Globoeconomic Policies For Overcoming Global Recession

Globoeconomic Policies for Overcoming the Current Global Recession

USA

JAPAN

UK

NIGERIA

THAILAND

Sa’idu Sulaiman Samarib Publishers

GLOBOECONOMIC POLICIES FOR OVERCOMING THE CURRENT GLOBAL RECESSION

By

Sa’idu Sulaiman E-mail: [email protected]

©2009 By Sa’idu Sulaiman All rights reserved. No part of this book shall be reproduced, stored in a retrieval system or transmitted in any form by any means without a prior written permission from the author.

Published in 2009 as an e-book

By

Samarib Publishers A division of Samarib Ventures Ltd Plot 326, Sallari, Babbangiji. Kano, Nigeria. E-mail: [email protected]

CONTENTS

FAGE

About the Author

i

Preface

ii

Introduction

1

Impact of Globalization on Macroeconomic Policy and Analysis

4

The Nature and Goals of Globoeconomics

8

Lessons from the Great Depression of the 1930s Causes and Manifestations of the Current Global Recession

12 18

The Response of the G-20 Leaders’ to the Current Global Recession

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Addressing the Global Economic Recession with a Globo-Economic Policy: An Illustration

25

Conclusion and Recommendations

30

References

32

About the Author Sa’idu Sulaiman is currently a Chief Lecturer in Economics at the Sa’adatu Rimi College of Education, Kano, Nigeria. He obtained a bachelors’ degree in Education/Economics in 1985, a postgraduate diploma in management in 1991 and an MBA in 1997. He wrote a number of books, among which are Researcher’s Companion (1998), Understanding Finance and Investment (1999), Understanding Philosophy of Education (2001), Understanding Book-Keeping and Accounts (2004) and The Making of Economics: an Introduction to the History of Economic Thought (2005). He edited Effective Management of Local Government (1998) with Dr. Isma’ila Zango Mohammed, Child Management (2003) with Sunusi M Kani, Leading Issues in Economic Development and Social Welfare (2002) with Professor Musa Abdullahi and Islamic Banking and Finance: General Framework and Case Studies (2003) with Dr. Bashir S Galadanci.

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PREFACE This book explores reasons from the available literature, which suggest the growing irrelevance of macroeconomic policies and analysis in giving direction to the economies of nations as a result of globalization, and calls for the adoption of globoeconomic policies, which incorporate the forces of globalization in macroeconomic analysis and policy, with a view to addressing the current global economic crisis generally identified as a recession. The book also submits that the recognition by the G-20 leaders at the London summit that the current global recession requires a global solution and that prosperity is indivisible indicates the need for a globoeconomic policy. An illustration on how to address the global economic recession with globoeconomic policies is also provided. The book concludes, among others, that protective macroeconomic economic policies such as tariffs are ineffective in overcoming global recession; they retard international trade and promote misunderstanding among nations. Globoeconomic policies, on the other hand, have the potentials of moving economic activities of different nations towards achieving common goals such as price stability, economic growth and development, curtailing unemployment, etc., and of promoting interdependence, peaceful co-existence and mutual benefits among them

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Chapter One INTRODUCTION An economic policy refers to measures taken by a government to influence the behavior of an economy, some of these measures operate over the whole economy and constitute a policy in the sphere of macroeconomics; others work on a specific part of the economy and represent a policy in the realm of microeconomics. Economists differ over the extent to which government intervention should be allowed in an economy, some adopt a laissez-faire view and trust the market forces. Other economists want governments to remedy the deficiencies of existing arrangements through eliminating unpredictable changes in economic activity, curtailing unemployment, promoting faster economic growth, preventing deterioration of the environment, etc. ("Economic Policy." Microsoft® Encarta® 2006 [DVD]. Macroeconomic policy is being used as a tool for boosting and giving direction to economic growth and development. As globalization is increasingly affecting macroeconomic policy and analysis, national economies are loosing their distinctive qualities, the forces of globalization therefore, need to be recognized in the pursuit of economic development. Prior to the emergence of the Keynesian economics, economists laid much emphasis on microeconomics. Keynesian economics, which was founded by John Maynard Keynes and refined by his followers, gave direction and impetus to macroeconomic analysis initially because of its relevance to the problem of the Great Depression, which affected many nations in the 1930s (Shapiro, 1970). Today economic analysis is done at two levels. There is microeconomics, which deals with the study of the economic behaviour of units, and in some cases, groups of consumers and producers in their attempt to allocate resources in order to meet

