A new international financial architecture, based on different rules, is a reform that has long been demanded by different sectors and is now "inevitable" in the face of the "universal and systemic crisis" originating in the United States, says Brazilian Finance Minister Guido Mantega.
The need for "regulation, controls and supervision" to limit excessive indebtedness on the part of financial institutions has been highlighted by the crisis, which is systemic because it has "obstructed credit" around the world and created difficulties for all financial institutions, the minister said Thursday at a press conference with foreign reporters in Rio de Janeiro.
Unless there are new rules, "confidence, which is vital in the financial system, will not be restored," he said, announcing that he would raise the issue at an International Monetary Fund (IMF) meeting to be held in Washington in early October.
I'm with Mantega so far, but he goes on:
The crisis may be creating a new world scenario, in which "the role of advanced countries, that are in fact prostrated" by economic and demographic stagnation, will give way to greater leadership by "emerging countries, that represent the future" because of their population, wealth and economic growth, he said.
It is no longer possible to keep countries that today are "the engines of global growth" out in the cold, with scant representation or none at all on international bodies, he added, mentioning BRIC (Brazil, Russia, India and China), which is excluded from the Group of Seven most powerful countries (G7), in which Russia has only "partial" participation.
While Emerging Markets such as the aforementioned BRIC countries may (or may not) be the "engines of global growth" either today or tomorrow, I think it is not only possible but overwhelmingly likely that the G7 - led by the US - will continue to lead the Bretton Woods Institutions (i.e. the IMF and World Bank) that continue to control the global financial infrastructure and this bloc will continue to ignore the reasonable demands of the rest of the world.
The article goes on to note, correctly, that:
The present crisis arose from a combination of financial troubles in the United States and soaring commodity prices, which reached their height in June and July, according to Mantega, an economist belonging to the governing leftwing Workers' Party (PT), who is close to President Luiz Inácio Lula da Silva.
Commodity prices have declined or increased more slowly since August, because of the end of a wave of speculation, but 2009 will still be a difficult year for countries around the world, the minister predicted.
The worst effects will be felt in "fragile countries, that is, the advanced countries" that were directly involved in U.S. bank and investment fund collapses or losses, have a "shrinking" domestic market, and in some cases have serious fiscal deficits and negative trade balances, like the United States, he said.
The "strong countries" at this juncture are the "emerging" economies, which have expanding domestic markets that can offset falls in exports, and a stronger fiscal situation with plenty of foreign exchange reserves, and are not hampered by the "rotten assets" that rich countries now have to absorb, the minister said.
But this next paragraph is suspect:
The BRIC countries, with their dynamic economies, will suffer a more moderate impact from the crisis, with a mild slowdown in economic growth. In Brazil, Mantega predicted gross domestic product (GDP) growth of "over four percent" in 2009, and of between five and 5.5 percent in 2008.
(See this recent economic forecast by JPMorgan for a rather different perspective.)
Although the rest of the report consists mostly of uncritical stenography of the Brazilian government's official line, it does go on to point out some economists simply are not in touch with reality - and most likely haven't been for quite some time, noting that:
Economist Fernando Cardim de Carvalho, of the Federal University of Rio de Janeiro, told IPS that seeking to reform the international financial system at a meeting similar to the 1944 United Nations Monetary and Financial Conference at Bretton Woods is not a viable prospect right now.
"There is no consensus," at the moment, and neither is there a dominant world power to "enforce it," as the United States did at the end of World War II, he said.
Cardim, who regards it as an "exaggeration" to speak of a systemic crisis today, said that only "a monumental disaster," more serious than the present one, could produce a global agreement for a new financial world order. Previous attempts, like that of the Basel Committee on Banking Supervision (BCBS), met with failure, he said.
Once again proving that a broken clock is right twice a day, Cardim does manage to correctly predict that:
The crisis will continue, however, because the U.S. model of financial organisation, based on independent institutions, "is moribund," and the European alternative of a universal bank has not proved efficient, Cardim said. Uncertainty will reign for a long time to come.
I do wonder what exactly the good professor means by calling the IMF and World Bank (and I suppose he might be referring to the WTO here as well) as independent, though. I mean, what countries have represented the leadership of these multilaterals other than the US and the wealthiest European ones? Who developed the world's financial architecture and the rules of international trade they follow, and more to the point, which countries benefit the most from these arrangements?
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