Coordinated international actions answer to crisis

Serina Joon of Malaysia’s BFM 89.9 interviewed Dr Jomo Kwame Sundram, assistant secretary-general for economic development in the United Nations Department of Economic and Social Affairs at 10.07 am on December 4. Here is the transcript of the interview.

BFM 89.9: Good morning. First, can you give us a prelude to the lecture that you will be giving on the Global Financial Crisis (referring to the public lecture organised by the Chevening Alumni of Malaysia on December 4).

Jomo: Well I think one of the real tragedies about this crisis is that it is a crisis foretold. In the sense that many of us had been warnedabout the likelihood of this crisis unfolding. At the UN for instance, we had published a number of reports over the recent years where we drew attention to the very large global imbalances which existed, and more importantly to the vulnerability which existed in certain financial markets.

It was just a matter of time before a perfect storm sort of came together and hit the world with such devastating consequences. If this was a completely sort of black swan event, then I think it would be much easier to forgive the people responsible. But precisely because it is something which is identifiable, something which is relatively well understood given past experience and so on and so forth, it is really very tragic and the consequences for billions of people, I'm not exaggerating, will be very dire.

BFM 89.9: What is the root cause of this financial crisis? If you can put it in layman's terms.

Jomo: Well, let me try. I think what we basically have is a situation where the most important authorities concerned overseeing financial markets did not really seek to regulate. They took the view that minimal regulation was best for market forces and they did not seek to regulate the market, allowing financial bubbles to emerge, and it was these bubbles particularly in this case, the housing bubble in the US and stock market bubbles all over the world. It was clearly unsustainable, and as we know the bubbles burst from around August 2007, and then we had the train of events that has led to the recent increase in turbulence with such devastating consequences.

BFM 89.9: How have international institutions responded though? I mean the International Monetary Fund (IMF) has been rather quiet amid all that's been happening.

Jomo: To be fair to the IMF, they began to belatedly acknowledge the problem, however, they continued to remain rather optimistic because they initially characterised it as a temporary blimp. More recently however, I think it'll be fair to acknowledge that the managing director of the IMF and many of the senior officials of the IMF have begun to recognise the gravity of the situation. And have called for coordinated international response. However this remains elusive partly because the IMF has lost considerable authority in the international financial architecture which has emerged since the 1970s.

So it is very much left to the major economies to coordinate. They of course have a mechanism for this called the G7. The G7 finance ministers meet at least twice a year. But so far they have not been able to get their act together. And more recently there has been an attempt to involve the other major economies in a grouping called the G20. But the G20 as well has not been able to do very much beyond promising to study various proposals to regulate. Which is a fairly important endeavour but what is urgently needed are two things in our view:

Number one is the need to have international coordinated micro economic responses, otherwise you'll get a beggar thy neighbour type of response with some countries doing certain things and other countries reacting and sort of negating what the other countries are trying to do.

The other major problem of course is the credit crunch which exists in international financial markets. And it is very important to ensure there is adequate liquidity, and lowering interest rates alone clearly is not able to achieve this. Japan tried to do this in the middle of the 1990s without much success. And we see that there are limits to how much you can achieve by lowering interest rates. So we have a very difficult situation which can only be resolved through well coordinated international actions. There are of course other elements as well, which are desperately needed.

But most importantly now, we find most developing countries do not have significant reserves. China of course has significant reserves, some of the oil exporting economies of course have significant reserves. But many other countries do not have those reserves which allow them to do very much in this situation according to IMF's advice. The IMF should reconsider its advice and allow a strong fiscal stimulus. And also monetary measures which would allow developing countries and other countries to respond more adequately to the crisis.

BFM 89.9: I want to bring this issue back to Asia right now. The financial crisis started in the US and Europe and now has trickled into emerging markets like Malaysia and the rest of Asia. How did that actually happen? Because it has been said before that Asia may be shielded from the crisis in the West because India and China will support the economies here. So how did it actually happen?

Jomo: Yes. What you have refered to is sometimes called the "decoupling thesis".

This in my view was a myth. On one hand, some people will talk about the virtues of globalisation, how financial globalisation for instance has done so much for wealth creation and so on and so forth. And at the same time they also were claiming that Asia and perhaps other emerging markets had decoupled from the global system. You can't have your cake and eat it. You either globalise or do not globalise.

But they tried to make these kinds of arguments and created this myth that Asia and other economies had decoupled as they called it and that they therefore (will) not be affected by this crisis. In various different ways I think it is very difficult to generalise. Different economies in Asia are very integrated into the international economy and international financial system. But depending on how they were integrated and depending on their vulnerabilities and exposure, they have been affected differently.

BFM 89.9: You've mentioned to solve this problem, it needs coordinated effort by the G7 and G20. You also mentioned just lowering interest rates alone will not do it. So what is your perspective on how to deal with this financial crisis? Any measures above and beyond providing liquidity, what do you think we should do?

Jomo: Well liquidity provision is extremely important. And I wasn't suggesting that lowering interest rates would not help. All I'm trying to emphasise is that there are limits to what lowering interest rates can achieve as we saw in the case of Japan during the mid 1990s. So while we should try to keep interest rates down, rather than raise interest rates as is sometimes advocated by some quarters, we must also recognise that that instrument alone has some potential, but limited potential. And while trying to see how much can be achieved by those means, there should be other measures as well.

I think it's generally agreed right now that most countries should try to adopt fiscal stimuli to try to counteract the effects of reduced demand, reduced investments so on and so forth by increasing public investment, by increasing public consumption. Of course this means that fiscal deficits are likely to increase in the short term, but there is no alternative to that as many economists now recognise. In a sense, this moment right now is not unlike the early 1970s when President Nixon declared that we are all Keynesians now.

And this is very evident in some of the more thoughtful writing of Paul Krugman for instance, recent op-ed pieces all emphasise the needs for such coordinated efforts, but at the same time recognising that each of the instruments available also have their limitations.

BFM 89.9: Thank you so much for taking time off your busy schedule and we hope to speak to you again soon.

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