Managing the Birth Pangs of the New Global Order
Gordon Brown is the prime minster of Great. Britain. His comments here are adapted from a discussion at the Council on Foreign Relations in New York in November in which NPQ editor Nathan Gardels participated.
New York—Today we are facing the first generalized crisis of the global age. The financial turmoil and resource pressures we must cope with are the birth pangs of the new global order.
Over the last 10 years we’ve seen some of the great benefits that globalization can offer, which makes me positive about the future of an open, free market, inclusive and sustainable world economy. We’ve seen cheaper consumer products coming out of China and the rest of Asia made available to millions of people. We’ve seen low interest rates, partly as a result of the dis-inflaitonary effect of cheap Asian exports. As a result of that rise in exports we’ve seen many hundreds of thousands of people taken out of poverty.
But now we are discovering four problems that arise inevitably from this process of globalization. If solved, they point to an opportunity-rich future.
The first problem is the restructuring of industries and services that will inevitably have to take place.
Second is the resource problem because the demand of the growing Asian economies for everything from better quality food to oil and other commodities puts pressure on supplies.
The third problem is the gap between rich and poor countries. We’ve got to be very careful that resentments don’t build up. We have a duty as well to do something about that gap.
The fourth problem is the financial system. While we now have global flows of capital and global financial arrangements we don’t have a global means of dealing with these problems, across continents, when they arise.
In the next 20 years the world economy will double in size. That will mean twice as many opportunities for good businesses to sell their products. That means a billion new jobs—but not all the same jobs for the same people. That is where the restructuring comes in.
It would be sending an illusion to people if we gave the impression that every job that is at risk at the moment is one that will always be there when this crisis is over. Instead we’ve got to tell people “we cannot help you, in some cases, to keep the last job. But we will help you get the next job.” That’s what a positive approach to an open, flexible and inclusive globalization is about. We will help you with the skills you need, with the training for new possibilities. To generate jobs and new opportunities, however, we must remain an open and not a protectionist economy.
Especially in the midst of this crisis, we must bring people to see the benefits of globalization. If we are simply for open, flexible economies and free trade—without preparing people for the skills and tools they need to operate securely in that environment—then there will be a protectionist reaction from those who feel they are not included. This is what happened in the 1930s.
We are learning now that long-term demand for oil, other commodities and food is going to grow, even though there has been a lull in the last few months. We therefore must have an energy and environment policy that is fit for the times. We’ve got to diversify out of oil into nuclear and renewable energy. We need to persuade the oil countries to recycle their revenues, particularly into non-oil sources of energy investment in the longer term. Having talked to the Saudis and other countries in the OPEC states, I believe a coordinated approach from consumers and producers to attain stability in energy prices is actually possible.
With such a bargain we solve three problems at once—the affordability and volatility of the price of oil; our climate change challenges, where we need to diversify out of fossil fuels, creating new jobs in the process; and the strategic problems related to the concentration of oil production in the Middle East.
The urgent problem, of course, is the financial crisis. We’ve seen share prices go down 40 percent in one year. We’ve seen a trillion dollars in write-offs. We’ve seen the slowdown and stalling of lending in different countries and we’ve seen the large number of banks that have had to be recapitalized.
We realized that the normal means of raising funding—through sovereign wealth funds, private equity and through issuing shares to the public—were not going to work to restructure and recapitalize our banks.
So we made the decision in Great Britain to recapitalize our banks as a government, and I’m pleased to say that large numbers of countries around the world have recognized that is the way to bring back the confidence into the banking system.
Now the problem we have to solve is getting the resumption of lending that is necessary for small businesses to have the cash flow, for people to be able to take out mortgages.
As Keynes understood, getting the economy moving again must involve more than the reduction of interest rates, but a fiscal stimulus. Given the very low inflation that is resulting from the fall in oil and food prices at the moment, I believe there should be a coordinated fiscal and monetary stimulus across borders, from China to the US to Great Britain. If countries complement each other with such action, then the benefits of a fiscal stimulus in any given country will not leak out through purchase of imports as has traditionally been the case.
Each country, of course, must grapple with the nature of its own stimulus, whether it is public works investment or tax cuts and incentives for the lower paid who have a higher propensity to spend.
Let me be very clear on one point. Deficits that result from fiscal stimulus must be temporary. You’ve got to be absolutely clear that these are temporary stimuluses that are necessary to get us through difficult times but at the same time build for the future. There must be a path back to sustainable finances. The link here that is most obvious is investment in green infrastructure and green technology. The great area of expanding growth, productivity and employment in the 1990s was information technology. For the period ahead I believe environmental technologies that respond to climate change and energy efficiency will play that role.
Franklin Delano Roosevelt said there is nothing to fear but fear itself. The corollary of that is, “confidence in the future depends on people being confident today.” We can build that confidence through the actions that governments take.
Global Financial Reform | Reforms in the international financial system and in our own domestic systems are also clearly necessary. The principles on which to build the reforms are transparency; responsibility—people taking responsibility in the companies they’re involved in; and integrity—removing conflicts of interest in the system. On a global scale, that will require some regime of international monitoring.
Beyond this, the IMF and World Bank are going to have to help distressed economies like Hungary, Pakistan and Iceland which can’t muster the resources the large economies can.
Finally, a world trade deal is absolutely crucial so we move forward with globalization and not, as I noted earlier, fall back into debilitating protectionism.
In 1933, the World Economic Conference was held in London to address the crisis of those years. It was supposed to bring the countries together, to prevent protectionism and to deal with problems together. It failed, and the well-known consequences followed.
We must be resolved, adamant and determined to avoid a similar outcome today. There is a way forward to an optimistic view of a global economy. That better world awaits us only if we don’t fail today.