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certain desired goals. These goals include efficient allocation of resources, utility and profit maximizing, cost minimization, etc. Macroeconomics, on the other hand, is the study of the aggregate economic behaviour of consumers and producers and of fundamental economic phenomenon such as inflation, depression and unemployment with a view to achieving certain desired economic goals. These goals include price stability, economic growth and development, obtaining a favourable balance of payment, controlling exchange rates, curtailing unemployment, etc. With the ever increasing influences of globalization on the economies of nations, macroeconomic variables such as inflation rate, level of unemployment, growth rate, etc, in one nation can have influence or be influenced by similar variables in other nations. It is therefore naïve to formulate macroeconomic policies for a single nation without due consideration to what obtains in other nations. Efimini (2003) rightly argues that, from the economic perspective, globalization gives a universal and global orientation to economic activities and renders state boundaries artificial in the production of goods of services. Keet (1999) depicts how the contemporary world conceives the global economy in terms of national economies loosing their distinctive qualities, viability and relevance, and of the existence of complex interactions between national economies and the global economy, among others. This depiction points to the growing irrelevance of macroeconomics due to the impacts of globalization on macroeconomic policies and analysis. Writing on globalization and national government, Lipsey (1999) contends that globalization alters possibilities for international trade because, among other things, components made anywhere can now be

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delivered precisely when and where they are wanted and this makes it possible for parts of a product to be made in a developing nation and exported to advanced nations. An American firm can, for instance, go to Nigeria and establish a tannery and a shoe factory there and be selling the shoes in America or other countries of the world. So globalization can alter the direction and nature of international trade either to the advantage or disadvantage of a nation state. Recession is defined as a “decline in economic activity within an economy, usually characterized by higher unemployment and less investment in new plants and equipment” ("Recession." Microsoft® Encarta® 2006 [DVD]). A more detailed definition of a recession is provided by the National Bureau of Economic Research (NBER), a nonprofit organization based in the United States of America, which is regarded as the official agency for the measurement of business cycles. According to the NBER, a recession is “a period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy”( Bonello, 2006). This book explores reasons from the available literature, which suggests the growing irrelevance of macroeconomic policies and analysis in giving direction to the economies of nations as a result of globalization. It also submits that the recognition by the G-20 leaders at the London that the global recession requires a global solution and that prosperity is indivisible, shows the need for a globoeconomic policy. The book then calls for the adoption of globoeconomic policies, which incorporates the forces of globalization in macroeconomic analysis and policy, with a view to addressing the current global economic crisis generally identified as a recession.

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Chapter Two IMPACT OF GLOBALIZATION ON MACROECONOMIC POLICY AND ANALYSIS Keet (1999) explains that the contemporary world conceives the global economy in four different ways. First, the global economy is seen as an international economic system within which economies of individual nations have been or are very rapidly being absorbed and disappearing. This is because the economic system is characterized by porous borders and limited policy options that are loosing viability and relevance. Secondly, it is seen as the sum of complex interactions between national economies. Thirdly, the contemporary world conceives the global economy as a complex combination of national economies or national economies within regional economies, upon which transnational economic agents and international institutions and regulations operate. Lastly, it is viewed as a dynamic combination of a distinctive supra-national global economy manifested by the independent operations of transnational economic agencies and actors which act upon and interact with the economies of individual nations and with regional economies while being uncommitted or unattached to any specific national economy (all italics indicate the actual words used by Keet). From the above, it is indicated that economies of individual nations are now being absorbed into the global economy or simply disappearing. Put in another way, national economies are loosing their distinctive qualities. It is further indicated that national economies are loosing viability and relevance. The global economy, as depicted above, is characterized by complex interactions between national economies and the global economy, and complex combinations of national economies with regional economies, transnational economic actors and international institutions. The economy of Germany, for instance, interacts and is

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acted upon by the European economy, which is a regional economy and by the global economy and the international economic institutions such as the World Bank and the International Monetary Fund (I.M.F.). Macroeconomic policy in Germany could be less effective and meaningful without the consideration of the influences of the European economy and the global economy. The independent operations of transnational economic agencies and actors, being uncommitted and unattached to national economics also have to be taken into consideration. Griffin and Khan (1992) have adduced a number of points that show the impact of globalization on macroeconomic policy and analysis. First, with the integration of states into something that is close to a single economic system, the ability of a nation to impose its will on other economic factors, notably transnational firms, is weakened. Second, it has become more difficult for a country to impose its authority on persons and entities that fall theoretically, under its jurisdiction. This is due to increased mobility of goods, assets and even people across national boundaries. Thirdly, internalization of currency markets has made the control of money supply by central banks of nations more difficult. Fourth, nations find it difficult to determine nominal rates of interest and the term structure of interest rates due to the integration of bond markets. Fifth, transfer pricing, used by large organizations for transaction between semi-autonomous divisions supplying components to one another, allows transnational corporations to shift profit tax liabilities from countries with high taxation to countries with law taxation. This affects the fiscal policy of nations. Sixth, the ability of large corporations to locate and relocate fixed investment almost anywhere in the world limits the power of a nation to regulate industry through taxation, minimum wage regulation, environmental control, etc. Seventh, international markets have eroded political sovereignty of nations, as they are

