The Future of the Global Financial System 2009

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.

Tags: Davos World Economic Forum, Global Capitalism, Global Finance, Neo-liberalism, Peak Oil, Tyranny of Oil (all tags)



If Davos was as productive...

...and I'm told it's as much about mental masturbation as anything else, maybe we could have avoided being where we are today.

That being said, I think it's going to evolve into a combination of options one and three, in terms of zeitgeist, or Fragmented Protectionism on a Regional basis, so to speak. Everyone will wax poetic about options two and four, and elements of those scenarios will also be in the mix.

In short: all of the above, assuming we don't blow ourselves up in the ongoing competitive effort to chase after dwindling resources...which is--regrettably--also a recipe for the worst of times being ahead of us, in and of itself.

by bobswern 2009-02-06 05:51PM | 0 recs
Re: The Future of the Global Financial System 2009

I think that is going to happen. I really recomment to people interested in the history of first crisis of global capitalism, back in the 30´s and its political consequence, the book "Global Capitalism", by Jeffry Frieden. Best thing about this book is that it is written i a plain reader-friendly language.

by aparicio 2009-02-06 11:11PM | 0 recs
Re: The Future of the Global Financial System 2009

I think you mis-characterize the fourth (and to them most desirable) scenario.  They specifically say that the Eastern bloc's approach to financial regulation, which they describe as characterized by "plain vanilla corporate lending," and "on-balance sheet transactions" that "create disincentives for speculation" and "improve financial and economic risk management."  

This is all called the "Buoyant East's new financial agenda," which the West, after a second financial collapse in 2017, is forced to accept, as the IMF moves its headquarters to Singapore.

This perspective embodies a fundamental critique of Wall Street culture and the development of exotic derivatives, etc.  My Japanese and Chinese business associates would certainly agree with this, as do I.

My basic point is that you mis-characterize this perspective to make a political point that is not entirely valid.  Enlightened capitalists (like Obama's Treasury appointments) see the need for fundamental regulatory reform of financial markets.  Valid critiques from the Left can still be made, but should not go the lazy way of taking on straw men.

by jmr1948 2009-02-07 10:57AM | 0 recs


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