World financial crisis: analysis of tendencies

Published in the magazine "Russia, Central Asia and Eastern Europe" (November 6, 2009), Chinese Academy of Social Sciences

The crisis, of course, remains the number one problem of global proportions, which has pushed to second place, even severe problems, such as events in Iraq and Afghanistan.

This urgency is due not only to the fact that under the threat are those global financial and economic models that have been emerged after World War II and intellectual schools which developed and promoted this model, but also to the fact that under challenge have become established political structure, security system, as well as the usual way of life of people in many countries.

The world financial crisis risks becoming a versatile catalyst that can trigger a chain of reaction in many spheres of global society. However, so far still there is no unified opinion as to whether the real crisis may profoundly affect the global economy and lead to drastic reformatting, or it is just temporary problems, despite its severity, not challenging the current economic, political and social model, lobbying by western thought.

Today, the number of expert opinions and evaluations, circulating in the world media, is more than thousands, and in this context, it is important for at least some clarification of the situation to identify major issues around which key intellectual trends develop.

At first, most acute controversy exists around the problem of the nature of the current crisis. Majority of the economists, especially in the West, is of the opinion that the crisis is a common occurrence in the cyclical fluctuations in economic growth.

Proponents of the theory of business cycles suggest that in today's crisis is not unusual, because economic activity has traditionally developed on undulating curve, where the phase of recovery over time are replaced by the phases of recession and depression, which then give rise to further growth. Such a cycle develops as a spiral, stimulating the economy to the stage for further growth.

In turn, supporters of cyclical point of view at the crisis fall into two groups.

First, the most numerous, is of the opinion that the current problems will last a very long 3-4 years, after which there will be restoration of the balance in the consumer and investment markets. The second group of pro-cyclicity of the crisis suggests that the current crisis, which began in the United States has expressed the nature of depression, similar to the Great Depression of 1930's, and its duration will be at least 8-10 years. These two groups are united by the fact that they did not challenge the existing model of the world economy.

Advocates of cyclical nature of the crisis are still opposed by the marginal group of experts, which believe that global financial and economic crisis is not cyclical, but structural crisis. It differs from the cyclical crisis in the objective prerequisites for radical change of economic development models. Apologists of the theory of structural crisis say that while the liberal-democratic structure, established in the West, does not give way to new forms of organization and regulation of the economy and financial flows there is no way out of the crisis. On the contrary, the crisis in all possible manifestations will only worsen. As an example, given the structural crises or long-wave cycles, for up to 50 years, took place in the history of the western capitalist model. These include the transition from manufacture to factory production in the late XVIII century, the dominance of transnational capitalism in the 70-ies of the last century, etc.

The second theme in the unfolding of acute controversy in international expert circles is the issue of future financial domination. Around since 1971, when the U.S. dollar was disentangled from gold, United States currency became the dominant in the global economy, which effectively replaced gold as the universal equivalent. The U.S. dollar has become not only a means of calculation, but also accumulation. This in turn has made the United States a de facto global emission center.

Meanwhile, the global economic crisis may put into question the dominant role of the United States in world finance. If supporters of the long-term of the current crisis are right, then in the near future there may stand very acute the issue of the financial architecture of the world.

In principle, this issue has already been on the agenda, while supporters of the U.S. dollar argue that the dominance of American currency is not at risk. They point out that in the mid 80-ies of the last century the U.S. dollar has demonstrated two-fold drop in price, but this in no way reflected on its position.

In addition, supporters of the U.S. dollar stressed that such big players as the leading EU countries and Japan, which are mutually-bound with trade and economic relations with the United States, and whose currency and accumulating foreign currency pegged to the U.S. dollar, are not interested in vast decline in the dollar. China will not be interested in this either, which is the number one state to buy American securities. Consequently, these actors of the world economy will seek to stabilize the monetary system, supporting the dollar.

