The global economic governance after the 2007 crisis, by Julio César Borges dos Santos

What can be said about the world economy today, after the great crisis of 2007? Overall, I suggest, despite the undeniable vision of a globally dominant dollar, that there is a window of opportunity concerning the reform of the existing global governance structures.

Since the global financial crisis really started to show its effects in the middle of 2007, the world has paid a severe price for its apparent complacence concerning the systemic risks surrounding the global economy.

Appreciating the nature of developments in the international economy system and the behavior of the actors identified with global economic governance – intergovernmental organizations, mainly the International Monetary Fund (IMF), World Bank ( Bretton Woods institutions), and World Trade Organization (WTO) makes it possible to envision the existence of severe global economic imbalances.

In the history of capitalism, financial crises have occurred frequently. However, as capitalism remains a fragile construct (Collignon: 2010), there is a significant level of uncertainty concerning its sustainability, and today, surprisingly, we cannot say its ultimate guarantor is only the modern democratic state. Moreover, the crises of the 1990s clearly demonstrate the incoherences inside the global economic system, particularly in terms of financial regulation.

The outbreak of global financial crisis of 2007 occurred after the wave of financial globalization that started in the mid-1980s. Curiously the five or six years before the crises was a period of low inflation, expansion of financial flows and robust international trade. The healthy state of the economy encouraged many Americans to buy houses. To meet the housing demand, generous and unscrupulous credit companies mushroomed across the country. Since the late 1990s to the mid-2000s a housing boom occurred at the United States economy and fueled the housing bubble – the low interest rates made it cheaper to borrow money and as a result a lot of people purchased houses with borrowed money. Indeed, during that moment, while the investment products flourished, more subprime mortgages were given to people with troubled credit and there were also more jobs added in construction. According with the financial liberalization of the economy at that moment, the banks transformed these loans into assets and the money the house owners reimbursed was almost immediately put on the market, in anticipation.

As the bubble started to collapse in 2007, prices took a downward turn. As many of the missing links in the financial chain were exposed, the perspective of a crash for all mortgage lending companies became more and more evident. This circumstance naturally caused a visible effect on the financial system. Investors suddenly lost confidence.

Years of incoherence about the understanding the risk of loss – maybe because of the prolonged period of economic growth and prosperity -, led to a moment of uncertainty and confusion throughout the financial markets when it wasn´t able to function properly. The relaxed constraints of the system and the predictable behavior of the nervous investors easily spread the fear and panic while the overall liquidity of those markets declined. While the U.S. Dow Jones average dropped to its lowest level since 1997, the stock markets worldwide literally plunged.

The emergence of the global financial crisis was a clear evidence of a systemic failure inside the global economic governance structures. At first, individual governments in advanced countries tried to response to the crisis in close consultation to each other. However, with the asymmetries inside the global economic system and the unexpected pace of events very soon become clear the need of a reform agenda concerning the global economic governance.

The undeniable conclusion pointed to the creation of a more inclusive and stronger global economic governance framework closed related with the necessary governance reforms at the IMF and World Bank.

Considering the present circumstances of the global economic agenda, it is clear those global economic governance structures are unable to face the economic challenges of the 21^st century.

The challenges to the systemic stability of the global economic system are still presents. In the absence of enforcing instruments and regulatory regimes, the resurgence of another crisis inside the global economic governance system could be just a matter of time.

Conclusion

History suggests that the most important aspect about the crisis is its potentiality to occur again. No matter how developed is a country or a region, there´s no guarantee against the resurgence of new crises.

The global financial crisis of 2007 highlighted the incoherences inside the global economic governance structures. Although there has been a diffusion of power in the monetary domain, not only among the states but also from states to societal actors (Cohen: 2008), the dollar remains the primary unity of international trade and finance and it seems the United States plays a unique role in the international monetary and financial system today, just as it did since the end of World War II.

Even considering that US geopolitical strength has declined significantly since the turn of the century, and the fact the rise of China is undeniable, the United States continue to be the main trading partner for most countries, and still absorb most of global exports.

It seems the ability of US having an international currency to run large current account deficits i.e. – the “exorbitant privilege”, still remains under the US prerogatives.  At the same time a reform concerning the global governance structures is a top priority, it seems it will need to occur in a world still under the preeminence of the United States economy – because of the international and foreign-domestic use of dollar (Cohen: 2008) -, despite the new status of China within the global economic system.

Referências

Cohen, Benjamin J., Subbachi, Paola.  A One-And Half Currency System. Journal of International Affairs, Fall/Winter 2008, Vol. 62, No. 1. The Trustees of Columbia University in the City of New York The Trustees of Columbia University in the City of New York.

Cohen, Benjamin J. The International Monetary System: diffusion and ambiguity. Prepared for a special issue of International Affairs. International Affairs 84 : 3 (2008) 455-470 . http://www.polsci.ucsb.edu/faculty/cohen/recent/pdfs/Intnl_Monetary_System.pdf

COLLIGNON, Stefan. The Moral Economy of Money and the Future of European Capitalism. In The Global Crash – Towards a New Global Financial Regime?. Edited by Leila Simona Talani. Palgrave Mcmillan.

Julio César Borges dos Santos. Mestre em Relações Internacionais pela Universidade de Brasília – UnB, doutorando em Relações Internacionais pelo Instituto de Relações Internacionais da Universidade de São Paulo – USP. (juliocesarborges@usp.br)