Monday, September 28, 2009

G-20: a global economic government?

Just one year after the financial crisis which started in the US the G-20 gathered in Washington, London and now in Pittsburgh, leaders from both rich countries and emerging powers which represent about 85% of the world output and almost two thirds of the world population. It was created in September 1999 after the financial crises of the nineties, but it was nothing more than a forum for dialogue among finance ministers and central bank governors of 19 nations and the European Union. Since the G-20 in Washington (Nov.08), the meeting is held at the level of Heads of State twice a year. We can ask whether it will now be more effective because it includes important new players like China, India and Brazil, or whether it will simply be more unwieldy.

Leaders agreed on a far reaching effort to revamp the world economic system*. The agreements, if carried out by national governments, would lead to much tighter regulation over financial institutions, complex financial instruments and bonuses. They could also lead to greater coordination and more external scrutiny over the economic strategies of individual countries, including the United States.

Most economists agree that the imbalances caused by the huge US trade deficit and related surpluses in China, Germany, Japan and oil exporters, contributed to the global financial and economic crisis. In fact, world growth was underpinned by surplus dollars from China and oil exporters recycled back to US consumers by the financial system. But that mechanism collapsed in 2007 as defaults from subprime borrowers surged and the financial system was severely affected with bailouts of banks and insurance companies in many countries.

In order to achieve a more balanced growth, the United States will be expected to increase its savings rate, reduce its trade deficit and address its huge budget deficit. Countries like China, Japan and Germany will be expected to reduce their dependence on exports by promoting more consumer spending and investment at home.

Whilst there is agreement on the need for harmonization of economic policies to avoid global imbalances, the leaders pledged not to withdraw stimulus measures until a durable recovery is in place. They agreed to co-ordinate their exit strategies, while also acknowledging that timing will vary from country to country depending on the forcefulness of measures in place. However, there will be no enforcement mechanism along the lines of the European stability and growth pact to limit budget deficits. For the first time ever, each country agreed to submit its policies to a “peer review” from the other governments as well as to monitoring by the IMF.

Nobody can doubt that the Obama administration is taking the reform agenda forward but it will face resistance from European nations which pursue national interests above all. The German government is determined to resist any firm commitment that would reduce its current account surplus and would not cede sovereignty on core economic decisions.

Another set of decisions concerns the governance structures, in particular the rebalancing of the IMF with developing countries at least 5% more of the voting rights by 2011 and the enhanced role of the Financial Stability Board (FSB) for early warning on emerging risks. Taken together the IMF overhaul with the expanded powers of the G-20 mark an important step in global governance.
Too much or too little? Some countries expected to go further, for example in capping trading bonuses , reforming global institutions or imposing sanctions to countries for not respecting their commitments.
What is at stake is the future of capitalism. The big question is whether G-20 would bring radical reforms to ensure a safer and more equal world or just save it from future crises. For the time being, it looks like an embryonic world economic government.


Monday, September 21, 2009

Zero Hunger depends on social choice

In 1976, a political scientist and activist, Susan George wrote a stimulating book* to explain the real reasons of world hunger. She destroys two popular misconceptions; firstly that there is not enough food and secondly that the world is over-populated. She demonstrates clearly that the planet could easily feed its present population and many more. She also explains that the problem is not climate change, nor will food technology provide the solution. The problem is that world food supply is controlled by the rich elite and the poor have no say on the terms of trade that keep the poor hungry. Although the book was written in 1976, the fundamental injustices of the world economy remain the same and they should be addressed vigorously.

But the question is whether under the present circumstances it is possible to alleviate or even eliminate hunger? In past decades, many policies and programmes aimed to reduce or eliminate poverty and hunger but their effectiveness has been so far mixed. Much has been done to alleviate the plight of the hungry over the years by church groups, NGOs and local authorities. Several governments have introduced programs aimed in various ways at easing the living conditions of the poor. In spite of all of this, hunger and food insecurity have continued to blight the lives of many human beings, preventing them from both benefiting from and contributing to their country’s overall prosperity.

In Brazil, President Lula since his first election sought to eliminate poverty with his ambitious program 'Zero Hunger' (ZHP) launched in 2003. President Lula’s phrase, presented in a speech in his election’s day, that became famous, expresses very well this universal character of the ZHP: “The first year of my mandate will have the hunger combat mark… If, at the end of my mandate, each Brazilian could eat three times a day, I will have realized my life mission”.

The International Bill of Human Rights and many national constitutions ensure universal coverage for health and education, the right to employment and they also include the right to adequate food. However, in Brazil as in many other countries, there is no 'public food system' as it exists for public healthcare and education (although their provision is constrained due to the fiscal crisis). In third world countries where the needs of the poor are huge, the State does not have the means to care for every essential right of each person. As resources are not large enough, the policy aims to target beneficiaries which are most in need in order to ensure maximum efficiency and avoid waste of resources.

In Brazil, the ZHP is based on the notion of 'vulnerable to food insecurity'. Using an estimation of domestic income, the target population was 9.3 million households vulnerable to food insecurity in 2001, which amounts to a total of 46 million people. It is also geographically concentrated in the North-East, with almost half of the 'vulnerable' population.

But the problem is not only food; we need to break the poverty cycle: low educational levels, job insecurity, poor nourishment and health, low income. Social policies have to be put in place to create equal opportunities for all in order to reduce the gap between the rich and the poor and allow future generations to improve their economic and social situation. The Human Development Program Oportunidades (Opportunities) launched in Mexico in 1997, which embraces health, education and food areas, is based on transfer of resources to the target household being conditional on beneficiary actions such as keeping children at school and benefiting from basic healthcare for the whole family. It served 4.2 million households with transfers of about 1% GDP and results look encouraging.

The ZHP focuses on food insecurity, but is part of a wider set of programs to ensure that populations vulnerable to food insecurity can enter in a self-sustaining development process. In other words, the transfer of resources to these populations presupposes some structural actions in terms of the provision of health, education and infrastructure (sanitation, water supply) with a view to improve household incomes.

These positive experiences- ZHP as well as Progresa- show that social choice is possible if those programs are well designed and targeted to the poorest. Social mobilization becomes a necessity to create the right environment which will enhance the effects of the social programs. But they will also become effective if other countries pursue similar policies and that hunger can be fought with adequate means and instruments.

* How the Other Half Dies: The Real Reasons for World Hunger (Penguin) 1976