Kemal Dervis & Juan Somavia
Sovereign countries will have the final say on their recovery packages, but global coordination will increase the effectiveness of everyone’s actions. Moreover, fairness and security considerations demand that the most vulnerable, who had no role in the making of this crisis, receive support

As recession spreads around the world, the global production networks that arose with the globalisation of the world economy have become sources of cutbacks and job losses. Postponing purchases of new winter coats in the United States means job losses in Poland or China. These losses then translate into reduced demand for American or German machine tools.

Unemployment and reduced sales then feed back into new losses in banks’ loan portfolios, further weakening the battered financial sector. As a result, anxiety, hopelessness, and anger are spreading, as what was a financial crisis becomes an economic and human crisis. Unchecked, it could become a security crisis.

Trying to rescue the financial sector without supporting a recovery in terms of businesses, jobs, and family purchasing power will not work. What is needed is a large worldwide fiscal stimulus to counteract falling private demand.

Different countries’ capacity to act depends on their indebtedness, foreign exchange reserves, and current-account deficits. Germany and China can do more than others. The US can do a lot, in part because of the dollar’s status as the main international reserve currency. Low interest rates mean that the additional debt burdens that public borrowing will create can remain manageable.

Moreover, if the stimulus succeeds and leads to an early recovery, the additional income gained may more than offset the increase in debt. Given the collapse of commodity prices and excess production capacities, there is no short-term inflation danger, even if part of the stimulus is financed directly by central banks.

The argument for a strong fiscal stimulus is overwhelming. Several countries have already announced measures, but there is a need to evaluate what they all amount to in reality. For example, some constitute “new” money, while others represent existing commitments brought forward. We also need to assess the quality of these packages.

The argument is strong for providing stimulus through increased government expenditures rather than relying on, say, tax cuts, because panicked consumers might save the money instead of spending it. Debt and inflation will reappear as medium-term problems, so it is critical that the fiscal ammunition used helps long-term productivity, growth, and sustainability.

Of course, fiscal stimulus does not mean just throwing money at the problem. There needs to be a strategy, priorities must be weighed, and empirical evidence analysed. We should also remember that what growth there is in the world economy in 2009-2010 will come mostly from developing economies. Policies supporting their growth are critical to prospects in the advanced economies, too.

Each country may hope that others will stimulate their demand while it preserves its fiscal headroom, thereby relying on exports as the engine of recovery. Each country may also be tempted by protectionist measures, trying to preserve domestic jobs at the expense of imports. Such “beggar-thy-neighbour” policies in the 1930’s aggravated and deepened the Great Depression.

The automobile industry is a good example. Measures to keep the industry afloat in one country look like unfair competition to others. But the answer is not to let a collapse in the world’s car industry fuel a deeper recession. The answer is to coordinate a global recovery package, which creates the opportunity to point recovery in the direction of a new generation of fuel-efficient and low-carbon-emission vehicles and green jobs.

Sovereign countries will have the final say on their recovery packages, but global coordination will increase the effectiveness of everyone’s actions. Moreover, fairness and security considerations demand that the most vulnerable, who had no role in the making of this crisis, receive support.

Extending social safety nets helps the most vulnerable and is likely to have high multiplier effects, as the need to spend is most urgent for the poorest people. Training programmes, including for green jobs, should be significantly increased. Public expenditures must be focused on programmes with strong employment content, such as in small- and medium-scale infrastructure projects and support to local governments.

Credit lines should be kept open to smaller businesses, which employ the bulk of the world’s workers but have the least access to credit. The use of social dialogue for crisis management should be increased, because trust must be rebuilt. Donors must maintain the promised (and very modest) levels of development aid for the poorer countries, and the drive to achieve the Millennium Development Goals must be renewed. The availability and affordability of trade finance should be improved.

The Bretton Woods institutions have a key role to play. The International Monetary Fund and central banks should increase liquidity in a coordinated fashion in the form of short-term credit to emerging-market economies suffering from cuts in capital inflows and export earnings. The World Bank should increase lending to help finance growth-supporting expenditures in developing countries. Tangible progress is needed in global trade negotiations in order to signal that the world economy will remain open.

While these recovery measures are put in place, the world must also build the institutions for the twenty-first-century economy. The International Labour Organisation’s Decent Work Agenda of employment and enterprise, social protection, sound labour relations, and fundamental rights at work creates a solid platform for fair globalisation.

Any crisis is also an opportunity. This crisis has demonstrated that the destinies of countries around the world are linked. Policy coordination and a global strategy that instils confidence and creates hope will bring a quicker and stronger recovery to us all. —DTPS

Kemal Dervis is the executive head of the United Nations Development Programme; Juan Somavia is the Director-General of the International Labor Organisation
Daily News

I throughly read this article. Its very informative indeed. In my view, depending more and more on Bretton Wood Institutes is problamatic. Injecting money in a rotton system is like donating blood again and again to a body which inherently disable to produce her own blood (a body without Red Blood Cells and Haemoglobin). Bailout plans are not sufficient enough to save the world from Global Financial Catastrophe. It will increase the circulation of money in the system which further deteriorate the problem. American concept of free capitalist market is one of the bigger reason of financial meltdown. Many critics identified this policy as a cause of financial meltdown as it swings between near full employment and large scale unemployment. In a meeting of delegates, Ex-President Bush maintained that: "Free market capitalism is more than an economic theory. It is the engine of social mobility—the highway to the American Dream." As for free-market capitalism serving as an "engine of social mobility," this movement has increasingly been in opposite directions, with those at the top of the social ladder increasing their share of total wealth to unprecedented levels, while the vast majority, the working people, have seen their incomes stagnate and decline. As a business analyst, i suggest government to search for new markets for their products but do that after getting some specialized position in some product by maintaining the international standard.

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Hazrat Ali (R.A)