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Risks
&
Opportunities
Risks & Opportunities
A
World
in
Ferment
A World in Ferment
The World Economy
An ‘ocean liner without lifeboats’
from
Keynesianism
to
Neo-Liberalism
Neo-Liberalism
Neo-liberalism (NL) = ideology & policy model centred on free market
At its core, NL = laissez-faire economics:
confidence in free markets as the most-efficient way of allocating
resources
emphasis on minimal state intervention in economic and social affairs
commitment to unfettered movement of goods, services and capital
NL = based on the belief that market driven economic growth holds
the key to human progress – but accepts periodic crises as means of
market correction.
Keynesianism
Keynesianism = set of policy prescriptions we associate with the work
of JOHN MAYNARD KEYNES (1883-1946) – perhaps the
most influential economist of 20th century.
= how to deal with unemployment, inflation, recession and
depression.
As early as 1919 – well before his General Theory of Employment, Interest and
Money (1936) – Keynes made his position clear. He resigned as official
representative of the British Treasury at the Paris Peace Conference – fiercely
opposed to austerity imposed on Germany.
KEYNES: “An inefficient, unemployed, disorganised Europe faces us, torn
by internal strife and international hate, fighting, starving, pillaging, and
lying.”
Keynesianism
Key propositions
No natural tendency for capitalist market economies to correct economic shocks and
maintain an equilibrium at full employment.
No self-generating economic forces can correct a situation of unemployment, in which
large numbers of involuntary unemployed seek work at the going wage rate but are
unable to find it.
Unemployment = result of inadequate spending.
Failure to spend = due mainly to a shortfall of business investment – often the result of
irrational business sentiment  a fall in demand, output and employment.
Governments had a crucial role to offset the shortfall in economic activity. Tools: taxation,
government spending, tax reductions, lower interest rates or greater money supply.
Politically: a large government sector holds the key to economic stability. ###
The ‘New Deal’
FDR Speech
at Madison Square
https://www.youtube.com/watch?v=3nuElu-ipTQ
The Double Movement
A useful starting point is Karl Polanyi’s The Great Transformation
He explained the economic evolution of 19th and early 20th century Britain in
terms of a double movement:
“the origins of the cataclysm [World Wars I and II] lay in the utopian endeavour
of economic liberalism to set up a self-regulating market system.”
Yet , the self-regulating market was not pervasive:
“. . . while on the one hand markets spread all over the face of the globe and
the amount of goods grew to unbelievable proportions, on the other hand a
network of measures and policies[were introduced] to check the action of the
market. . . ”
We thus have a pendulum effect:
FROM colonisation of society by the market economy TO resistance of
society to that colonisation AND BACK AGAIN..
Financial
Crises
Financial Crises
A brief history provided by The Economist
http://www.economist.com/news/essays/21600451-finance-not-merely-prone-crises-itshaped-them-five-historical-crises-show-how-aspects-today-s-fina
Other Crises:
 Throughout 19th century Latin American states ran into repayment problems and
many defaulted on European loans they had taken out to finance various projects.
 In the 1970s, with the collapse of the Bretton Woods system Latin American
countries entered periods of recession and incurred debts they could not repay
 In 1982 Mexico’s central bank could no longer pay its $80 billion foreign debt
 By 1986 more than 40 countries had encountered severe external debt problems
 Late 1990s-Early 2000s: mounting debt  recession in both Brazil and Argentina
 1998 Russian financial crisis  devaluation of the ruble and debt default.
Causes of Financial Crises
Each crisis has specific causes, its own financial
dynamic and political environment .
But most crises share a number of common factors:
 Asset Price Bubbles
(e.g. house prices rose sharply prior to the 2008 global crisis
(in US, UK, Iceland, Ireland, Spain) fuelled by fast rising
credit
 Credit Booms
Often fuelling real estate booms (increased mortgage
financing in US  unsustainable debt service relative to
disposable income)
Causes of Financial Crises
Other Factors
 Deterioration in lending standards
Lending viable only in favourable economic conditions  loans
vulnerable to economic downturns and changes in credit and
monetary conditions  high probability of default.
 Financial liberalization, ineffective regulation and supervision
 poor oversight  excessive risk taking
 financial institutions, merchant banks, investment banks and
commercial banks operating a shadow banking system  chain
reactions leading to systemic risk.
