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Coping with a global crisis

Beyond the Crash: Overcoming the First Crisis of Globalisation by Gordon Brown
Simon & Schuster

We begin 2011 in the United Kingdom with further austerity measures in place in the form of a rise in Value Added Tax and an uncertain outlook for growth and jobs for the next few years. Unemployment is not forecast to fall much in the near future. The Conservative-Liberal Democrat coalition is betting that a boost to exports and investment will revive the economy. Yet other countries hope for the same. We cannot all export and investment has to be driven by the prospect of higher consumption.

It is in this context that Gordon Brown calls for a global plan for growth in Beyond the Crash. Our former Prime Minister argues that individual nations or regions cannot promote recovery on their own. Only co-ordinated action will work. To support his argument, he takes the reader through his experience of the financial crisis and the subsequent G20 meeting in London which promoted stimulus measures.

The first part of Beyond the Crash examines the banking crisis. Brown describes how, with leading American figures such as Alan Greenspan and Larry Summers, and with colleagues in Europe and Asia, he debated after the Asian financial crisis of 1998 “what we should do if there were ever liquidity or solvency crises and how we could spot the difference. We also discussed at length the problem we have now been facing in earnest in the past two years: how we could avoid moral hazard while at the same time intervening to prevent and solve crises.”

A lot of good it did them, since a decade later the authorities’ responses to the banking crisis were made up as they went along. Facing a systemic crisis, they had first to wrestle with a prevailing free market ideology that was a blinker on their outlook. Only the prospect of disaster forced such measures as bank nationalisation and recapitalisation by the taxpayer – and then almost too late.

The British push for capital injections helped to change the global response. Banks had to be saved from themselves and they had little idea of the risks they had taken. Brown regrets not having secured global financial regulation ten years beforehand.

International agreements helped end the crisis and global action helped prevent a deep recession becoming a great depression. But the banking crisis rolled on into early 2009, as did the shock to world economic confidence. The G20 summit in London in April 2009, which Brown led, agreed a substantial rescue plan to stimulate the world economy. Failure at that summit could have made things worse. Brown recounts how he prepared for the meeting and obtained worldwide consensus. The plan consisted of commitments to further funding for the International Monetary Fund and World Bank, reform of international institutions, and help for the world’s poor. The experience clearly made an impression on Brown, who writes: “After such an extraordinary co-operative effort, the world will never be quite the same again.”

Brown believes the global recovery is at risk and that further co-operative action must be taken. One of his refrains while in government was that China and India were growing fast and presented a competitive challenge to this country. He still believes these economies have great potential, but maintains that they will not take the place of American and European consumers in the short term. The developed economies face persistent high unemployment and, without action, the global level of demand will remain below pre-crisis levels for some time.

Individual countries are pursuing their own austerity measures because they are worried about high levels of debt – and probably low levels of growth, too. Brown argues that if countries act together to promote growth with further stimuli and pro-trade measures, these fears can be allayed. But if they focus on only national concerns we will be condemned to a decade of low and lost growth.

What a global plan for growth would look like in detail is not clear, however. Perhaps Brown believes current deficit cuts should be suspended and the consequent stimulus be allowed to boost growth and reduce deficits that way while reducing unemployment. He mentions with approval an IMF study that supports the case for global action.

His economic surveys are very much at the macro level. There is little consideration of the role of businesses and consumers and the part played by their confidence in the future. He probably relies unnecessarily on current economic forecasts. The influence bond markets can have on government plans is considered but dismissed too quickly. Markets can be wrong for a long time, as we have seen, and Brown declares that fears of inflation are overdone. A global agreement on growth might be worthwhile yet it would need to be set in the context of credible plans to control government debt levels over the medium term.

The author is hardly critical of anybody, apart from bank executives. World leaders acted differently but understandably. There was an awful lot of reasonable behaviour at global summits, apart from a long speech by Colonel Gaddafi. His colleagues are highly regarded and this affects his analysis of the financial and economic crisis. His personal accounts contain the odd pointed reference to domestic political difficulties but this is a book with a global theme.

Is Gordon Brown correct that a global growth plan is required? He makes a good case even though a consensus would take time to build. This book must reflect the frustrations of someone who, after the general election in May, has seen momentum for global action slow without an advocate such as himself. It is easy to forget the global leadership role he had, but the contrast with the Tory-Lib Dem coalition is stark. At present, it appears the global economy will muddle through, but with risks that the recovery will be muted. Brown highlights why this might happen: the rest of the world cannot yet replace demand lost in America and Europe. Muted recovery means hardship for millions. Some sort of global action makes sense. Yet it must be dynamic in nature, focused on building confidence and directly addressing unemployment.

This article was first published in Tribune on 14 January 2011.
Tribune, 14 January 2010, 15/01/2011

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