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unable to act unilaterally in pursuance of economic goals. The above seven points indicate the diverse impacts of globalization on macroeconomic policy and analysis made to achieve certain macroeconomic goals or address macroeconomic problems. Even the developed nations are not free from the effects of globalization on their economies as Griffin and Khan (1992: 64) argue: No one would pretend, for example, that the United States in 1992 is just as capable of regulating its internal economic affairs as it was in 1952. It clearly is not: globalization has made a difference. To further support the thesis that globalization is undermining the relevance and effectiveness of macroeconomic policy and analysis, the views of specialists in international economists could be of value. Krugman and Obstafeld (undated) have observed that the inherent inter dependence of open national economies sometimes bring difficulties for governments seeking to achieve macroeconomic policy goals such as full employment and price level stability. Secondly, after describing the international economy as comprising sovereign nations with freedom to choose their own economic policies, they went ahead to say: Unfortunately, in an integrated world economy one country’s economic policies usually affect other countries as well. For example, when Germany’s Bundesbank raised interest rates in 1990 – a step it took to control the possible inflationary impact of the reunification of West and East Germany – it helped precipitate a recession in the rest of Eastern Europe (Krugman and Obstfeld, undated, :7).

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By talking about open national economies and an integrated world economy, Krugman and Obstfeld are simply referring to the global economy, which operates within the context of globalization. Their views also lend support to the thesis that globalization limits the relevance and effectiveness of macroeconomic policy and analysis.

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Chapter Three THE NATURE AND GOALS OF GLOBOECONOMICS Sequel to the growing irrelevance and ineffectiveness of macroeconomic policy and analysis, we require another level of economic analysis that will suit the circumstances brought by globalization. This means that macroeconomic analysis could be ineffective if made with reference to a single country without considering other economic actors and forces in the global economy. Griffin and Khan had used the term “global macro economy”* probably as something to receive the attention of economists instead of the Keynesian macroeconomics, but they failed to provide its definition and goals. Krugman and Obstfeld (undated), the two scholars of International Economics, have also talked about the importance of what they termed “international macroeconomic policy coordination”. Perhaps this could be construed as their own yearnings for something that can at least supplement if not replace macroeconomic analysis due to the influences of globalization. It could be better for economists to come up with new a concept in referring macroeconomic analysis that reflects globalization instead of “global macroeconomy”, or the “international macroeconomic policy coordination”, as policy coordination deals with coordinating macroeconomic policies already formulated by individual nations without necessarily taking the forces of globalization into consideration. Coordination should start at the level of policy conception and formulation, and continue up to the levels of policy implementation, appraisal and review. When the Leaders of the Group of Twenty (G-20), held an initial meeting in Washington on November 15, 2008 on the current recession, they declared that the major underlying factors that lead to the current situation were, among others, inconsistent and insufficiently

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coordinated macroeconomic policies, and inadequate structural reforms (Online Wall Street Journal.com, 2008). The term globoeconomics could serve as a new concept to refer to the third level of economic analysis, the first and second being microeconomics and macroeconomics respectively. Globoeconomics has been simply defined as the study of macro-economic variables and policies of a nation, region or the entire globe as they influence or are influenced by macroeconomic variables and policies of other nations or regions as a result of globalization (Sulaiman, 2005::55-56) Globoeconomics involves the study of macroeconomic variables of a nation as they relate and interact with similar variables in other nations. It also studies macroeconomic variables in regional economies such as the European or Asian economies as they relate to and interact with similar variables in individual nations, other regional and sub regional economies and in the entire global economy. Thirdly, as the world is increasingly emerging as a global village, globoeconomics studies macroeconomic variables in the entire global economy, for instance, attempts can be made to determine the global inflation rate, global level of output, unemployment, etc, with a view to achieving desired economic goals such as eradication of global poverty, promoting global welfare and increasing global consumption and sales of certain goods and services. Globoeconomic policies are macroeconomic policies that take in to account the forces and requirements of globalization from the time they are conceived and formulated to the time they are implemented, coordinated, appraised and reviewed. Globoeconomic policies have the potential of moving economic activities and goals in the entire world towards a unity of purpose and benefits. This is because it is characterized by

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interdependence, which is analogous to the interdependence existing among parts of the human body, for instance, a faulty fiscal policy in an African country can exacerbate depression, and this can lower demand for both domestic and foreign goods thereby affecting sales, productivity and employment in the domestic economy and in the economies of nations trading with that country. Globoeconomics analysis should aim at achieving the following major goals: (a)

Providing a fair and comprehensive description of economic phenomenon in individual nations, regions and at the global level by taking into account the prevailing forces of globalization. Economic phenomenon such as exchange rate, level of capacity utilization, level of sales, growth rate, etc, should be described in the context of globalization.

