Can Global Governance Avert Economic Crises - Essay Example

Can global governance avert economic crises? Does history repeat itself? The age old adage may ring true, especially when it comes to an analysis ofthe Great Depression and the parallels with the current economic crisis. Financial instability over the past hundred years is a result of the universal entrenchment of capitalism and neoliberal inspired growth. This paper argues that the global entrenchment of neoliberal economic activity is responsible for the economic crises afflicting the world, and begins with an overview of the precursors to the global spread of neoliberalism and will follow with an analysis John Kenneth Galbraith’s work, The Great Crash, 1929. This paper also argues that the global system of economic affairs is prone to repeated crises due to the nature of neoliberalism and capitalist forms of economic development throughout the globe, the following will explore the recent global economic crisis and compare it with the Great Depression of 1929. Accordingly, the current economic crisis shares many parallels with the economic crisis that occurred eighty years ago. This paper will look at the role of organizations such as the IMF in mitigating – although not hindering – the outbreak of the global economic crisis. The essay then concludes with an overview of the issues analysed (Harvey, 2007: 33-27). The Global Spread of Neoliberalism Planned capitalism, expressed through governmental economic intervention and the Bretton Woods Agreements of 1944, exploded during the 1970s. Bretton Woods, which established both the World Bank and the IMF, symbolised the supremacy of the United States in setting international monetary policy. Hobsbawm argues that these two international institutions were “de facto subordinated to US policy” (1994: 274). When the United States pulled out of the Bretton Woods monetary system in 1971 and allowed its currency to float in international markets, it caused a chain reaction with unexpected global ramifications. Currencies were devalued across the board and the United States, as well as its Western allies, was ill equipped to deal with the resulting oil embargo implemented by OPEC two years later. When OPEC, the Organization of the Petroleum Exporting Countries, announced that it would no longer be shipping oil to countries that had supported Israel in its war with Egypt and Syria in 1973, it triggered an international calamity known as the Oil Crisis of 1973. The Yom Kippur War – as the war between Israel and the joint forces of Egypt and Syria in 1973 is now known – inadvertently led to a global economic crisis OPEC members and Arab oil producing states used their economic leverage to embargo the West. Oil shipments to the Western world stopped and this was aimed at causing specific damage to the economies of the United States and its allies. Petrodollars, meaning money earned by Middle Eastern countries through the sale of oil to the West were re-invested in those same countries, and used to extract serious political leverage. This made IT clear just how dependent the West had become on the oil producers. Describing the situation as the start of the “Crisis Decades”, 1973 represented an important turning point in global economic relations. The Crisis Decades were particularly harmful for members of the Third World. In fact, “since 1970 almost all of the countries in the region had plunged deeply into debt” (Hobsbawm, 1994: 422). Deep debt – all of sub-Saharan Africa reportedly had debt in 1980 that exceeded its annual GDP – ensured that these countries semi-permanently remained at the bottom of the world capitalist economic system. Foreign direct investment ceased to exist altogether and debt servicing, an average of 9.6 percent in 1982, kept these developing countries in servitude. According to Hobsbawm, “The main effect of the Crisis Decades was thus to widen the gap between rich and poor countries” (1994: 422-424). The first global oil crisis occurred in 1973 when OPEC’s Arab countries of established OAPEC, the Organization of Arab Petroleum Exporting Countries, an organisation that played an important role in the oil shocks of the early 1970s. As a result of the Yom Kippur War in 1973, the first oil crisis began with an oil embargo, explicitly stated by OPEC and the dual countries of Syria and Egypt. Announcing the oil embargo in early October 1973, the Arab members of OPEC, along with Egypt and Syria announced their oil embargo in response to what it perceived to be flagrant American support for Israel during what became known as the Yom Kippur War. This was in response to what many in the Arab world perceived to be the unrelenting support of the United States toward the state of Israel. These sentiments were exacerbated by events such as Operation Nickel Grass, in which the United States blatantly rearmed Israel during the Yom Kippur War. Although the United States was the initial target of the embargo its scope was later defined to include any county that supported Israel during the war. Using their economic leverage and the ability to wreak havoc on international financial markets, the Arab countries of OPEC used this multilateral organization for political purposes. Seeking to exert pressure on much of the West for its support of Israel during the recent war, but also dating back to 1948 and the establishment of a modern Jewish state in the Middle East, the Arab countries of OPAC sought to punish the supporters of Israel (Vietor, 1984). A global financial system based on extraction and division of the planet between poor and rich countries has created inherent instability throughout global economic markets. Even the