New directions for globalization in times of crisis
As the world economy entered into its worst crisis since the Great Depression of the 1930s, both claims were proven utterly wrong. The present crisis emerged on the back of an intrinsically unsustainable global growth pattern. This pattern was characterized by a strong consumer demand in the United States, funded by easy credit and booming house prices. Far-reaching financial deregulation facilitated a massive and unfettered expansion of new financial instruments, such as securitized sub-prime mortgage lending, sold on financial markets worldwide. This pattern of growth enabled strong export growth and booming commodity prices benefiting many developing countries. Growing United States deficits in this period were financed by increasing trade surpluses in China, Japan and other countries accumulating large foreign-exchange reserves and willing to buy dollar-denominated assets and fuelling mounting global financial imbalances and indebtedness of financial institutions, businesses and households. In some countries, both developed and developing, domestic financial debt has risen four-or fivefold as a share of national income since the early 1980s. This rapid explosion in debt was made possible by the shift from a traditional “buy-and-hold�? banking model to a dynamic “originate-to-sell�? trading model (or “securitization�?). Leverage ratios of some institutions went up to as high as 30, well above the ceiling of ten generally imposed on deposit banks (cf. United Nations 2009a). In the context of a highly integrated global economy without adequate regulation and global governance structures, this risky pattern of financial expansion implied that the breakdown in one part of the system thus would also lead to failure elsewhere. It is this systemic failure we are witnessing today. The deleveraging now under way has brought down established financial institutions and led to the rapid evaporation of global liquidity affecting the real economy in developed countries and developing countries are being hit through collapsing global trade, plunging commodity prices and reversals of capital flows, thus falsifying the “decoupling�? hypothesis. Until September 2008, all parties seemed to benefit from the boom, particularly major financial institutions in developed countries, despite repeated warnings, such as those highlighted in successive issues of the United Nations’ World Economic Situation and Prospects (2006b, 2007b, 2008b, 2009a, 2009b), that mounting household, public sector and financial sector indebtedness in the United States and elsewhere, and reflected in wide global financial imbalances, would not be sustainable over time.3 The interconnectedness of excessive risktaking in financial markets with the problem of the global imbalances, vast dollar reserve accumulation (especially in parts of the developing world), volatile commodity prices and declining trends in productive investment explain why this crisis is systemic and worldwide. This global growth pattern dictated by the US consumer, the Chinese businessman and the international financier has produced very uneven and unbalanced results. Some big developing countries, notably China, India and some other emerging market economies, have seen strong growth accelerations. Most recently, also low-income countries saw substantial average welfare improvements, epitomizing what might be seen as the “rise of the rest�? (Amsden 2001).