(b)

Formulating policies, designing of models and strategies for moving the economies of nations, regions and the entire globe forward; and minimizing their economic problems on the bases of achievements made in relation to the first goal.

(c)

Globoeconomics, because of its tendency to move economic activities towards a unity of purpose, should promote interdependence, peaceful co-existence and mutual benefits among nations.

These goals cannot be achieved if there is no fair play in the global economic game and competition, and if weak nations are not assisted to utilize resources at their disposals and in line with their socio-cultural peculiarities and economic needs.

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The unity of purpose which globalization should facilitate needs to be achieved through peaceful (not forceful) means.

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Chapter Four LESSONS FROM THE GREAT DEPRESSION OF THE 1930s There are number of lessons to be drawn from the Great Depression of the 1930s that could be helpful in addressing the current recession. A summary of an article by Robert S. McElvaine entitled “Great Depression in the United States", is made here for the purpose of drawing lessons from the Great Depression of the 1930s. The summary covers the causes of the Great Depression, its impact and finally the government responses to it. The Great Depression that began in the United States of America had been described as the worst and longest economic collapse in the history of the modern industrial world. It existed from the end of 1929 until the early 1940s and spread to most of the world’s industrial countries. The Great Depression was caused by a number of deep problems in the modern economy that were building up through the “prosperity decade” of the 1920s, they include the following: a) After the World War 1 (1914-1918), Americans turned away from international issues and social concerns and toward greater individualism. They laid emphasis on getting rich and enjoying new fashion, new inventions, etc. b) The self-centered attitudes of the 1920s seemed to fit nicely with the needs of the economy, which produced vast quantities of consumer goods. Advertising methods were used to persuade people to buy such relatively new products as automobiles and such completely new ones as radios and household appliances, even though income was unevenly distributed.

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c) During the 1920s, workers got a relatively small share of the wealth produced, between 1923 and 1929, manufacturing output per person-hour increased by 32 percent, but wages grew by only 8 percent while corporate profits went up by 65 percent in the same period. As a result of these trends, many people who were willing to listen to the advertisers and purchase new products did not have enough money to do so. This led to another innovation— ‘credit’, an attractive name for consumer debt, which allowed consumers to “buy now, pay later.” d) American farmers—who represented one-quarter of the economy—were already in an economic depression during the 1920s, which made it difficult for them to take part in the consumer buying spree. But after the world war, they found themselves competing in an over-supplied international market. As Prices fell the farmers were often unable to sell their products for a profit. e) After World War 1 the United States became the world’s chief creditor as European countries struggled to pay war debts and reparations, American bankers lent heavily and unwisely to borrowers in Europe, especially Germany. These huge debts made the international banking structure extremely unstable by the late 1920s. f) The United States maintained high tariffs on goods imported from other countries, at the time it was providing foreign loans and trying to export its products. This combination could not be sustained, if nations could not sell their goods in the United States, they could not make enough money to buy its products or repay loans. All major industrial countries were also advancing their own interests without regard to the international economic consequences.

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g) The rising incomes of the wealthiest Americans

led to a rapid growth in the stock market, especially between 1927 and 1929, prices of stocks were rising far beyond the worth of the shares of the companies they represented. Investors bought millions of shares of stock “on margin,” a risky practice similar to buying products on credit. There was a stock boom but it could not last. In late October1929, the market nose-dived as investors began selling stocks. On October 29, in the worst day of the panic, stocks lost $10 billion to $15 billion in value. The stock market crash announced the beginning of the Great Depression, but the deep economic problems of the 1920s had already converged a few months earlier to start the downward spiral.

Impacts Made by the Great Depression The Great Depression saw rapid declines in the production and sale of goods and a sudden, severe rise in unemployment. With little consumer demand for products, hundreds of factories and mills closed, and the output of American manufacturing plants was cut almost in half from 1929 to 1932. Businesses and banks closed their doors, people lost their jobs, homes, and savings, and many depended on charity to survive. In 1933, at the worst point in the depression, more than 15 million Americans—one-quarter of the nation’s workforce—were unemployed. Jobless men sold apples and shined shoes to earn a little money. Many banks had made loans to businesses and people who now could not repay them and some banks had also lost money by investing in the stock market. When depositors hit by the depression needed to withdraw their savings, the banks often did not have the money to give them. This caused other depositors to panic and demand their cash, ruining the banks. As people lost their jobs and savings, mortgages on

