UNITED NATIONS - The current economic meltdown will continue for years if the world community does not take firm and coordinated action to regulate the flow of capital, say researchers who have just concluded a new study for the United Nations.
"There hasn't been much achievement in regulating the financial markets," says Heiner Flassbeck, one of the study's authors associated with the U.N. Conference on Trade and Development (UNCTAD). "The world is still mired in deep economic crisis."
The UNCTAD "Trade and Development Report" points out that despite a professed commitment to tackle the recession, many countries in the developed world have failed to rein in the financial industry's indulgence in speculative investment.
According to the report, this crisis reflects the "predominance" of the financial markets over the real economy.
Flassbeck lashed out at governments of the most industrialised countries for not doing enough to rein in the powers of the financial industry, saying that they had let the financial sector continue to do "business as usual".
Though appreciative of the fact that within the industrialised world, the U.S. was the only country to take concrete measures to address the issue of recession by holding Congressional hearings, he noted that Washington was mainly focusing on the housing market and credit industry.
"There are [also] bubbles in the currency, stock, and commodity markets," Flassbeck stressed. "[There is a lot more] that has been missed."
In the last six months, the same bubbles were being inflated again "in a primitive attempt to anticipate a recovery that is not yet there," he said, "but they would deflate again when speculators realise that the global recovery is not as strong as anticipated."
Flassbeck argues that private sector demand can only grow through consumption and investment, but concludes that rising unemployment and depressed wages are undermining the growth in consumption.
"There is no demand for new investments, and profits have declined due to new demands," he said, stressing the need for governments to take meaningful steps to stimulate the economy.
In explaining how certain countries in the developing world faced unfairness in their attempts to cope with the current crisis, he noted that many countries that are laden with wealth opted for cuts in interest rates and increased stimulus measures, while due to the conditions imposed by the International Monetary Fund (IMF), others had to do the opposite.
He cited the example of Hungary, where the markets had shown confidence for seven years. The moment the global financial crisis hit that country, the currency in Budapest declined. Why? Because, the IMF told the Hungarian government that it must regain the confidence of the same financial markets that had 'overvalued' its currency.
This kind of behaviour requires international scrutiny, he said, suggesting the creation of a new global institution.
"There is now a need for asymmetry between deficit and surplus countries," he said. "Currency exchange rates should not be left to markets but to an international agreement or body that would stabilise exchange rates on the basis of competitiveness rather than speculation."
"The World Trade Organisation (WTO) does not accept such distortions, while the International Monetary Fund does not address trade issues," he said. "Only an institution with a much broader mandate should be responsible for the coherence of the international economy."
He said the problem of climate change cannot be addressed if fossil fuel prices are subject to speculation, adding that the U.S. Congress was the "only body to address the financialisation of the commodity markets".
The U.N. General Assembly president, Miguel d'Escoto Brockmann, agrees with this prognosis. On the launch of the report this week, he said: "The real global and economic crisis has yet to be faced."
In his view, speculation has played "too large a role" that must be taken into account in formulating monetary policies to deal with the current cycle of recession.
The 181-page report warns paints a grim picture for achieving the anti-poverty Millennium Development Goals (MDGs) in many parts of Africa, and predicts "dim" prospects for recovery in most of the countries in the developed world.
The study's authors strongly recommend reforms of the international financial institutions, including the World Bank and IMF, a call that has been reiterated by international civil society groups in the past several years.