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Double standards of the West

Mahbubur Rahman
***The global financial turmoil due to the collapse of big financial corporate houses has exposed the lack of good governance and transparency, which the developed economies have so long been preaching for adoption by the developing economies.***
THE ’financial tsunami" originating in the US has plunged the world economy into its worst crisis since the great depression of the 1930s, What started as a sub-prime mortgage crisis in the US has now gone global. The damage to economic growth, incomes and jobs is already being felt sharply in every corner of the world. The crisis has created a downward spiral of loss of confidence and trust in the free market system.
Against this backdrop, the three challenges to be addressed are: the current financial crisis and its impact on real economy, emerging role of Asia, and the possible niches for countries such as Bangladesh.
It is said that globalisation has the potential to benefit all people, not just a fortunate few. and it can provide a conduit to a better life and deliverance from poverty and despair. Regrettably, the reality of the international system today does not match the rhetoric.
The global rules are negotiated by a select few. with too much protection for special interests, underpinned by too many broken promises. Weakly regulated financial markets have become prey to the self-serving actions of a limited few. And, the lives and livelihoods of hundreds of millions are adversely affected.
Consequently, the real economy has
received a tremendous systemic shock. The credit crunch has hit both manufacturers and consumers. Businesses can no longer rely on so-called sophisticated financial instruments. Reduced spending by consumers will depress demand and create a vicious cycle in which manufacturers cut back even further, with consequent job cuts.
International cooperation on a global scale is essential to build a consensus on what needs to be done to reduce the potential depth and duration of the global slowdown and to ensure coherence among national policy responses. Many countries have taken unprecedented steps to address this problem; their success remains to be seen.
The vast sums of liquidity pumped into the banking system have not found their way into the real economy. It would appear that any funds the banks now receive are used to increase the reserve margins. On the contrary, what is essential now is for banks to restore confidence by extending credit to consumers and to businesses, which was exactly the point of the government intervention in the first place.
For any consensus, a vital element for countries will be to resist any temptation to isolate themselves from the global crisis through protectionist measures to restrict imports. Parallels are being drawn between the crisis of today and the Great Depression -- the last crisis of comparable proportions.
Almost 80 years ago, many nations reacted to the Great Depression by raising border tariffs, and ended up making matters worse - for themselves also. Beggar-my-neighbour protectionism ended up beggaring everyone. That is one of the most unambiguous lessons of the 1930s.
Perhaps this crisis will also lead to modification of global economic power structures. What will be Asia's role in the changing global financial landscape? Asia with its huge markets will clearly have a role in this changing global financial landscape, and should not be a passive bystander. It should project its influence on any initiative to give shape to a new global financial architecture. Asian countries have skilled, cost-effective labour, and they are quick in acquiring and developing technology and the know-how that is required to compete in a globalised world.
In the financial world, their reserves built on oil revenues or export earnings, estimated at over $3 trillion plus, have created a new player on the global stage: Sovereign Wealth Funds. Investors eagerly seek these funds, and quiet deals are being made. This gives them a potential that they must exploit for the good of humankind.
The G-20 Summit in Washington on November 15 agreed on certain key issues, including reform of international financial institutions (IMF and World Bank), agreement for a successful free-trade deal before the year ends, improvements to financial market transparency and ensuring complete and accurate disclosure by firms of their financial conditions, preventing excessive risk taking by the banks and financial institutions, finance ministers to draw-up a list of financial institutions whose collapse would endanger the global economic
system, strengthening countries' financial regulatory regimes, and taking a fresh look at rules that govern market manipulations and fraud.
The question of reforming the Bretton Woods Institutions has now come up. One may wonder about the effectiveness and necessity of such institutions in the wake of the financial crisis. During the debt crisis of the 1980s and 1990s it became amply clear that there was something wrong with the architecture of the IMF's facility regime.
The East Asian states also remember what they consider the "hostile" role the IMF played in the 1997 financial crisis. Instead of bailing them out under its $95 billion loan package, what the IMF did was to bail out their western lenders. The IMF itself had, at that time, "become a part of the problem rather than part of the solution."
Since the west was not affected by the Fund's way of fixing an economy, it did not feel the need for seriously looking into its functioning and improving its governance in the light of complaints, nor took measures to change its methods. Now that it is the west itself which is at the centre of the storm, it is showing urgency not only in reforming the IMF but also in strengthening the Fund itself, instead of reviewing the necessity of such an institution!
However, for all the talk of actions and changes, some analysts and campaigners said the outcome was disappointing. The immediate impact of the outcome of the Summit has not been encouraging, as has been evident from the downslide in stock markets all over the world, as well Japan joining the countries facing recession. It is predicted that the US economy will be in recession beyond 2009.
Bangladesh and other vulnerable
economies must cautiously watch the impact of actions taken, and to be taken, by the world leaders representing 85% of the world economy to restore the global growth. These countries should also take appropriate actions in time to face the consequences of the fall-out.
If there is a silver lining to the current crisis, it may be that it is delivering a painful message that governments must develop more effective ways of governing an interdependent world in order to maximise the good effects of globalisation and minimise the bad. The global economy is in increasing need of better governance -- and that implies deeper and wider cooperation between nation states than they have shown themselves capable of to date.
The global financial turmoil due to the collapse of big financial corporate houses has exposed the lack of good governance and transparency, which the developed economies have so long been preaching for adoption by the developingeconomies.
However, for smaller countries such as Bangladesh, challenges from a protracted
global recession may be serious. Many have opened up their economies to a remarkable degree, and will face all the consequences that are associated with this.
Where exports were important, there will be reduced export earnings; where workers' remittance was important, there will be declines; where FDI or foreign investment was important, foreign investors may seek to take their funds out or demand extraordinarily high returns.
In Bangladesh, the newly elected government will inherit a more challenging set of tasks than any of its predecessors in decades, and Bangladesh has to be managed towards having a politically and economically stable nation to achieve its full potential in the wake of the global financial crisis.
The article is based on the current world financial situation, deliberations and opening statement made by the Author at the Plenary Session of DCC1 International Business Conference held onOctober31,2008.
Mahbubur Rahman is President, ICC, Bangladesh