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many homes and farms were foreclosed. Homeless people built shacks out of old crates and formed shantytowns, which were called “Hoovervilles” out of bitterness toward President Herbert Hoover, who refused to provide government aid to the unemployed. The plight of farmers, who had been in a depression since 1920, became worse, already low prices for their goods fell by 50 percent between 1929 and 1932. While many people went hungry, surplus crops couldn’t be sold for a profit. Government Response to the Great Depression The initial government response to the Great Depression was ineffective, as the then President of the United States, Herbert Hoover, was adamant that the economy was sound and that prosperity would soon return. To him, the basic need was to restore public confidence so that businesses would begin to invest, expand production and provide jobs and income to restore the economy to its former level. Businesses, however, saw no reason to increase production while unsold goods congested their shelves. By 1932 investment had dropped to less than 5 percent of its 1929 level. President Hoover was convinced that a balanced federal budget was enough to restore business confidence; he wanted to cut government spending and raise taxes. But this policy served only to reduce demand further. Hoover and most of his Republican Party firmly supported protective tariffs to block imports and stimulate the American economy by increasing sales of American-made products. In 1930 the Hoover’s regime enacted the Hawley-Smoot Tariff, which established the highest average tariff in American history. It became a devastating blow to European economies, which were already sinking into depression. Other nations hit back by raising their own tariffs. This helped to worsen and spread the depression by lowering the volume of international trade, for instance, in 1929 and 1932 the total value of world trade went down by more than half.

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Like Hoover, leaders of other nations were determined to balance their budgets by raising taxes and slashing government spending. By the election year of 1932, the depression had made Hoover very unpopular; this made it easy for the Democratic presidential candidate Franklin Delano Roosevelt to become next president of the United States. Within days of his inauguration, Roosevelt called Congress into a special session, during which many pieces of emergency legislation were passed. He quickly lifted the nation’s spirits with the rapid and unprecedented actions of the New Deal. He also declared a nationwide bank holiday, closing all banks to stop panicky depositors from withdrawing money. After few days, he reassured Americans that all banks that were allowed to reopen would be safe. The New Deal involved a wide variety of programs aimed at reducing unemployment, assisting businesses and agriculture, regulating banking and the stock market, and providing security for the needy, elderly, and disabled. Under the Agricultural Adjustment Act of 1933, the government wanted to raise farm prices by paying farmers not to grow surplus crops. The New Deal also tried to increase demand through pumping large amounts of money into the economy through public works such as schools, dams, and roads, and relief measures. Roosevelt never accepted the new ideas of British economist John Maynard Keynes, who argued that intentionally unbalancing the budget to a significant degree would boost demand to the point where recovery would take place. He refused to create an unbalanced budget on the scale Keynes advocated until World War II forced it upon him. Once the government started spending at the levels Keynes had recommended, the depression came to an end. With the outbreak of World War II in Europe in September 1939, the U.S. government was spending large amounts of

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money to produce ships, aircraft, weapons, and other war material. The increase in government spending stimulated industrial growth, unemployment also declined rapidly. The Lessons to be Learnt a) Cutting government spending and raising taxes are not the appropriate measures for overcoming depression, they serve only to reduce demand further, and subsequently increase unemployment and misery. Government should increase demand by creating an unbalanced budget as the British economist John Maynard Keynes, recommends. This is done to with a view to pumping large amounts of money into the economy through public works such as schools, dams, and roads, relief measures, increase in wages and salaries, provision of loans to industry, lowering interest rates or even abolishing them. b) Protective macroeconomic economic policies such as tariffs are ineffective; they retard international trade and promote misunderstanding among nations. c) Collective global measures need to be taken by nations through meetings of leaders, economists and executives of businesses on measures that would stimulate demand and economic activities in each nation based on its resources, capacities and areas of specialization. d) There are limits to which businesses should be providing goods to people on credit for the sake of earning interest and recording high sales. It is better to empower people to make purchases with their own money, and when necessary, to provide credit facilities to people with abilities to pay debts.

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Chapter Five CAUSES AND MANIFESTATIONS OF THE CURRENT GLOBAL RECESSION Causes of the Current Global Recession When the Group of Twenty (G-20) leaders held an initial meeting in Washington on November 15, 2008, on the current recession, they identified its roots causes which include seeking higher yields by market participants without an adequate appreciation of the risks and failure to exercise proper due diligence during the period of strong global growth, growing capital flows, and prolonged stability earlier this decade. Other causes are weak underwriting standards; unsound risk management practices; increasingly complex and opaque financial products; and resultant excessive leverage combined to create vulnerabilities in the system. In addition, policy-makers, regulators and supervisors, in some advanced countries, failed to adequately appreciate and address the risks building up in financial markets. According to the G-20 leaders, the major underlying factors that lead to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, and inadequate structural reforms (Online Wall Street Journal.com, 2008). As Uwah (2008) recounts, Nancy Pelosi, the speaker of the US House of Representatives, during her opening speech to flag off a debate on the $700 billion bailout package for the financial industry sent to Congress by President George W. Bush, blamed the crisis on the carefree attitude of the regulators of America’s financial system. The regulators of the system were derelict in the guise of free market principles. But when the crisis threatened to envelop the entire globe, they discarded these principles and went for Keynesian intervention as a solution. The cause of the current credit squeeze is almost similar to that of 1929. There has been a free

