The Future of the Global Financial System 2009
by Charles Lemos, Fri Feb 06, 2009 at 03:04:58 PM EST
The above is a presentation from the Davos World Economic Forum summarizing four possible scenarios through 2020 for the global financial system. The four scenarios are Financial Regionalism, Re-engineered Western Centrism, Fragmented Protectionism, and Rebalanced Multilateralism. More on these below the fold.
1) Financial Regionalism. Under this scenario, the world by 2020 is divided into three major trading blocs: the European Union, the "Democratic Trade Alliance" led by the United States and its free trade partners supposedly in the Western Hemisphere, and the "fast-expanding Eastern International Economic Community. This scenario foresees a world where goods and services flow freely within each region but barriers between are high.
2) Re-engineered Western Centrism. This scenario envisions a Bretton Woods II that resets a global monetary system marked by increased financial regulation that provides for uneven global development and stagnation in emerging markets. This scenario predicts a regular string of economic crises. The presentation concludes that this approach is a stop-gap measure that will require a Bretton Woods III.
3) Fragmented Protectionism. This scenario predicts a retreat from globalization first in the United States as its recession lingers forcing an economic populism. According to the Davos Set, economic protectionism will lead to a break down of the international order if not outright war over resources. For the Davos Set, this is the worst case scenario and thus it is painted blacker. The truth is that we have already seen a new race for resources in era of "free trade." Daewoo Logistics has negotiated a 99-year lease on some 3.2 million acres of farmland on the impoverished island of Madagascar in order to secure long-term food security for its home South Korean market. China has been scouring across Asia, Latin America and Africa in search of resources to feed its growing industrial base. In the past decade, Myanmar, Sudan and Zimbabwe have emerged as clientelistic states of China. Earlier this month, it was learned that two Japanese corporations are seeking to develop Bolivia's vast lithium reserves in an effort to secure access to one of the key metals in the evolution of batteries and energy storage. This week, Russia lend energy-rich Kyrgyzstan $2 billion, wrote off $180 million in debt and add gave outright another $150 million in aid on the condition that Kyrgyzstan close the US air base in the country.
4) Rebalanced Multilateralism. This scenario envisions a "global financial ecosystem" under a restored International Monetary Fund, now based in Singapore, reflecting a power shift in the world's economic forces to the East. This scenario foresees greater global co-operation including harmonization of regulations, still uneven, but moving in the direction that provides a stable global investment climate. Clearly for global capitalism this is the best possible outcome where property rights are sacrosanct and labour markets remain flexible, that is cheap. This scenario holds that the present era of financialization based upon securitization will survive largely intact and unregulated.
The underlying assumption, of course, made by the Davos Set is that neo-liberal economic policies that include free trade, harmonization of regulations and tariffs (a race to the bottom), flexible labour markets, the free flow of capital, the sanctity of contracts and increased financialization and securitization are the summum bonum that will to unparalleled asset creation. As always, the Davos Set fails to ask the question for whom?
Under each of these scenarios, created by some of the world's most well-connected, the prospects for the United States indicate a decline of American economic power. My own view is that we are heading for a period of sustained deflation the likes of which the world hasn't seen since the Panic of 1873. There is clearly a crisis of global capitalism. The neo-liberal economic model has run its course but it is not clear what will replace it. A few years ago, I would have place my bet on neo-conservativism, which combines the neo-liberal economic model with an authoritarian state but it seems that, at least for now, the neo-conservative agenda came undone in the crucible of Iraq. A return of the embedded liberal state, as we once enjoyed, does seem feasible but at the same time it would be unrealistic to believe that the prosperity once enjoyed is again a matter of destiny. To be blunt, our future prosperity requires breaking the tyranny of oil.
I was struck by the fact the President used that phrase the other night in Williamsburg. It demonstrates to a subset of a global elite of scientists, academics and policy makers that the President understands that in the long-term our economic prosperity is tied to the creation of an economy not wholly based on fossil fuels. That the President uttered those three little words -tyranny of oil- is a fact that should not be lost on the progressive community. Obama, it seems, does get it.