accepted in the wake of the Great Depression in the 1930s. The
percentage of public spending in the national income grew rapidly in
15
developed countries, passing, of an average of less than 10%, at the end of
the 19th century, for more than 20% before the War (Maddison, 2004).
And, in the post-War period, most countries put in place a set of social
policies designed to promote the reconstruction of their economies, which
caused the public sector to contribute, on average, for more than 40% of
national income (Hobsbawn, 1994).
As the century went on, the central problem became how, and if, to
restore international economic integration (Eichengreen, 2008). The
compromises between globalism and nationalism, and between the social
reform and market forces, enabled Western economies to grow rapidly
and steadily after the II World War. Bretton Woods tried to accommodate
that compromise in 1944.
This model of mixed economy was the supreme achievement of the
20th century, and the new balance between states and markets created
the conditions for a period of unprecedented social cohesion, stability and
prosperity in advanced economies, which lasted until the mid 1970s.
However, nothing gold can stay, and the system began wearing out in the
1980s, due, mainly, to the advance of the globalization process. And the
explanation is relatively simple: mixed economy of post-war was built and
managed at the level of nation States, maintaining, at a comfortable
distance, the international economy.
Bretton Woods regime implied a superficially international economic
integration, which required a thorough control of international capital
flows, which Keynes and his followers considered fundamental to the
management of domestic economy (Rodrik, 2008). The adherent countries
were required to maintain a limited trade liberalization, with many
exceptions in socially sensitive sectors (agriculture, textiles, services),
16
provided they complied with few and simple international rules. But these
commitments began to erode, as participant countries were becoming
increasingly integrated (in what concerns trade and financial relations)
and other type of economies were joining international economic order
(especially developing countries and former central planning economic
regimes).
The current crisis shows how the Bretton Woods model stopped
working a long time ago. Globalization, especially in its financial aspect,
launched confusion with the old rules. As Rodrik (2009) puts it, when
Chinese capitalism met North American one, there was an explosive
result. The extraordinary reserves of Asian countries and oil exporting
countries helped feeding the exorbitant US current deficit, further
undermining confidence.
Also, there was a severe risk of not being able to prevent the
combination of the deeply recessive drying of capital flows to developing
countries and emerging economies, with the accumulation of large
international reserves. Much of the emerging economies suffered a
sudden stop in capital inflows, with devastating consequences, especially
in Central and Eastern Europe.
The problem is that it did not exist, or they didn’t work, protective
mechanisms to prevent excess global liquidity to develop, which, in
combination with the failures of US regulatory authorities, eventually
produced a spectacular boom and crash in real estate assets. Finally, due
to globalization, there were no international barriers that could prevent
this crisis from spreading to world economy.
17
5. Final remarks
The dynamics of the globalised economy are considerably powerful in the
process of (des) integration of national economies. As Rodrik (2009) puts
it, as the Adam smith’s model of minimalist capitalism was transformed in
Keynes’ mixed economy, we must now consider the transition of the
national version of mixed economy to its global equivalent,
This means to conceive a more equitable balance between markets
and their institutions of support at a global level. This might imply to
extend regulation beyond national context, and the strengthening of
global regulation itself. In other cases, it will mean prevent markets to
expand beyond the reach of national institutions that should look after
them. The right approach might differ from country to country, according
to its specific concerns (Rodrik, 2009).
For public policy definition and implementation, it is necessary the
adjustment to a new reality: national regulations and international
markets are inextricably linked, and they need to be that way in order to
take profit of the benefits of globalization.
One of the current priorities should be in the path of good
governance, as a sine qua non condition for the economic and social
development, both for poor and rich countries. Governance, as the set of
policies and institutions that govern the interactions between individuals
and groups in society, is seen as part of the foundations for sustained
growth and human development.
In this context, it is also of particular importance the setting of a
(new) international monetary order that can reconcile the benefits arising
from the process of globalization and liberalization of markets, with the
stability of national economies, particularly in what concerns monetary
18
and exchange rate issues. The empirical evidence, over the past 50 years,
showed us that the orthodoxy in public policies agenda (especially
exchange, monetary and budgetary policies), in the wake of the guidelines
provided by international organizations, caused dramatic consequences
on the stability and the economic and social well-being of many countries,
developed and developing ones.
