Global Trends by Martin Khor

Monday 16 February 2009

Worst recession in 100 years?

Last week, a Minister and close confidante of British premier Gordan Brown warned that the recession is worse than the 1930s Great Depression, while the United Statres Congress passed a US$787 billion stimulus package containing a strong protectionist element.  

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Perhaps the most sensational news in Britain last week was a speech by premier Gordon Brown’s closest economics advisor that the world is facing its worst recession in a hundred years, thus implying it will be worse than the Great Depression of the 1930s.

It was the bleakest sceneario yet painted by a senior member of the Western establishment.  And in this scenario, the effects of the recession will last 15 years.

The author of this is Ed Balls, one of Brown’s cloest allies and confidants. He is a senior Minister in charge of schools and for many years he had been the chief economic advisor of the United Kingdom’s Treasury, when Brown was Chancellor.

Speaking at a Labolur Party conference, Balls said:  "The reality is that this is becoming the most serious global recession for, I'm sure, over 100 years, as it will turn out."

He warned that events worldwide were moving at a "speed, pace and ferocity which none of us have seen before" and banks were losing cash on a "scale that nobody believed possible".

He admitted that financial regulators had failed, saying:  “"People are quite right to say that financial regulation wasn't tough enough in Britain and around the world, that regulators misunderstood and did not see the nature of the risks of the dangers being run in our financial institutions – absolutely right."

He described the financial crisis as worse than the one in the 1930s and hinted that the far right could gain ground, as they did then.

"The economy is going to define our politics in this region and in Britain in the next year, the next five years, the next 10 and even the next 15 years," said Balls. "These are seismic events that are going to change the political landscape. I think this is a financial crisis more extreme and more serious than that of the 1930s, and we all remember how the politics of that era were shaped by the economy."

Balls’ comments caused quite a lot of alarm because Brown had been trying to give the impression the government had things under control, even as bad news was emerging about big losses in banks, the latest being Llyods.

There was speculation that Balls has inside information on how very bad the situation is, which the British government has not yet made known to the public.

The U.K.’s Financial Services Authority also gave a warning, but milder, that the recession "may be deeper and more prolonged than expected", adding that the global financial system had "suffered its greatest crisis in more than 70 years". 

Last Friday and Saturday, the finance ministers and Centfral Bank governors of the Group of 7 leading indistrial countries met in Rome to discuss the crisis.

Their statement at the end of the meeting did not contain anything new on measures to manage the crisis.  News reports indicate that one major issue in the discussion was the need to prevent protctionist measures, since such measures in one country could lead to retailiation from others.

Accordingly, the statement dutifully pledged that “the G7 remains committed to avoiding protectionist measures, which would only exacerbate the downturn, to refraining from raising new barriers and to working towards a quick and ambitious conclusion of the Doha round.”

But while the G7 Ministers pledged to avoid protectionism, a few of their countries were in fact taking protectionist measures.

France last week announced bailout loans to its motorcar companies, and tied these to their maintaining production and jobs in France, thereby rousing anger from the Czech Republic which now fear that the French car companies’ factories in the country may retrench workers or even close.

The biggest worry however is the United States’ US$787 billion fiscal stimulus package, which was passed by Congress last Friday night.

The bill, which is expected to be signed by President Obama this week, stipulates that none of the funds appropriated may be used for public works projects “unless all of the iron, steel, and manufactured goods used in the project are produced in the United States.”

When a draft of the bill containing this clause was made known, it led to protests from political leaders in Europe and Canada.

President Obama promised that the bill would be amended to avoid protectionism.  The final bill adds this line: “This section shall be applied in a manner consistent with United States obligations under international agreements.”

This is taken to mean that the buy-American principle would not be implemented if it violates rules in the World Trade Organisation or in free trade agreements that the United States has signed.

However, there is cold comfort in this because the WTO’s multilateral rules do not forbid a country from having measures requiring that spending by the government on its projects should be on locally produced goods and services.

There is a plurilateral agreement on government procurement in the WTO that obliges those who are members to allow the imported products or services from other members to benefit from government spending.

The US is a member of this agreement, thus it has to allow fellow members to bid for projects under its stimulus package.  But there are only a few other members, and almost all of them are from developed countries.

Developing countries will thus not be able to profit much from the expanded government expenditure in the stimulus programme, since almost no developing country has signed on to the WTO’s procurement agreement.