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flow of credit in the American system in the past few years to the extent that people who are not creditworthy were provided with a sub-prime mortgage facility. Sub-prime mortgages carry a higher risk to the lender as they are offered to people with financial problems or who have low or unpredictable incomes. Higher interest rates are charged on Sub-prime mortgages because of the high risk. Some of the Manifestations of the Current Global Recession The National Bureau of Economic Research (NBER), which uses key monthly indicators of economic output, including employment, industrial production, real personal income, and wholesale and retail sales - to determine when economic growth has turned negative, declared that the US entered a recession in December 2007, and that the "decline in economic activity in 2008 met the standard for a recession" (http://news.bbc.co.uk/2/hi/business/7759470.stm, 16 December 2008) The Business Cycle Dating Committee of the NBER, in its deliberations, relied on a number of monthly and quarterly economic indicators published by government agencies. The Committee reports, among others, that “industrial production peaked in January 2008, fell through May 2008, rose slightly in June and July, and then fell substantially from July to September.” The October value of the industrial production index lingered a substantial 4.7 percent below its value in January 2008 (http://www.nber.org/cycles/dec2008.html). The global financial turmoil seen during 2008 has led to extreme volatility on the world's stock markets. Stock market indices such as the British FTSE 100, the French CAC 40, the German DAX, the Japanese Nikkei 225, the American Dow Jones Industrial Average and S&P 500 Index, the Indian Sensex, the Australian All Ordinaries and the Hong Kong Hang Seng Index continuously declined as the following graphs indicate:

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Fig. 1 Dow Jones Industrial Average: Jan-Dec 2008

Fig. 2 Nikkei 225 Index: Jan-Dec 2008

Fig. 3 Dax Index: Jan-Dec 2008

Fig. 4 Cac 40 Index: Jan-Dec 2008

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Fig. 5 BBC Global 30 Index: Jan-Dec 2008

(Source for figures 1-5: Global stock markets in 2008 http://news.bbc.co.uk/2/hi/business/7716406.stm) After reaching a record high in July 2008 of $147 a barrel, the price of oil had fallen to $39.67 on 31st December, 2008. This has serious implications for oil exporting countries like Nigeria. The Nigerian economy, unlike the American economy, which is a credit economy, is a cash-and-carry economy: every transaction is by cash. Despite this, the Nigerian capital market is suffering the impact of the global credit squeeze as foreign portfolio investors in the market had fled even before the crisis became prominent. The mass exodus of the investors is at the root of the persistent share-price decline (Uwah , 2008). Industrial output in Japan dropped by 8.1% in November compared with the previous month, the biggest fall since records of such output statistics began. At the same time, unemployment rose to nearly 4% of the population as more than 2.5m people were out of work in Japan in November, a rise of 100,000 compared with the year before. Factories were also closed as demand for manufactured goods slumped amid the global financial downturn (http://news.bbc.co.uk/2/hi/asia-pacific/7799908.stm, 27 December 2008). These few examples indicate the recession has already enveloped the entire world.

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Chapter Six THE RESPONSE OF THE G-20 LEADERS TO THE CURRENT GLOBAL RECESSION The Leaders of the Group of Twenty (G-20) met in London on 2 April 2009, with the belief that the world economy was facing the greatest challenge in modern times; a global crisis requires a global solution; prosperity is indivisible; and that for growth to be sustained it must be shared. They took a number of decisions bordering on the following areas (see London Summit – Leaders’ Statement): a) On restoring growth and jobs, the leaders agreed to undertake an unprecedented and concerted fiscal expansion that will amount to $5 trillion and raise output by 4 per cent by the end of 2010 and also save or create millions of jobs. b) As regards the strengthening of financial supervision and regulation, the G-20 leaders identified major failures in the financial sector and in financial regulation and supervision as fundamental causes of the crisis. Therefore, they agreed to rebuild trust in their financial system, take action to build a stronger supervisory and regulatory framework for the future financial sector, and ensure that their domestic regulatory systems are strong. c) On the issue of strengthening the global financial institutions, the G-20 leaders believed that emerging markets and developing countries have been the engine of recent world growth and were facing challenges that aggravated the current downturn in the global economy. It is therefore necessary that capital continues to flow to them through strengthening of the international financial institutions, particularly the International Monetary Fund (IMF). An additional $850 billion is

