Sixty-third General Assembly

Second Committee

Panel Discussion (PM)

global crisis has debunked myth of infallible markets, incompetent

government, second committee told during panel discussion

 

Laissez-Faire Needs Proper Burial, Speaker Insists

As Fellow Panellist Underlines Link Between Financial, Energy Crises

The current global financial crisis had created a dramatic opportunity to rethink all the assumptions of the past 30 years, including the one that markets could do nothing wrong and Governments could do nothing right, Robert Kuttner, co-founder and co-editor of The American Prospect magazine, told the Second Committee (Economic and Financial) today as it held a panel discussion on “Overcoming Economic Insecurity”.

Mr. Kuttner, a Distinguished Senior Fellow at the think tank Demos, said that, while the world had supposedly learned once in the 1930s that markets were a threat to stability if left to their own devices, laissez-faire had been resurrected from the dead over the past 30 years as though that lesson had never been learned.  The recent crash had also been the crash of an ideology, and the only good thing to have come out of it was that no one believed any longer that markets were entirely self-regulated.

Laissez-faire was dead, but it needed a proper burial.  In the 30 years after the Second World War, the North had done “pretty well” at balancing private capital with social needs, but that had not spread to the developing world.  Indeed, the past 30 years had seen the achievements in even the rich countries go into reverse.  Increasing inequality, the risk of unemployment, and the fear of losing health-care benefits, among other things, had all been shifted back from society to the individual.

He said what was occurring in the United States had been disguised for the past 15 years by a kind of bubble economy.  The country had a terrible trade imbalance, but a trade surplus in three things:  toxic financial products, toxic ideology and “IOUs”.  The consequences were dire because of the degree of leveraging, and because financial bubbles were substituting for real economic activity.  Additionally, because the United States had so much influence, the contagion had extended to the rest of the world.

The crisis was even more serious than that of 1929 in some respects because the leveraging was even more extreme, he said, noting that whether the United States was spared a depression would depend on President-elect Barack Obama.  The crisis had swept away what was left of the Washington Consensus, and the United States should have the humility to realize that there was much that the North could learn from the South.  Time was very short, and if the United States let it get away, it would be in for a great depression that would magnify all the other problems in a global economy.

Also expressing his concern was a second panellist, Michael Klare, Professor of Peace and World Security Studies at Hampshire College in the United States, who urged policymakers working to alleviate the financial crisis not to lose sight of global energy insecurity, which was closely linked to global economic insecurity.  A reliable, adequate supply of affordable energy was vital for the effective functioning of a global economy, but it was becoming increasingly evident that such a supply could not be expected for years to come.

He said higher energy prices in 2007 and the first half of 2008 had contributed to the looming economic crisis, causing great pain to the automobile, aviation and agriculture sectors, as well as other energy-dependent industries, even before the September collapse of the investment bank Lehman Brothers.  Energy insecurity had resulted from a sharp increase in international energy demand, particularly in the developing nations of Asia; the inability of the international energy industry to keep pace with the ever-increasing demand for oil; instability and high climate risk in oil-producing areas; and the slow pace of developing alternative energy sources such as wind, solar and geothermal energies and advanced biofuels.

Transforming the global energy system must be a major priority for any long-term economic stabilization programme, with the ultimate goal of reducing global reliance on fossil fuels, especially oil and coal, he said.  That would require people to drive less, trade in “gas-guzzling” vehicles for fuel-efficient cars, rely more on public transportation, and improve energy efficiency in homes, businesses and electrical appliances.  It would also entail developing more fuel-efficient vehicles, factories, appliances and heating systems, in addition to replacing oil-powered cars with gas- or electricity-run hybrids, improving wind and solar power and developing advanced biofuels derived from non-edible plants.  The more visionary sources of energy, such as geothermal, wave power, hydrogen power and nuclear fusion, would also require greater scientific and technological advances.

Vaga Reddy, recently retired Governor of the Reserve Bank of India, said he supported the intention of the United Nations to create a task force to address the financial crisis, as well as comprehensive macroeconomic policy reform and integrated macroeconomic development and strategies.  Developing countries should aim for fiscal empowerment, involving investment in education and health.  Counter-cyclical policies must be carefully calibrated and coordinated and not left entirely to a banking regulator or a fiscal policy office.  There was a need for countries to stabilize funds in times of huge capital outflows and inflows.