Supporters of the U.S. emphasize that it is a very difficult problem to agree on the positions of all stakeholders on the compliance of their interests in the new global financial architecture. Much easier would be to save all along the current system of currency transactions, based on the dollar. The parties would be difficult, because the U.S. has not agreed to relinquish their positions.

However, advocates of reducing the significance of the U.S. dollar argue that in the near future debates over the issue will turn increasingly, and it is here that will be a point of controversy between the United States and other leading political and economic forces seeking to create a supranational global emission center. This is because a share in global emission is a tasty morsel, because this will help strengthen economic and political position of the country that this share would receive.

The fact that such a confrontation will occur is increasingly demonstrated in expressed statements about the need to create a single global unit of account, under the supervision of the Special Committee or the UN, or international financial institution like the IMF.

The problem of international financial and industrial and economic architecture is closely related with the discussion of the future of globalization. The main engine of globalization in recent decades, of course, has been the U.S., Europe, Japan and China. Their growth process ignited a global movement of capital, labor, technology, goods, transfer of production capacity, the global division of labor, standardization of laws, etc.

In the global politico-economic, cultural and scientific processes currently involved virtually the entire world. One of the most effective results of globalization has been ongoing since the end of World War II growth of world GDP and global trade. However, financial and economic crisis are threatening to make serious adjustments in the processes of globalization.

According to the World Bank report, dated 8 March 2009, this year will see the first negative growth in the global economy after the Second World War, as well as a sharp drop in world trade over the past 80 years.

The report notes that the sharp drop in the global economy has affected not only in developed but also developing countries. For example, the global volume of industrial production in the fourth quarter of last year fell by 20%, of which 23% occurred in developed countries and 15% - in developing. As a result, the strike has already inflicted on the core engine of globalization - global trade, movement of goods and investment.

Thus, there has been a slowdown in the global oil trade and a fall in the volume of traffic. Oil-exporting countries are forced to make some reduction in production and supply in mind that in the importing countries as a result of the crisis energy consumption is gradually stagnating and even in some cases reduced. This trend threatens to continue in 2009. According to the OPEC forecasts in the current year drop in global demand for «black gold» will be 0.2% or 0.18 mln barrels per day. In turn, the International Energy Agency (IEA) predicts drop in demand for oil at 0.6% or 0.5 mln barrels per day. According to the IEA, in 2008 daily oil consumption in the world fell by 0.3 mln barrels. For the first time since 1982 demand for oil is falling for two consecutive years.

To decrease the volume of international freight transport will be influenced by adverse conditions in the metals market. Thus, falling prices for aluminum from 3341 dollars per ton in mid-July 2008 to 1300 dollars by the beginning of March 2009 led to a substantial reduction of this metal which has lasted for more than half a year.

At the same time, a more powerful impact on the process of globalization can inflict not so much declining global trade, but growth in the popularity of emerging protectionism. In some developed countries are increasingly calls to buy goods of domestic producers, as well as to provide substantial funding to sustain their own business. While not openly stated that they are doing everything to protect its own economy - manufacturing and financial sectors, however, many strategies for saving the economies are strong protectionist. This, of course, is the growing controversy, especially in industrially developed world.

As already mentioned, namely the industrialized countries provide a motor of globalization, and if they do give preference policy of protectionism in the context of growing crisis, we can actually talk about the suspension of progressive globalization. Today, the views within the political-economic and experts are divided.

The main debate is around the topic of what is preferred in a crisis - saving the global economy or saving the national economies.

This discussion is relevant also because it is linked with the future model of economic and financial development of the world. If the process of globalization will be suspended as a result of the victory of protectionist tendencies, then we may encounter with the new version of the phenomenon of economic regionalism. This means that, on the one hand, industrialized countries will be closed off from each other protectionist measures, and on the other hand, they will try to establish a zone of economic influence. Theoretically, one can say that there are preconditions for the emergence of relatively closed regional markets, the axis of which may make the United States, China, Japan, European Union and, under certain conditions, