The global economic crisis ... a view from the South

By Dr. Odeen Ishmael

With the world plunged into a financial and economic crisis, the international media continues to be engrossed with the 'bale out' efforts in the United States and Europe in the attempts to alleviate the escalating problem. Aside of government circles in the pre-eminent capitalist economies, economists, financial experts, political and social scientists at the regional and international levels have also been examining this global situation and making parallel proposals to stem the economic slide.


Leaders of the South (the developing countries) have commented on the efforts to 'rescue' the global economy but are not too impressed by actions taken in the United States. Criticising the US$750 billion 'bail out' package for the American bankers, Chilean President Michelle Bachelet felt that such a hefty sum could easily solve the problem of hunger across the world.


Brazil's President Luiz Inacio Lula da Silva bluntly accused wealthy nations of being responsible for the global financial crisis, saying their irresponsibility could destroy fiscal progress made in the developing world. He said growing economies that "have done everything to have good fiscal policy ... can't be turned into victims of the casino erected by the American economy.'


He added: "It's not fair for Latin American, African and Asian countries to pay for the irresponsibility of sectors of the American financial system."For his part, Venezuelan President Hugo Chavez pointed to the irony of the 'capitalist' American government's intervention in the economy by nationalising financial institutions, while his government a few months ago was sharply criticised by the US administration for taking control of the Spanish-owned Banco de Venezuela as well as the foreign-owned steel and telecommunications companies.


With respect to the impact on the smaller economies, Guyana's President Bharrat Jagdeo noted that developing countries are worried that since major international banks have frozen credit, foreign investors would face difficulties in accessing loans from these institutions to pursue their investment plans.


On the other hand, he explained that his country's banking system was isolated from the impact because it was not investing heavily in the world markets reeling from the financial freefall.The international media, unfortunately, have paid scant attention to the effects of this current crisis on the developing countries.


Thus, little heed was given to 'The International Conference on Political Economy: Responses from the South to the World Economic Crisis', held in Caracas on October 8-11 when researchers from across the world examined the turbulence in the global economy from the perspective of the South.This forum agreed that the economic and financial crisis has worsened and accelerated enormously and its future development, in addition to being difficult to predict, can take dramatic turns day by day.


For Latin American and Caribbean countries, there are now clear indications they would feel the impact of the economic fallout. They certainly will be confronted with an expected deterioration of international commerce as well as serious financial turbulence in the short term.The Caracas forum called on the regional governments (especially those of South America) to institute measures for the well-being and the rights of their peoples and not to come to the aid of the banks responsible for the crisis -- a position diametrically opposite to what is currently happening in the United States, Europe, Japan and South Korea.


In a major proposal which could be viewed as pro-socialist, the participants urged governments in the region to immediately take custody of the banking systems by way of control, intervention, or nationalisation without indemnity.


Such action would prevent capital flight, a run on the currency, the transfer of bank assets to foreign banks, and the freezing of credit by banks that do not lend the funds they receive.At the same time, the forum suggested the closing of offshore branches of the banking system in each country because they 'constitute a dangerous shield against fiscal regulation in these circumstances.'


There was also a call for the ratification of currency exchange controls with the purpose of protecting the reserves and preventing capital flight.


With regard to state intervention in the banking system, the participants recommended that the state should recuperate the cost of the bailout with the assets of the banks, and should have the right to regulate the assets of the stockholders and the administrators.


Ever since the economic turmoil in the United States began to bubble more than a year ago, some South American economists have been pointing to the absence of coordinated monetary policies which could lead to "competitive devaluation" and worsen the crisis in regional economies. This point was echoed at the forum which stated that this situation could impede a coordinated regional response and threaten integration initiatives such as those promoted by the Union of South American Nations (UNASUR).


Last year when the Bank of the South (Banco del Sur) was formally established, its members (Argentina, Brazil, Bolivia, Colombia, Ecuador, Paraguay, Suriname, Uruguay and Venezuela) anticipated that for its development, there must be increased communication among central banks of member countries.


The Caracas forum gave its support to this idea, and emphasised that by doing so the Bank would establish more efficient management of its members' international reserves. In this regard, it also supported an existing South American proposal for a Fondo Común del Sur (Common Fund of the South) as an alternative to the IMF, with contingency funds available for fiscal emergencies.


And considering the suspension of credit lines imposed by that the global financial crisis, many countries in the region are now considering the temporary suspension of payments of the public debt. In the short term, such action is expected protect domestic resources threatened by the crisis and prevent the depletion of the nations' financial reserves.


But Latin American and Caribbean nations (especially those of South America) are extremely concerned over the negative impact the crisis would place on social development and the on-going fight against poverty. In this respect, a proposal has been made for a Regional Fund for Social Emergencies, managed by the Bank of the South, to ensure the availability of food and energy. This Fund, if implemented, can also address the severe problem of migration and the expected cutbacks in remittances to the region from the developed countries.


Significantly, the experts at the Caracas forum, while sharply objecting to aiding bankers responsible for the crisis, urged the establishment of anti-inflationary mechanisms and greater assistance to the general population through social spending.


They identified the priorities as job security, universal income, housing, public health and education.Currently, there exists also serious concern over the escalating prices of food products -- a grave setback in the fight against poverty and hunger in the developing world.


At the PetroCaribe summit in July 2008, Latin America and Caribbean leaders blamed the price escalation on speculators (international market profiteers) for buying out supplies in the international oil and commodities 'futures' markets.


This process also involved massive financial transfers globally, thus having debilitating impacts on currencies, with developing economies ultimately feeling the squeeze.To deal with aspects of this problem, many political and economic analysts in the South feel that consideration should be given to the imposition of a UN-administered 'Tobin tax' of half of one percent on large scale international financial transfers which could easily raise more than US$2,500 billion annually which could be dispensed to help ailing economies in the developing world.


Even if a watered-down version of one-tenth of a percent is applied, roughly US$500 billion can be accrued for this enterprise. This tax was suggested in the 1980s by the American Nobel Prize Keynesian economist James Tobin (1918-2002) and, more recently, his idea has generated discussions in political and academic circles in the South.With the economic slide generating speed across the globe, this could be one factor which can help apply the brakes while at the same time generating worthwhile assistance to the developing world in the face of the global economic tsunami.


Dr. Odeen Ishmaelembguy@cantv.net(The writer is Guyana's ambassador to Venezuela. The views expressed are solely those of the writer.)