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'We desperately need a new Bretton Woods'

May 28, 2009

In an interview to La Repubblica, renowned Indian economist Prof Jayati Ghosh says that the ongoing economic crisis is the creation of ‘deregulated financial market’ system and therefore requires government regulation. She argues in favour of more equitable and sensible patterns of consumption and production.

Here are the excerpts:

La Repubblica: What is the relationship between food crisis and the present economic depression?

Jayati Ghosh: The global food crisis reflects several imbalances, in both the real and financial economies. It started while the world economy was still booming, and was reflected in dramatic increases in food prices in world trade.

Jayati Ghosh.jpg

While demand-supply imbalances have been touted as reasons, this is largely unjustified given that there has been hardly any change in the world demand for food in the past three years.

In particular, the claim the food grain prices have soared because of more demand from China and India as their GDP increases, is completely invalid, since both aggregate and per capita consumption of food grain have actually fallen in both countries.

Supply factors were more significant, such as the short-run effects of diversion of both acreage and food crop output for biofuel production, as well as more medium term factors such as rising costs of inputs, falling productivity because of soil depletion, inadequate public investment in agricultural research and extension, and the impact of climate changes that have affected harvests in different ways.

But the role of finance was also very important: financial speculation was the major factor behind the sharp price rise of many primary commodities in 2007 and the first half of 2008, and the subsequent sharp declines in prices were also related to changes in financial markets, as investor moved out of commodity markets to get liquidity to cover losses.

The global economic crisis has actually made the food crisis worse in developing countries. Even though global trade prices of wheat, rice, maize and other food items have fallen dramatically since mid/ late 2008, the retail or wholesale prices of these commodities in many developing countries continue to increase.

The financial crisis also operates to increase food insecurity by putting constraints on fiscal policies in balance of payments constrained developing countries, causing exchange rate depreciation (which makes imported food more expensive) because of capital flight and reduced remittances from migrant workers, and adversely affecting livelihoods and employment, which reduces the ability of vulnerable groups to purchase food.

LR: Trento University Chairman Innocenzo Cipolletta affirmed that the crisis is like an earthquake: unpredictable.

JG: The current crisis was not just highly predictable, it was also actually predicted, not only by heterodox economists in the West but also by several economists in developing countries.

For example, it was obvious that the huge expansion of the sub-prime housing market was unsustainable in the US and was based on irresponsible lending practices that were covered up for some time by “securitising” the loans.

Also it was obvious that the US could not go on running huge external deficits and making the rest of the world provide savings for its consumption beyond a point. Many economists also realised too many other economies were relying on the US as the engine of growth, and therefore any recession in the US would have major global transmission effects.

So the current crisis is not like an earthquake or natural disaster at all, it is entirely created by the system, so it is more like a bomb.

The current financial implosion reflects the inherent tendency of deregulated financial markets to get into boom-bust cycles, which was analysed long ago by economists like John Maynard Keynes, Hyman Minsky and Charles Kindleberger.

Policymakers and the mainstream economics profession had forgotten these analyses and started believing in the “efficient markets hypothesis”, but that has now been exposed as a myth. It is essential for governments to regulate markets, and especially financial markets, to avoid this tendency to damaging volatility.

LR: Is it enough to just outlaw the tax havens as it was done by G20, or do we urgently need a new Bretton Woods?

JG: The G20 discussion did not really outlaw tax havens: all that was done was to agree to share some information between countries on demand, and all the really significant tax havens have hardly been affected.

But even if this had been done properly, it would not have been enough. We desperately need a new ‘Bretton Woods’ that will be based on the participation of all countries, not a G20 that just invites a few new members to the ‘high table’.

This is required to develop a financial architecture that will enable a smooth resolution of the existing global imbalances; to provide resources to developing countries that have been adversely affected by a global crisis that was not of their own making; to ensure currency stabilisation through international monetary cooperation; to encourage the expansion of international trade in a stable way; and to promote development by facilitating productive investment.

LR: Many of your colleagues have said that the poor are becoming poorer by the economic crisis. Do you confirm it?

JG: I did not really understand this question. But I will say this: It is already clear that poor developing countries, and the poorer sections of population in all countries, are the worst affected by this crisis even though they were not responsible for creating this mess and they did not gain from the earlier boom.

Already, in both developed and developing countries there have been the significant increases in unemployment, falling wages of workers, the worsening of the agrarian crisis because of rising input prices and volatile prices of cash crops, and a credit crunch that denies essential resources even for working capital to small producers.

In developing countries, these problems have been made even worse because their governments often cannot afford to provide fiscal stimulus or countercyclical policies that would cushion the shock and provide safety nets. Also the return of migrant workers and the reduced possibilities for getting remittance incomes have added to economic difficulties.

LR: The depression is a good or a bad thing? To hear you the elites should reduce their extravagant lifestyles. Would this not lead to a greater depression?

JG: There is no question that recent patterns of growth have been both unequal and unsustainable, involving rapacious use of natural resources, involving processes that lead to global warming and creating artificial and unnecessarily wasteful ways of living among the elite in both rich and poor countries.

The current crisis is an excellent – even unique – opportunity to bring a shift in socially created aspirations and material wants, and to reorganise economic life.

It is obvious that current ‘Northern’ standards of life cannot be sustained if they are made accessible to everyone on this planet. This means that future economic growth in the developing world has to involve more equitable and sensible patterns of consumption and production. But that hardly deals with the basic problem.

Even if the elite and middle class of the developing world, and particularly China and India, just stopped increasing their consumption, simply bringing the vast majority of the developing world’s population to anything resembling a minimally acceptable standard of living will involve extensive use of global resources. It will necessarily imply more natural resource use and more carbon emissions.

So the stark reality is that the developed world must, on the whole, consume less of the world’s resources and reduce its contribution to global warming absolutely. This in turn has effects on income as well.

It is not immediately clear why rich countries with falling populations necessarily need to increase their GDP, and why they should not focus instead on internal redistribution and changing lifestyles, which could in fact improve the quality of life of every citizen. But sadly, this message is not being heard at least among the major policymakers in the core capitalist countries.

In the United States, even the relatively environment-friendly Obama administration simply talks about promoting “cleaner, greener technologies” rather than altering absurd and wasteful consumption patterns. For example, it is still basing its transport strategy on excessive reliance on private automobile use rather than more extensive and efficient public transport.

In Europe, too, the focus is on reviving and increasing the old (outdated) patterns of consumption. For example, your President a few months ago pleaded with Italians not to change their lifestyles because of this crisis, because this would reduce economic activity immediately!

The implication is that wasteful and excessive consumption is socially desirable because that is the only way to preserve employment.

But this is simply not true. There are many ways to improve both the quality of life and economic justice to all citizens, which do not have to involve mindless consumption that only benefits a few and simultaneously deprives and marginalises the larger section of current humanity as well a future generations.

But for this to happen, we as citizens have to force our governments to show more imagination and vision in their policy responses.

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