As Eichengreen (2008) puts it, since the collapse of the Bretton
Woods system, there was a sharp turn towards floating exchange rate
regimes, or at least adjustable ones, largely as a result of restrictions on
internal monetary policies resulting from the liberalization of capital
movements. Assessing the impacts of coexistence between the
requirements of a system of fixed exchange rates and the integration of
financial markets worldwide, Eichengreen argues that exchange rate
fluctuation will certainly not be the best of worlds, but could, at least,
constitute a more credible environment for all economic actors.
On the other hand, emerging markets, despite the upheavals of
recent times, should continue to grow. As some markets have very
significant dimensions, its growth will stimulate the development and its
liquidity is likely to be absorbed by the region where they belong. As
emerging markets grow, allowing an efficient allocation of capital, its role
in the overall balance will become more relevant. A fundamental
challenge will reside in legislation, since the markets are global but
regulations are local. It should exist a greater coordination at the
international level, implying greater representativeness of those countries
in international organizations.
And, in this context, another important aspect to consider is, of
course, the configuration and the role to play by the organizations, as the
19
IMF, the World Bank or groups of countries, within the G-20 or others. The
ascent of countries such as China, India or Brazil, among others, and the
consolidation of the respective positions in global macroeconomic
(in)balances, raises the chances of a geostrategic change scenario at the
global level, reinforcing the feeling of uncertainty in the evolution of
international economic relations.
The decision of increasing the financial allocation of IMF, enabling it
to intervene in a more assertive way, and to strengthen the role of SDRs,
the only true international currency, is a powerful, although symbolic
achievement. It matches, not only the aspirations of emerging economies
(such as China), but also of all those who, in the wake of Keynes’ positions
in Bretton Woods, support an international monetary order that does not
depend exclusively on a single currency, but should found itself on the
interrelation of multiple currencies assigned to participating economies in
international economic relations.
The hegemony of the US dollar as the prime currency of
international monetary system has been questioned, increasingly. This
dispute assumed greater relevance with the impact of the subprime
lending crisis and the financial upheaval that followed.
Several scenarios have been on the table: heavy pressures on the
dollar, with dramatic consequences for the whole of the world economy;
the rise in US interest, with harmful repercussions on the economic
recovery; the assumption of the loss of value of the dollar, with effects on
American assets held by foreign investors, with an emphasis on the Asian
economies. In this context, China and Japan were to suffer the greatest
losses, since they are the largest holders of debt securities. In any case, it
20
is foreseeable that there should be a diversification of assets denominated
in dollars for other currencies of the international monetary system.
Of course, the role of the European Union, the world's first
commercial power, and of the European Economic and Monetary Union,
should be a powerful factor in the overall equation. Despite the
uncertainties and hesitations that feature the European response to the
worsening of the global financial crisis, we should not forget that the euro
disputes monetary world hegemony with the US dollar, in the traditional
roles of a reference currency of the international monetary system (Costa,
2004). However, despite the success of the European currency, which
already consists of 16 countries, it is not clear that the euro zone, a set of
national economies that are still significant different in what concerns
socio-economic development, will be able to perform its role.
We believe that it is necessary to avoid a disproportionate reliance
on market forces to solve all the problems, supporting the beneficiaries of
the global economy and handle the discontent. But it is also necessary to
avoid a turning move towards insularity and economic protectionism,
although the process of liberalization of international trade should be
accompanied with special caution, primarily by its effects on the weakest
economies in terms of their international insertion.
Such a mission requires a set of demanding tasks. The first one
should be to build and sustain an integrated international political and
economic order. There are many risky factors (geopolitical, ideological,
religious), which, in principle, oppose to a global economy. The
proponents of an international open economy need to work together to
build an effective and stable governance for international economic
interactions.
21
The second part of the mission will be to establish and maintain
domestic economic conditions that support international commitments,
but, at the same time, reinforce specific assistance to the most affected
groups. This would support a smoother transition, and the possibility of
maintaining domestic social stability, reaping the fruits of international
economic integration.
