The decade since the global financial crisis has been tumultuous, to say the least. True, no great war has erupted, and we have more or less avoided the mistakes of the Great Depression, which led in the 1930s to greater protectionism, bank failures, severe austerity, and a deflationary environment. But renewed market tensions indicate that these risks have not been eradicated so much as papered over.
In a sense, the story of the 2008 financial crisis begins when the global order was created from the ashes of World War II. Initiatives like the Bretton Woods institutions (the World Bank and the International Monetary Fund), the Marshall Plan, and the European Economic Community supported the reconstruction of significant portions of the world economy. Despite the Cold War (or perhaps because of it), they also re-started the globalization that WWII had brought to a halt.
This globalization process was interrupted during the late 1960s and early 1970s, owing to the Vietnam War, the suspension of the US dollar’s convertibility into gold, the 1973 oil price shock, and the great stagflation. But the United States and the United Kingdom then underwent a kind of conservative revolution and a revival of neoliberal economic policies, including widespread deregulation, trade liberalization, and unprecedented capital-account openness.
While this redesigned globalization process helped to fuel growth and development, its effects were uneven, and the financial and economic changes it wrought outpaced legal and ethical adaptation. Particularly consequential, innovative financial instruments were used with abandon, subject to only loose supervision and weak regulation. As a result, finance eventually became the master of the world economy, rather than its servant.
Given all of this, when the crisis struck, it was deep and far-reaching, and today’s strengthening economic recovery has not overcome the understandable but devastating loss of trust in the financial system that followed. This has been made apparent by political developments in the US and Europe. US President Donald Trump’s administration continues to tout an “America First” policy approach, reflected, most recently, in the imposition of large tariffs on steel and aluminum imports. The UK vote for Brexit reflects a similar backlash. Meanwhile, state-led capitalism offers China’s economy its own protections.
But polarizing new models of competition and resistance to trade are not the way to restore trust. Instead, we need to reassert control over the financial sector, to ensure that it is serving the economy, not vice versa, by advancing a set of goals upon which the world agrees – beginning with those established at three momentous conferences in 2015.
At the Third International Conference on Financing for Development, held in Addis Ababa, Ethiopia, participants set economic, social, and environmental priorities with which financing flows and policies for sustainable development should be aligned. At the United Nations Sustainable Development Summit in New York, UN member countries formally adopted an ambitious new global agenda. And at the UN Climate Change Conference (COP 21) in Paris, countries agreed to hold global warming well below 2° Celsius above pre-industrial levels.
Articulating these goals was an important first step. But if the world is serious about achieving these shared goals, an effective mechanism for financing them must be established, supported by well-designed regulations that create the right incentives. And, so far, the world has not made nearly enough progress on this front, as the continued misallocation of capital shows.
Stakeholders must take a longer-term view of business operations and investment strategies. Finance must be made genuinely useful, balancing progress toward agreed goals – guided by existing global targets – with the need to generate sufficient financial returns to ensure that progress is sustainable. We must keep saying it, and keep doing it. There is no other option.
In some quarters, commitment to global goals has so far been too weak. In the case of the US and the Paris climate agreement, that commitment has been rescinded outright. But, to succeed, everyone must be on board. This includes multilateral lenders, which need to revise old tools and rapidly develop new ones, in order to mobilize private-sector capital. The private sector, for its part, must be open to an updated approach to public-private partnerships. Simply paying lip service to change, while clinging to outdated modes of working, is not an option.
More broadly, we need to work to ensure that the benefits of technology are shared by all. To that end, we should follow the advice of David Lipton, the IMF’s first deputy managing director, and move beyond the fashionable “OHIO” approach, focused on getting one’s “own house in order”, to the more demanding California – or “CA” – strategy of “collective action”.
The path ahead will not be easy. But this is no excuse for apathy. As investors, consumers, voters, and citizens, we must make our voices heard, in order to ensure that finance is used to promote shared values and the common good. Only then can we go beyond merely avoiding another devastating crisis and build a better future.
Copyright: Project Syndicate
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