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Mats Hellstrom

The financial and economic crisis has been unprecedentedly sharp and dramatic with a total drying up of bank liquidity some weeks after the collapse of Lehman Brothers in September last year. Some time later, world trade fell 40% during three months.

Worries about strong protectionist reactions have been great.  Certainly, classical protectionist measures have been taken - for example, in steel with the Buy American Act, the car industry, European milk, and so on.

There have also been many grey zone measures. As fiscal policy is national, the fight against increasing unemployment has included classical measures which increase domestic demand.  That can – but must not, of course - discriminate against foreign companies.

Another grey zone dimension includes national bank rescue programmes that, in some countries, have had provisions which benefit only domestic borrowers and could hurt global finance flows. In defence of such schemes; it has been argued that it is natural that the use of domestic tax-payers money should benefit the domestic economy.  Although some of these types of measures expand domestic economies, they could have global financial effects of a contracting kind in an already vulnerable world economy.

A study on current protectionism made jointly by the WTO, OECD and UNCTAD for the G-20 meeting this autumn concluded that, yes, there was “policy slippage” in a variety of fields that could become a build up of “sand in the gears”.  This  could undermine an early and sustained recovery.   There had been, however, no “high intensity protectionism” as a reaction to the crisis. In fact, after a change of mind in the Government in New Delhi, efforts are now even being made, while admittedly weak, to revive the Doha-Round in the WTO.

So what is the character of this crisis and of the policy response?  What are the main reasons behind the unusually drastic fall in demand this winter and then an unexpectedly quick upturn this autumn? In fact, there is already  talk of new asset bubbles being inflated.

Are we basically seeing first an inventory recoil and then an inventory build-up, or have the concerted fiscal stimuli of many governments, together with central bank loose monetary policies, having a Keynesian effect on the world economy?

Certainly there are good reasons for Ukraine to hope that the second scenario is relevant.  World demand is now picking up in some of Ukraine’s most important export goods, like steel, where the recession struck especially hard.   In this context, clearly, Ukraine’s new membership in WTO is important.

Is there a sustained up-turn being started?  Or, given the strong financial imbalances that have not yet been rectified; between consumption and savings and between different countries – like USA and China - do we rather expect a weak and drawn-out enhancement in demand and economic growth?  Are we seeing the emergence of creeping economic nationalism - or perhaps the opposite – a concerted action of central banks and governments that has led to a quick recovery?

Some economists argue that the free trade system has shown itself to be rather robust, but instead the financial system is very fragile, vulnerable and immature and here lies great risks for future crisis outbursts.  This is one reason to be cautious about launching early on the so called ‘exit strategies’.

Economists debate fiercely the background of the crisis.  Some blame governments and central banks for creating the bubble that burst through loose credit policies. Others blame the financial institutions for profiting from non-transparent, high risk instruments, like derivatives, through excessive leveraging and other means exploiting low interest rates.  

Of course, some economists see a combination of misguided public and private policies as the root. Some see more long term explanations. George Soros claims that the crash of 2008 was caused by a super bubble that had been inflating for almost two decades since 1980.

Sharp recessions can be expected to stir and shake up structures in the world economy.  This may occur not only between countries but also between business sectors and branches as a result of shifting demand.  Are we in the midst of a structural leap, perhaps?

What kind of economic growth will emerge in the future? Parallel to the economic crisis there is a climate crisis with global warming that will probably force changes in traditional living standards and consumption patterns. It has been said that if all the people in the world lived by “western standards”, it would require so many resources that we would need three globes – not just the one we live on!

Innovations are said to be especially important in times of sweeping changes. What about the term sustainability? Could it be that in the future sustainability will be seen, not as a restriction on growth, but rather a spur to create new and innovative forms of products, services and economic growth?

Be that as it may, I think one important conclusion about the present turmoil has recently been drawn by Daniel Yergin. Given the debates and blame-games going on now, it will be very important which story, which narrative of the roots and evolution of the economic crisis,  prevails in the minds and historical textbooks. This story could shape the future policies that  will or will not be effective in countering possible new Great Recessions.

Hopefully today’s conference in Kyiv will contribute to the formulation of such a credible such story and narrative about our turbulent past and present.

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