All countries were experienced a huge sense of insecurity in income and employment, which had both cyclical and structural components, he said, pointing out that it was easier to manage a currency crisis than a banking crisis.  In that sense, the developing world was in a better position because its banking industries did not offer the sophisticated financial products that had caused the crisis in advanced economies.  However, capital flows to developing countries and their debt markets had been seriously affected, as had commodity markets, due to price volatility.  There was a perception that the onset of recession in advanced economies would affect all countries.  Those with large deficits would indeed be under stress, and those with large external debts, particularly sovereign or short-term debt, would become more vulnerable.

Opening the panel discussion, Committee Chairperson Uche Joy Ogwu ( Nigeria), said the economic policy mantra had for a long time been to let market forces find the right outcome.  Indeed, the world had been told that market forces were irresistible and, therefore, beyond collective political control.  The 2008 World Economic and Social Survey challenged that approach, arguing that unregulated markets were unlikely to deliver the desired mixture of prosperity and security, and that a proactive and coherent policy response, tailored to particular circumstances and preferences, was both needed and possible.  The reaction of the advanced countries to their current difficulties suggested that that was quickly becoming part of a new policy consensus.  The panel would explore some of those issues, paying particular attention to the causes of the financial crisis and what could be done to regain stability, particularly at the global level.  It would also look at the links between financial shocks and other threats to economic security.

In the ensuing discussion, Pakistan’s representative asked how the additional constraints placed on the world today made the current situation more complicated than previous crises.  Israel’s representative asked what “new global capitalism” meant, and what the balance would be between Governments and global structures.  The representative of the United Republic of Tanzania asked whether there was a need to concentrate more on sustainable production and consumption.

Mr. Reddy responded by pointing out that the current crises were global in nature, and that much of what was happening was not the fault of developing economies.  However, there was a need for a global initiative, which should include them.  Size did not matter, and any measure should be very clear about what it was trying to protect.  It should protect institution from total failure, as well as the interests of investors.

Mr. Kuttner said there was an opportunity in having social investment, particularly when it aimed to produce renewable energy.  On the regulatory front, part of the problem was institutional and part was political.  It was necessary to restore democratic openness and transparency.  The window of opportunity would close fairly quickly, but there was still time to prevent the crisis from turning into a depression.  The incoming United States Administration must move very quickly, and collaboration on the global level would also be important.

Mr. Klare said he saw the crisis as a 50-year crisis at a minimum, because that was how long it would require for a transition to a combination of renewable energy sources that would form the basis for the next energy system.  If the world attempted to persist in its reliance on fossil fuels, it would face one oil shock or economic crisis after another because of shortages, disruptions due to conflicts and upheavals in the oil-supplying regions, or climate difficulties.

Wrapping up the discussion, panel moderator Jomo Kwame Sundaram, Assistant Secretary-General for Economic Development in the Department of Economic and Social Affairs, underscored the urgent need not only to limit the spread of the financial crisis to the real economy, but also to reverse its adverse impact on the real economy.  That would require counter-cyclical measures in the fiscal and monetary spheres, and much more international coordination.  There was an urgent need for medium-term systemic reform that would embrace the financial and monetary exchange-rate system.  The upcoming Doha International Conference on Financing for Development to review implementation of the Monterrey Consensus offered a unique opportunity to address many of those issues.  There must also be greater international tax cooperation to ensure the reversal of the “race to the bottom”, in which countries competed to offer less and less taxation.

Like the panellists, he pointed to the trajectory of the current financial crisis, beginning with the subprime mortgage crisis 16 months ago, the subsequent flight of capital, derivatives and other financial instruments from Wall Street to the commodity sector, and the ensuing spike in energy and food prices.  That trend had had very adverse consequences for poor people and countries.  A major element of the United States’ New Deal legislation following the 1929 financial collapse had been the development of an interstate highway system, which had created a major fiscal stimulus while also encouraging greater fossil-fuel consumption and carbon emissions.  To address the current crisis, the world must think ahead to ensure the development of sustainable solutions, as well as sustainable and equitable development for all.

The representatives of India, Brazil, Malaysia, France and Algeria also participated in the discussion.

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For information media • not an official record