developed West is not immune to such crises. An exploration of John Kenneth Galbraith’s impressive work, The Great Crash, 1929 explains how the current global economic crisis shares parallels with the Great Depression. Analyzing The Great Crash Written more than half a century ago, The Great Cras , 1929 explores which factors lead to the Great Depression in 1929 and seeks to provide a comprehensive analysis of the precursors to the worst economic crisis in American history. The United States, the UK and much of the Western world remain in one of the worst financial crises since the Great Crash of 1929. In the wake of the Cold War, the United States emerged as the dominant global economic and military power and ushered in a new world order of capitalist-inspired economic growth and prosperity. Virtually uncontested at the helm of the world’s strongest economy, the United States has recently witnessed ominous signs of an impending economic meltdown. A variety of factors precipitated the current economic crisis, an event which draws parallels with the Great Depression of eighty years ago. Some of the precursors to the current financial crisis include the implosion of the American sub-prime lending market, a mortgage market in crisis and an induced credit crunch with global ramifications. Banks are foreclosing, people are losing their homes and the international economic situation is precarious as global lenders are closing their doors and filing for bankruptcy. The correlations with this financial crisis to the Great Crash of 1929 are so similar that it is eerie. Attempting to understand the reasons for the Great Depression, John Kenneth Galbraith analysed the economic situation in the United States leading up to the Crash and outlined the preconditions for the crisis. Viewing the rise in speculation as perhaps the most important precondition for the Great Crash of 1929, Galbraith emphatically argues that an economy based on speculation, such as through stocks, bonds, currencies, real estate, derivatives, and commodities is inherently unstable from a macroeconomic perspective and prone to a burst in the speculative bubble. Optimism is a characteristic of the speculative investor and Galbraith argues that an economic system with a speculative basis is liable to crash and subsequently form a shaky basis for an economy. In addition to the risks caused by a speculative market, income inequality, which was very pervasive in the United States during that period, further contributed to an unstable economy and this income distribution imbalance exacerbates instability. Accordingly, when “five percent of the population with the highest incomes in that year [1929] received approximately one third of all personal income", an economic crisis inevitably to follow. Additional antecedents to the collapse include a weak banking structure, imbalance in foreign trade, weak economic intelligence and problems in the structure of American corporations. Galbraith argued that as economic actors, corporations in America were structured to contribute to the deflationary cycle as opposed to opposing it (Galbraith 1994: 102-206). The International Monetary Fund and the Global Financial Crisis The International Monetary Fund (IMF) is an international organisation that has effectively succeeded in managing the international financial system by creating the “rules of the game” for the global economy and by applying the principles of the Washington Consensus to countries in need of developmental aid. The IMF is a multilateral organization whose purpose is to ensure the compliance of member states with it macroeconomic principles. By managing exchange rates as well as the balance of payment between member states, the International Monetary Fund lends money throughout and applies stringent macroeconomic conditions to its loans. As an international organisation which ensures member state compliance with the macroeconomic principles of governance, the International Monetary Fund has both proponents and detractors. Seeking to understand the IMF in light of the global economic crisis, the following will critically evaluate the successes and failures in managing this crisis (Coburn, 2000). The global financial crisis is so severe that it may threaten the very foundation of the global economic system. Arguing that world trade and global economic growth have decelerated in the wake of the financial crisis which has engulfed the developed countries of the Western world, the International Monetary Fund has sought a variety of means through which it hopes to tackle the crisis. With the aim of hampering the fallout of the crisis in developing countries of Eastern Europe, the IMF is addressing both short-term problems and long-term needs. While the United States, Canada, Australia, Japan and the advanced economies of Western Europe have been hit hard by the financial crisis, little attention has been paid to the effects of this financial crunch on the economies of the poorer sectors of the globe. Seeking to address these challenges in the wake of the largest crisis in global history since the Great Depression of 1929, the International Monetary Fund has provided emergency assistance to some of the weaker European economies who risk being swept away by the economic doom emanating from the financial centers of London, Frankfurt, New York and Toronto. Accordingly, earlier this year the IMF has approved emergency loans for Hungary, Iceland, Belarus, Latvia and the Ukraine, totaling more than $39 billion USD. Furthermore Serbia has requested additional funds from this multilateral international organization which are currently being considered in this emergency situation. Arguing