The last quarter of 2008 saw unprecedented public support packages for the financial and the real sectors of the world economy. Between 2% and 4% of global GDP of taxpayer money should be spent within the next 12-15 months in order to prevent a world depression. Industrial countries are leading this “Keynesian” surge – mainly because they have most to lose and also because they have access to the necessary financial means. However, also emerging countries, like China, Russia, Kazakhstan, Argentina, and others, are attempting similar demand-supporting measures.
Suddenly, recently staunch supporters of neo-classical policies (“more private, less state”) policy makers now proudly describe themselves as “Keynesians” – whom they had laid into a deep, deep grave only months before.
It is once more again the really poor countries who are drawn into the crisis deeper and deeper, but have no means and access to resources to run demand-supporting policies. They are still hit by high food prices, internal and external conflict, victims of climate change, capital flight and out-migration of some of their best and most scarce human resources.
The new pragmatism of policy makers is to be welcomed, even if John Maynard Keynes himself probably does not recognize today’s policies as his own prescriptions: He knew that financial markets are different from commodity markets and thus require constant and close supervision and restrictions; he knew that current account -corrected by policy; he knew that the supremacy of a single national currency as “world currency” was detrimental to global welfare; he knew that “beggar-thy-neighbor” policies were not sustainable.
Be it as it may: today, we all know that this sudden – if variously expected – crisis requires unorthodox remedies, both in fiscal policy, but also in monetary policy. In this latter vein, national banks have begun to issue credit themselves. Some governments have started to nationalize banks or supply them with subordinated capital, in order to improve their balance sheets and get them to lend again. Governments and multilateral bodies, such as WTO and European Commission, have recognized the gravity of the situation and given permission to relax some of the founding pillars of their orthodoxy: competitions rules, state aid rules, balanced-budget rules, etc.
There is a significant danger that this hard-hitting, fast-spending activism by policy makers around the world is more geared towards the domestic electorate than to the global economy. The lack of coordinated global economic policy governance is glaring, even if some laudable attempts have recently been made by the European Union and the G-20. They still remain inadequate, however.
Actions plans, both for the domestic/national and for the global dimension could contain some of the following principles:
- The financial sector packages are necessary, if apparently not sufficient, to re-establish confidence between banks and between banks and their customers in order to start the business of extending credit and transforming term structures and risks once more. The states and national banks must use their aid to also change banking behaviour form their previous excesses. A new economic model, based on less debt and leverage, must be developed, if we want to prevent similar crises from reoccurring.
- The demand-supporting packages for the real sector need to be time-constrained. They need to combine short-term effective demand management with longer-term structural requirements, such as education, R&D, health care, pension systems, infrastructure needs, combating climate change, and – above all – poverty alleviation. It is very likely that in countries with low shares of public-sector provision of social services, packages would be better placed in public spending programs than in tax relief, since significant parts of the latter might be saved by households, in order to provide for the hard times ahead expected.
- Much more attention must be laid on re-establishing a more acceptable distribution of income. Not only need their be curbs on the obscene remuneration packages of CEO’s and financial engineers, but effective models for income support for low earners and the non-active must be developed, in addition to special emphasis on education and training.
- Globalization has reduced the economic policy leverage of nation states, especially of the smaller ones. So far, only inadequate attempts to overcome this grave policy deficit have been made. The recent attempt by the G-20 is a step in the right direction, but still inadequate, since not poor and developing countries were included. In the absence of an effective world government, global rules will be effective only, if all (types of) states and civil society participate in their negotiation. Participation and ownership are the key words here.
- Global rules are necessary for the fields of global macroeconomic stabilization; for global income distribution (development issues); for investment, trade and competition; for labor practices and migration; for environmental issues; for illegal activities (drugs, weapons, terrorist activities); and for the elimination of tax and transparency and reporting havens.
- While the global financial system has brought many benefits, its excesses have also nearly brought the world economic system down. A new system which combines the benefits of the original purposes of financing with a measured use of new instruments – without the excesses, based on unrealistic rate-of-return expectations (“25% plus”) needs to be created. For this we need global supervisory rules, and possibly institutions for cross-border activities, but should also seriously think of introducing incentives against short-termism and “greed, such as the global introduction of a financial transactions tax.
- Crisis prevention activities must not crowd out progress on combating climate change and world poverty. Both are time bombs if not tackled expediently. It is up to the politicians to impress upon their citizens that short-term activities must be tied into longer-term objectives.
- Successful crisis prevention on a global scale requires global solutions: The multitude of regional and bilateral agreements between states during the past decade needs to be reverted, or at least complemented, by truly global rules. Otherwise, the danger is high that resources are wasted, that counter-productive activities prevail and that the crisis deepens still further.
The present crisis is not over yet. Probabilities that it will go still deeper, that the feedbacks between the real and the financial sectors will generate a downward spiral, are high. Some very positive pragmatism (keyword “we are all Keynesians now”) has arisen. Still, the danger that national-motivated hyper-activism crowds out directed, medium/term global action, that only a return to the status quo ante is achieved, is high. Crisis mitigation will exert high costs on many persons, both in terms of short/term job and income losses as in terms of longer-term costs in terms of higher taxes or reduced public spending. We must prevail on our policy makers to make the right choices in this challenging time: The above principles might help to that.