This year marks a critical juncture in the evolution of the world economy. A year after the historic collapse of Lehman Brothers, policymakers are still attempting to agree on how to recover from the most serious economic collapse since the 1930's. Unlike the Great Depression, the extent of the current crisis reflects an unprecedented level of economic interdependence between countries, which has resulted in the developing world facing a particularly dire outlook over the coming months. According to the World Bank and the United Nations, the financial crisis will push up to 100 million more people into extreme poverty in 2009.
In response to decades of policies that have strongly promoted deregulation and market liberalisation, leaders in low-income countries have long been calling for a more stable and inclusive financial architecture. The power to create such a system, however, rests largely in the hands of finance ministers from the 20 leading industrialised nations who recently met in London to discuss how best to continue their recovery program.
But decisive action was hampered by disagreement between the social democrats of Europe and the Americans who, like the British, prefer keeping their hands off the free-market. Despite their rhetorical claims of establishing a sustainable economy, the G20 ministers only managed to highlight the group's overwhelming desire to pursue business as usual - their vision for the future consisting of little more than a return to what is essentially a ‘pre-crisis' economy. There was little to convince the developing world that decisive action will be taken to prevent future crises, or that any of their urgent needs or calls for financial reform will be sufficiently prioritised.
A year after the crash, tighter regulation of the financial sector - a key measure for avoiding a future meltdown - seems increasingly unlikely. In solidarity with investment bankers, the British Chancellor Alistair Darling was particularly keen to allow banks more regulatory leeway, a sentiment enthusiastically shared by his American counterpart, Timothy Geithner. However, with France, Germany and Sweden favouring caps on bonuses, ministers were unable to agree on how to curb the risky rewards-based culture, and instead suggested weaker recommendations that merely bring bonuses more in line with performance.
Further disagreements between the two camps centred on an appropriate exit strategy from the stimulus ‘black hole'. With an estimated US$10.8 trillion already spent on resuscitating the global economy, governments have accumulated record levels of national debt over the past year. Quite rightly, many European countries regard a continued stimulus totally unsustainable, but fears of a ‘double-dip' if support is prematurely withdrawn was still too strong, and ministers agreed to continue spending their way out of the quagmire.
As poverty and inequality continues to rise throughout the world, and with policymakers unwilling to move away from the dogma of their free market policy framework, the G20's lacklustre vision for a sustainable economy should be regarded with growing scepticism. In line with decades of corporate friendly policies, the leading industrialised nations seem to be spending in all the wrong places. Trillion-dollar support for the London-New York financial axis has not benefitted the ‘core' economy - smaller businesses and ordinary people. Aside from encouraging risk, executive bonuses redistribute their enormous profits to board members and not shareholders, customers or taxpayers. The looming recession has not stemmed this trend - executive salaries in FTSE 100 companies increased by 10% over the past year, whilst job losses and unemployment soared.
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Instead of re-assessing their neoliberal assumption that wealth will ‘trickle down' from businesses and rich individuals to the broad population, G20 ministers appear to be relentlessly pursuing policies that try to expand monetary wealth and the size of the economy. The evidence to debunk such policies is now widely available, and includes decades of work by economists that contest the sanity of pursuing unlimited growth in a world of finite resources. Not only is endless growth in rich countries potentially reckless and environmentally unsustainable, the proceeds of this growth are demonstrably accumulating to a relative minority, and thereby widening the inequality gap. Despite this growing body of evidence, nothing in the G20 communiqué released after the meeting reflects these social and environmental realities, and ministers remain mistakenly confident that the economy can carry on as before if they provide enough support to the financial sector.
It is likely that the economic ‘green shoots' recently reported in some European countries are merely the consequence of an over-lubricated finance sector. There is little to suggest that the unprecedented stimulus has benefitted the bulk of the economy, as unemployment is still predicted to increase well into next year on both sides of the Atlantic, and banks continue to ignore the credit needs of small businesses.
Another area of concern is the G20's support for international financial institutions that have a history of creating economic havoc in the developing world. At their April meeting earlier this year, G20 leaders agreed to treble their funding of the International Monetary Fund (IMF) to US$750 billion in order to ease international lending. But the Fund's work in low-income countries is dogged by a controversial history, since the structural adjustment policies pursued by the IMF and World Bank in the 1980s and 90s destroyed safety nets in many developing countries. Instead of establishing essential welfare infrastructure, indebted countries were encouraged to redirect public funding to debt repayments - leaving them particularly vulnerable during the current crisis.
The G20 communiqué did purport to consider more seriously the matter of tax havens and the need for a more representative IMF membership, but there is little expectation of any purposeful action on a bailout for the world's poor. Of the US$750 billion pledged, the IMF will only make US$8 billion available the poorest nations over the next two years. In addition, as the recession continues to bite donor counties, the G20s already insufficient aid commitments are also increasingly unlikely to be unmet.
Despite the raw memory of the Lehman Brothers fiasco, the outcome of the latest G20 meeting demonstrates that this group of finance ministers and central bank governors from the world's largest economies is not fit for purpose. If the group's leaders intend to make genuine progress at their upcoming meeting in Pittsburgh, they will need to act far more decisively on financial and institutional reform.
Instead of merely reinventing the old system, the G20 need to prioritise equality and stability over profitability and growth. A meaningful transformation can only happen when policymakers address the structural inequalities within the exclusive and competitive form of international finance they continue to pursue. The financial crisis has presented a rare opportunity to make a clean break from the tired, profit-oriented economy of the past, paving the way for a system of international finance that works in the true interest of the global public.