The world is yet to tackle the imbalances that led to the 2008 financial crisis. FILE PHOTO | NMG
A decade after the collapse of Lehman Brothers, the world economy is back on shaky ground.
Tariff
wars are making headlines but the underlying problem is a failure to
tackle the imbalances and inequities that led to the crisis in the first
place.
Since 2008, leading central banks have pumped
trillions of dollars into the global economy. The big commercial banks
at the centre of the crisis have recapitalised and financial markets
have rebounded; government spending, which initially helped stabilise
the global economy after the crisis, has been squeezed; and wages have
stagnated. This economic mix has failed to generate robust recoveries in
advanced economies, and with debt levels higher than ever and income
gaps widening, more and more people feel anxious about future prospects.
The arc of politics has bent accordingly.
Emerging
economies were also hit by financial shockwaves but recovered more
quickly, declaring themselves decoupled from the problems of the
advanced world. In reality, much of their recovery was dependent on the
liquidity splurge in advanced economies, triggering a borrowing spree,
particularly by the corporate sector, as investors sacrificed caution in
search of yield.
Though advanced economies have not
done enough individually or together to rebalance the global economy,
the worry now is that normalising monetary policy could send shockwaves
through capital and currency markets in developing countries. The damage
is already apparent in some emerging economies but there are many
others in a vulnerable position. Mitigating the problem is likely to be
all the more difficult given the failure of post-crisis reforms.
The
financial crisis revealed the difficulties for policy makers when banks
become “too big to fail” but in our hyperglobalised world, the
accumulation of concentrated economic power is not confined to financial
markets. Global trade is dominated by big firms, including through
their organisation and control of global value chains. The spread of
these chains contributed to a very rapid growth of trade from the
mid-1990s up to the financial crisis, with developing countries seeing
the fastest growth, including trading more with each other.
Participation
in these chains seemed to promise a path to higher value-added tasks
and more diversified economies. This has rarely happened, and where it
has, notably in the case of China, the policies that made it possible
are now being presented as a source of disruption to the trading system,
requiring reforms to the World Trade Organisation to ensure other
developing countries cannot follow suit.
Moreover, as
less of the value created has been retained in the fabrication links in
these chains, rents have flowed to pre- and post-production activities,
with the gains skewed in favour of the lead firms thanks to a mixture of
increased market concentration and control of intangible assets. As a
result, the profits of larger firms, particularly those operating
internationally, are hitting all-time highs as the share going to wages
declines. And when international corporations are (on paper) making more
money in Luxembourg and the Bahamas than in China and Germany, people
instinctively recognize that they are playing a rigged game in an ever
more unequal world.
With big multinationals skimming the economic cream, many
developing countries are putting their faith in disruptive digital
technologies, hoping the widespread use of data intelligence will
strengthen development prospects. It may well be. However,
monopolisation is, if anything, an even bigger threat in the digital
economy than in the analogue economy. In particular, super platforms
have been able, through strengthened intellectual property rights,
first-move advantages and sheer market power, to establish a
monopolistic hold over data that allows them to create super profits and
to close down the possibility of newcomers entering the field.
Developing countries are particularly vulnerable on both fronts.
Active
policy initiatives combining targeted industrial policies, tailored
financing mechanisms and regulatory measures, including support for data
localisation, will be essential along with south-south cooperation to
ensure international agreements preserve policy space.
The
uncomfortable truth of our hyperglobalised world is that footloose
finance plus unequal trade plus unaccountable corporations are posing
challenges for policy makers everywhere. But neither a retreat to
nostalgic nationalism nor a doubling down on support for “free trade”
provide the right response.
In this world, deploying
the big tariff guns will do little to correct the macroeconomic
imbalances that lie behind the heightened anxiety of depressed northern
communities or to break the Medici vicious circle of corporate political
capture and rent-seeking behaviour. Equally, calls for extending free
trade will simply provide ideological cover for a world dominated by
large, footloose corporations.
where free trade
agreements, while promising a level playing field and more inclusive
outcomes, have curtailed policy space for developing countries and cut
away protections for working people and small businesses, even as they
have carved out more space for predatory international firms to boost
their profits.
Reviving multilateralism will only
happen if trust can be restored to the system. That will require rules
for managing trade that can support commitments to full employment and
rising wages, regulations for curtailing predatory corporate behaviour
and guarantees of sufficient policy space to ensure countries can
integrate into the global economy without compromising sustainable
development goals. So far, too much of the talk about reforming the
system is moving in the wrong direction.
Richard Kozul-Wright, Director of the Division on Globalisation and Development Strategies, UNCTAD
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