by Dean Baker

Imagine that the United States was researching biological weapons and it inadvertently allowed a deadly bacteria to get into the atmosphere. The bacteria quickly spread around the world, leading to sickness and death everywhere.

Fortunately, US scientists have developed a drug to treat the disease, which the United States generously shares with the other wealthy countries and a select group of developing countries. Unfortunately, there are a number of developing countries with whom the United States does not choose to share the drug.

This picture would pretty well describes the world financial crisis as the G-20 prepares to meet in Washington this week. The Wall Street geniuses managed to tie up the whole world's financial system with the housing bubble in the United States. They crafted exotic financial instruments which they sold to investors in Europe, Asia, and elsewhere.

The collapse of the housing bubble led to the disappearance of trillions of dollars of financial wealth in a hugely over-leveraged system. This has led to the rash of bank collapses in the United States, Europe, and in other countries where banks bought Wall Street's junk.

However, the financial panic has also infected regions of the world where the banks did not play the Wall Street housing bubble game. The widely touted flight to safety has meant massive withdrawals of capital from countries like Argentina and Pakistan, where banks and investors had been little involved in the speculation driven by the housing bubble. The fear generated by the financial panic has caused investors to flee developing countries for the safety of US treasury bonds or the bonds of other wealthy countries.

The cure that the wealthy countries have for their financial crisis actually makes the situation even worse for the developing world. The United States government and European Union countries have given hundreds of billions of dollars to their banks to keep them afloat. These governments have also guaranteed a wide range of deposits, which means that deposits in these banks are now as secure as the governments themselves.

This massive infusion of money, coupled with the government guarantees, gives the banks in the wealthy countries an enormous competitive edge over their counterparts in the developing world. Banks in Argentina or Pakistan would have to pay an enormous interest rate premium to compete with government-subsidized banks in the United States and Europe, which now operate with government guarantees.

This protectionism (yes, it is protectionism, even though the media do not use that term to describe government subsidies to banks) is inflicting an enormous cost on the developing world. Just as would be the case when the developing world is left to confront the deadly bacteria on its own, most of the developing world will have to cope with this US-generated financial crisis on its own.

The G-20 will no doubt decide to make some aid, presumably through the International Monetary Fund, available to the countries being hit by the fallout from Wall Street's financial meltdown. But this aid will come with strings and likely not be sufficient to make these countries whole.

There is no easy remedy to this situation. But it should be obvious to the developing world that the only way that they can protect themselves from the episodic crises created by the rich countries is to have alternative poles of financial support. Specifically, if they can establish regional funds, as the South American countries have begun to do with the Bank of the South, then they can hope to insulate themselves from the financial dealings and misdealing of the wealthy countries.

Building up regional funds will not be easy. Countries will have to make compromises and surrender some control to allow a regional fund to operate effectively. In addition, the wealthy countries will go to considerable lengths to prevent the creation of effective regional funds. The most obvious route will be to invite a few important actors in the developing world to sit among the wealthy countries as junior partners.

These tactics may prove successful. However, until the developing countries can turn to alternative sources of capital, they will be susceptible to every crisis resulting from the regulatory failures of the wealthy countries, even if they had been completely responsible in managing their own financial affairs. It's not fair, but that is the way the world works.