 Greed and Corruption
Speculation fuelled by search for windfall profits – fraud and conflicts
of interest in the absence of transparency and accountability.
Politics
of
Austerity
Politics of Austerity
Austerity measures have been pursued by governments of all colours.
Austerity measures seek to reduce government spending by slashing
government spending.
reduced welfare payments and cutting public sector jobs.
Some (e.g. UK PM David Cameron) have called for a permanently
‘leaner’ government.
Austerity drives in Germany, Switzerland and Sweden have been
moderate – and mirror weaker effects of 2008 financial crisis.
More severe measures have been introduced in Poland & UK.
Draconian measures in Portugal, Spain, Italy, and Greece.
Effects of Austerity
Those working part-time in Europe but need to find more work make up:
Switzerland:
6% of part-time workers
France:
about a third
Greece & Italy
about half
Spain:
a staggering 66%
Youth unemployment:
UK
Sweden, Poland & France
Italy
Greece & Spain
around 17%
over a third
over 40%
over 50%
Effects of Austerity
‘Flexicurity’
Aim is to create a flexible job market in which workers
accept higher risk of losing their job – hardship eased by
unemployment benefits and further training.
BUT during an austerity drive it is easier to do the first part
(remove people from work), but much harder to do the
second, that is, get access to benefits and training or have
real prospect of new jobs.
Inequality
within and between
Countries
How has the percentage share of national income of the
richest 1% changed over time?
Share of global wealth
of the top 1% and bottom 99%
Wealth of the 80 richest
and of the bottom 50%
Wealth of 80 richest people in the world
doubled between 2009 and 2014,
while the wealth of the bottom 50%
was lower in 2014 than it was in 2009.
Number of billionaires it takes to have accumulated the same
amount of wealth as the bottom 50% of the global population
Global Inequality
Capital in the Twenty-First Century
by Thomas Piketty, translated from the French by Arthur Goldhammer
Harvard University Press
http://www.amazon.com/Capital-Twenty-First-Century-Thomas-Piketty/dp/1491534656
Review of the book by Paul Krugman
‘Why We’re in a New Gilded Age’, New York Review of Books, 8 May
2014
http://www.nybooks.com/articles/archives/2014/may/08/thomas-piketty-new-gildedage/
Power Shift
Economic Multipolarity
With the start of the 21st century the global economy has become
increasingly multipolar
 US economic dominance &  globalization = contributing factors
Globally, economic power is shifting.
Following the reconstruction of Europe and Japan and the creation of
the European Union, we have seen developing regions gaining in
importance and developed regions becoming less dominant.
Rise of East Asia
Emergence of BRICS
Share of World Goods Exports
Selected Countries, 1950-2004
Source: WTO (http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/shareworldexports.html on 16 September 2006)
E7 and G7 growth paths
in PPP terms
China’s Central Role in World trade
 China’s imports as a percentage of world total
The Asian Infrastructure
Investment Bank
Twenty-one Asian countries signed a memorandum of
understanding on 24 October 2014 to establish the bank
Led by China, headquarters will be in Beijing
Will help finance construction of roads, ports, railways and other
infrastructure projects in Asia – authorised capital of $50bn,
eventually to be raised to $100bn.
Expected to be fully established by end of 2015
As of 15 April 2015, there are 57 prospective founding members,
37 from within Asia and 20 from outside the region
Taming the Market
A Global Approach
Key Principles
 Economic Inequality   Ecological sustainability
 Transparency
 Regulation & Oversight
Subsidiarity
 Accommodation of diverse interests
Economic governance in a multipolar context
Institutions
Radically renewed international framework
A major new organ of the UN system to replace existing Economic and
Social Council – equal in status to UN Security Council – to have oversight
over all UN related organisations and agencies with economic functions
(including IMF, World Bank, UNDP) – and intensive consultation with national
governments and other relevant organisations
A third chamber within the UN system (made up principally of representatives
of business peak bodies, professional associations and civil society
organisations) with powers of oversight and advocacy
A streamlined system of consultation and coordination between regional
institutions (e.g. European Union, African Union, BRICS) and the UN system
Periodic national, regional and global summits to review economic trends and
set broad economic benchmarks.