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to be provided through the global financial institutions to support growth in emerging markets and developing countries. The G-20 leaders, among other measures taken, have agreed to increase the resources available to the IMF through immediate financing from members of $250 billion. They also supported a substantial increase in lending of at least $100 billion by the Multilateral Development Banks (MDBs). d) In the area of resisting protectionism and promoting global trade and investment, the G-20 leaders observed that falling demand was intensified by growing protectionist pressures and a withdrawal of trade credit; they promised not repeat the historic mistakes of protectionism of the past. To this end, they decided to refrain from raising new barriers to investment and trade in goods and services, and to minimise any negative impact on trade and investment of their domestic policy actions. e) Finally, as regards ensuring a fair and sustainable recovery for all, the G-20 leaders expressed their determination to restore growth and lay the foundation for a fair and sustainable world economy. They recognized their collective responsibility to lessen the social impact of the crisis, reaffirmed their commitment to meeting the Millennium Development Goals and to achieving their pledges including commitments on Aid for Trade, debt relief, etc. It is interesting to note that the above decisions taken by the G20 leaders indicate their understanding of the real causes of the global recession and the solutions to it. The leaders have recognized that the crisis requires a global solution and that prosperity is indivisible.

Moreover, inconsistent and insufficiently coordinated macroeconomic policies had been recognised as one of the major causes of the global 23

recession by the G-20 leaders at an initial meeting in Washington on November 15, 2008, on the current recession. These recognitions show the need for the adoption a globoeconomic policy to replace the moribund macroeconomic policy. The G-20 leaders also rejected protectionism and supported increase in government spending, regulation and close supervision of the financial sector. They also realized the need for continued support to emerging markets and developing countries because they are the engine of recent world growth. What now remains is their wholehearted commitment to the implementation of these decisions. Leaders of other nations need to understand how these decisions will affect the economies of their respective nations and the kind of effort they also need to make as their contributions to the global effort.

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Chapter Seven ADDRESSING THE GLOBAL ECONOMIC RECESSION WITH A GLOBO-ECONOMIC POLICY: AN ILLUSTRATION The diagram below depicts the relationship between the economies of five nations. It is used to illustrate the need for a globo-economic policy in addressing the current global economic recession. For simplicity it is assumed that there five nations in the world and each has one major economic activity as the chief source of its income. Thus agriculture, mining of petroleum, production of automobiles, manufacture of consumables, and tourism are considered to be the mainstays of the economies of United States of America (USA), Nigeria, Japan, United Kingdom and Thailand respectively. Each country pursues its economic activity on the basis of its natural endowments, technological development and the comparative advantage it has in relation to its economic activity.

USA

JAPAN

UK

NIGERIA

THAILAND

Fig. 6 Economic interdependence among the members of a five-nation world

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United Kingdom is put in the middle of the other countries to show how its economy relates with the economies of the other countries. The arrows originating from United Kingdom indicate what goes out from it to other nations, while those originating from USA, Nigeria, Japan, and Thailand indicate what it gets from these countries. Each country can therefore, assume the position of the United Kingdom in the diagram to indicate how its economy helps and depends on the economies of other nations. In the example, United Kingdom manufactures consumables such as chemicals, lubricants, processed foods; stationery and drugs. It imports petroleum from Nigeria, and farm produce from USA. It also imports vehicles from Japan for distributing its finished goods. With an increase in economic activities and prosperity in this country, its demand for these imports will be on the increase and the number of tourist wishing to visit Thailand from the United Kingdom will also increase. Thus when the economy of the United Kingdom prospers, it will boost economic activities in the other countries. Since recession is about low demand for goods and services, low domestic and foreign demand for manufactures from the United Kingdom will lead to low demand for farm produce from USA, automobiles from Japan and petroleum from Nigeria. Moreover, a downturn in the economic activities in the United Kingdom will reduce the number of tourists willing and capable of visiting Thailand. Low demand for petroleum from Nigeria can be aggravated by low demand for automobiles and by the use of alternative fuel for running them, this will result in less income among Nigerians and subsequently a fall in their demand for other goods and services produced by the other four nations. From this simple illustration it could be seen that with the ever increasing forces of globalization,

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macroeconomic policy in a single nation with a view to increasing output and employment or reduce inflation rate is becoming increasingly ineffective. So nations have to sit together to fashion out a mutually beneficial goboeconomic policy. With the simplified example of a five-nation world, the affected nations can meet to agree on the following policies: 1) Stimulating domestic demand for goods and services in each country though the means of government spending in form increase in public works (roads, dams, schools, electricity, etc) upward review of workers’ salaries and allowances for students, etc. A deficit budget is needed in a period of recession so the increase in government expenditure can come through borrowing from local and foreign sources depending on what will be done with the money. Projects that require foreign exchange can require external loans while projects that can be executed with local resources do not require external loans. The disadvantage of borrowing by government is that the prevailing interest rate may go up, thus increasing the cost of capital for investors. Increase in money supply by printing additional money and using it to increase government spending is another alternative for a deficit budget. Its disadvantage is that it will lead to inflation if the amount of money supplied exceeds the level of output in an economy. In developing and underdeveloped nations, reliable measurement of their levels of output does not exist as most informal economic activities are left It could be out in determining their GDPs.1 1