Finally, we believe that the existing economic theory is appropriate
for dealing with the problems in analysis, under multiple perspectives,
since it contains the main theoretical approaches, the analytical
instrumental, and the empirical material we need to conduct analyses and
produce recommendations on economic policy. We share Eichengreen’s
(2009) view, who believes that a powerful factor to failure in economic
prediction, along the entire 20th century, was the dominance of deductive
over inductive economic analysis. We’ve testified the profusion of ultra
sophisticated economic-mathematical models, flexible enough to consider
all variables that should represent the functioning of modern economies,
but that, in most cases, ignored the empirical reality that should underlie
and the social, political and cultural framework (Colander et al, 2009;
Acemoglu, 2008). As Rodrik (2009) puts it, when asked about the
magnitude of the devastation caused by the current crisis, "blame the
economists, not Economics".
22
References
ACEMOGLU, Daron (2009), “The crisis of 2008: structural lessons for
and from economics”; Centre for Economic Policy Research (CEPR), Policy
Paper
Nº28,
January.http://www.cepr.org/pubs/PolicyInsights/PolicyInsight28.pdf
AKERLOF, George and SHILLER, Robert (2009), Animal Spirits: How
Human Psychology Drives the Economy, and Why it Matters for Global
Capitalism, Princeton University Press.
BHAGWATI, Jagdish (2004), In Defense of Globalization, Ed.Oxford
University Press.
COLANDER, David et al (2009), “ The financial crisis and the systemic
failure of academic economics”, Kiel Institute for the World Economy,
Working-Paper nº1489, February 2009.
COSTA, Carla (2004), Economia e Política da Construção Europeia - Os
Desafios do Processo de Integração; Ed. Terramar, Lisboa.
EICHENGREEN, Barry (2009), “The last temptation of risk”, The
National
Interest
Online,
May/June
2009
Issue. http://www.nationalinterest.org/Article.aspx?id=21274
EICHENGREEN, Barry (2008), Globalizing Capital: A History of the
International Monetary System, Ed. Princeton University Press, 2nd Edition.
EICHENGREEN, Barry and BRODO, Michael (2002),” Crises now and
then: what lessons from the last era of financial globalization?”, National
Bureau of Economic Research (NBER) Working- Papers, nº 8716.
FERGUSON, Niall (2008), A Ascensão do Dinheiro: Uma História
Financeira do Mundo, Ed. Civilização.
HOBSBAWN, Eric (1994), A Era dos Extremos: História Breve do Século
XX, 1914-1991, Ed. Presença.
23
KINDLEBERGER, Charles P. and ALIBER, Robert (2005), Manias, Panics
and Crashes: A History of Financial Crises, Ed. Palgrave Macmillan, 5th
edition.
KRUGMAN, Paul (2008), The Return of Depression Economics and the
Crisis of 2008, Ed. Penguin Economics/Business.
IMF (2009), Statistical Appendix – Global Financial Stability Report,
International Monetary Fund.
MGI (2008), Mapping Global Capital Markets, Fifth Report, Ed.
Mckinsey Global Institute, Nova Iorque.
MINSKY, Hyman (2008), Stabilizing an Unstable Economy, Ed.
McGraw-Hill Professional.
PISANY-FERRY, Jean and SANTOS, Indhira (2009), "Reshaping the
global economy", bruegel.org Policy Contributions, issue 2009/04.
http://www.bruegel.org/public/publication_detail.php?id=1171&publicati
onid=14825
RODRIK, Dani (2009), "Blaim the economists, not Economics", project
Syndicate.http://www.project-syndicate.org/commentary/rodrik29
RODRIK, Dani (2008), One economics, Many Recipes: Globalization,
Institutions and economic Growth, ed. Princeton University Press.
SHILLER, Robert (2005), Irrational Exuberance, ed. Princeton
University Press, 2 nd Edition.
STIGLITZ, Joseph (2006), Making Globalization Work, ed. w. w.
Norton & company, New York.
WOLF, Martin (2008), Fixing global finance, ed. John Hopkins
University Press.
24
WTO (2009), International Trade Statistics – 2008, World Trade
Organization.http://www.wto.org/english/res_e/statis_e/its2008_e/its08
_toc_e.htm.
25