that the time has come for increased regional cooperation within Europe and beyond, Marek Belka, head of the IMFs European Department argued that "The current crisis is a timely wake-up call to strengthen European cooperation in the area of financial stability, especially when it comes to cross-border financial institutions." Presently, it appears as though the IMF’s focus has been aimed at stabilising emerging Eastern and Central European countries, some of which were avowedly socialist up until the past quarter century and thus these economies fragile with respect to the global economic shocks which have engulfed the world. Hence, the precariousness of these economies remains a concern for the IMF as well as the international economic community. Countries that were once socialist and part of the Soviet block are now thoroughly integrated into the global capitalist economy and thus remain interdependent of the rest of the modern, developed world. Accordingly, is standard with IMF loans, the International Monetary Fund is advocating fiscal restraint for its loan programs dropout Europe. With the aim of stabilizing global trade and keeping some of the most fragile economies in Europe afloat, how has the IMF responded to the global financial crisis in other regions of the developing world? Since the outbreak of the global financial crisis the International Monetary Fund has approved loans for a variety of emerging economies including Pakistan. A strategically important country in the war on terror and one country with enormous economic potential in the wake of an international economic crisis, Pakistan recently applied for and received a loan from the IMF. Seeking money to insulate itself from the shocks of the global economic crisis, Pakistan recently received a $7.6 billion USD loan from the IMF which will support and strengthen the country’s economic system. Without the loan, Pakistan claims that, it would have defaulted on its international debt, thus plunging the country into further economic disarray (BBC, 2008). Has the IMF been successful in mitigating the effects of the global economic crisis? Yes, the International Monetary Fund has an important role to play in ensuring that the global capitalist economic system stays afloat. By focusing on the needs of some of the weakest economies in the international economic system, the IMF has played an important role in ensuring the continued stability of the capitalism system across the globe. Whether capitalism is the ideal system for the world economy is another topic worthy of further scrutiny. Concluding Remarks Globalisation remains inherently tied to the forces of capitalism and neoliberalism and this is why the international economic system remains inherently unstable. This paper has traced the antecedents to the current wave of globalisation with an emphasis on key global events: such as the social revolution of the 1960s, the economic crises of the 1970s, neo-liberalism in the 1980s, followed by the Communist collapse and the emergence of authoritarian capitalism in East Asia. The strategies outlined by Galbraith to limit the eventuality of a future economic crash are varied and provide lessons for the future to ensure that a crisis like the one of 1929 never reoccurs. Lessons for the future include correcting the imbalance of foreign trade, restructuring the banking system to safeguard against inherent instability within the markets, restructuring of American corporations to make them less predatory, properly distributing income within the United States, lessening of the dependence on speculation for the market to function. The Great Crash, 1929 is incredibly timely in light of the current global economic meltdown and although Galbraith provided strategic economic aims to ensure that an event like the Great Depression never happens again, it is obvious that his forewarnings of more than half a century ago have gone unheeded. More importantly, strategic economic aims provided by The Great Crash of 1929 include a lessening of the dependence on speculation as the backbone of the economy and further redistribution of wealth to ensure that a complete reorientation of the production engines takes place. Accordingly, when persistent income inequality is a feature of a domestic economy, the system itself will remain untenable and prone to implosion. Whilst international organisations such as the IMF may help repair the damage caused by global economic crisis, fundamental issues that are intrinsic to the capitalist form of economic development remain the cause of the perpetual economic crisis amongst the world’s capitalist economies. References Andersen, C. January 14, 2009. Europe and the Financial Crisis. Retrieved May 4 2010, from IMF.org website: http://www.imf.org/external/Pubs/FT/SURVEY/so/2009/INT011409A.htm Coburn, D. 2000. Income inequality, social cohesion and the health status of populations: the role of neo-liberalism, Social Science & Medicine, vol. 51, no. 1, pp. 135-146. Galbraith, J.K. 1992. The Great Crash, 1929. New York: Penguin Books. Harvey, D. 2007. A Brief History of Neoliberalism. Oxford University Press, London.. Hobsbawm, E. 1994. Age of Extremes: The Short History of the Twentieth Century: 1914-1991. London: Abacus. IMF approves loan to aid Pakistan. (November 25, 2008). Retrieved May 4 2010, from BBC.com website: http://news.bbc.co.uk/2/hi/south_asia/7746083.stm Vietor, R.H.K.1984. Energy Policy in America Since 1945: A Study of Business-Government Relations. Cambridge University Press, Cambridge. Wade, R. 2007 The First-World Debt Crisis of 2007–2010 in Global Perspective. Retrieved May 4 2010 http://www.challengemagazine.com/extra/023_054.pdf Read More