Gross Domestic Product (GDP) is the total value of goods and services produced in a country over a period of time, it may be calculated by adding up the value of all goods and services produced;

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argued that the use of money in providing basic infrastructure could lead to rise in GDP as well as lower the cost of production facing industries thus reducing the level of inflation. Some leaders and economists tend to emphasize a control of inflation rate even if such control will bring hardship to people. Achieving a low inflation rate is simply a means to an end, not an end in itself. The end is to increase the standard of living of people though good nutrition and health care, education, etc. That is why development is now measured in terms of the Human Development Index2, not low inflation rate or the GDP only. 2) Curtailing protectionism -. There are two types of protectionism. Use of tariffs and taxes to discourage imports from other countries as well as outright banning of importation of certain goods can be referred to as primary protectionism. Secondary protectionism can be seen as any attempt to achieve complete selfthe expenditure on goods and services at the time of sale; or producers’ incomes from the sale of goods or services (Gross Domestic Product. Microsoft® Encarta® 2006 [DVD]. Redmond, WA: Microsoft Corporation, 2005.) People can made to suffer unnecessarily when governments rely on reducing money supply to control inflation, which is just one of its many causes. In addition to this calculation of GDPs , especially in the less developed nations, do not fully reflect activities in the formal economy talk less of the black economy, so using them as basis for determining the appropriate money supply for an economy can cause hardships to people unnecessarily or suffocate economic growth. 2

Human Development Index (HDI) is an estimate of living standards published for the first time in 1990 by the United Nations Development Program. It uses a scale of 1 to 100 and takes into account GDP per head, adult literacy, and life expectancy (ibid).

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reliance on home made goods coupled with conduct of researches on the production of alternatives to goods being imported from other stifle nations even if the nation doing so lacks a comparative advantage in producing them. Therefore nations wishing to formulate an effective globo-economic policy have to agree on the level of protectionisms they can tolerate in view of their peculiarities and needs as individual nations, and on the basis of their collective goal of attacking global recession. 3) Setting goals and targets as well as identifying means for achieving desired level of global output, employment, economic growth, etc, and specifying the contribution of each country in relation to these goals and targets.

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Chapter Eight CONCLUSION AND RECOMMENDATIONS Conclusion Depression is not synonymous with dearth of wealth or resources, it implies low demand (purchasing power) leading to low utilization of available resources including labour, so it requires reflationary measures. Protective macroeconomic economic policies such as tariffs are ineffective in overcoming global recession; they retard international trade and promote misunderstanding among nations. Globoeconomic policies, on the other hand, have the potentials of moving economic activities of different nations towards achieving common goals such as price stability, economic growth and development, curtailing unemployment, etc., and of promoting interdependence, peaceful co-existence and mutual benefits among them. These goals cannot be achieved if there is no fair play in the global economic game and competition, and if weak nations are not assisted to utilize resources at their disposals and in line with their socio-cultural peculiarities and economic needs. Conflicts arise more often than not among nations due pursuance of economic goals by a nation or a group of nations without regard for global peace and development. Recommendations Lessons from the Great Depression of the 1930s would be useful in overcoming the current recession but the forces and requirements of globalization need to be taken into consideration when conceiving and formulating policies aimed at ending it. So globoeconomic policies need to designed and implemented by individual nations, sub-regional, regional and world bodies with due consideration of forces and requirements of globalization and with a view to setting goals on desired employment and

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productivity levels, growth rates, etc, which should be in line with the existing endowments and capacities of each nation, sub-region or region. Reflationary measures should be employed by nations to increase aggregate demand in their economies with a view to reducing unemployment. It can be executed through printing of money or through public sector borrowing (government borrowing from the private sector). Leaders of individual nations should know the difference between what can be done with foreign earnings and what can be done with their local currencies and how the two are related. It is improper to tie, for instance, provision of adequate money for a project that can be executed with local resources, to foreign earnings. Where dams for irrigation, roads for transportation and buildings for schools and hospitals are mainly made with local resources (rocks, sand, cement, etc) found in a given nation, local currencies can be printed to buy these resources. This policy would increase economic activities and reduce poverty among people through the multiplier effect. It will also provide the infrastructure required for boosting productivity. Foreign earnings should be used for foreign goods and services and in line with the priorities of the moment. Financial aids and assistance given to the poor and less developed nations by the developed ones should not be curtailed as doing this will further reduce global demand for goods in services and subsequently exacerbate global recession. Additional sources of revenue other than taxes should be identified and used to supplement government revenue. Asking people to pay more taxes or pay new ones reduces their disposable incomes and leads to a further fall in demand.

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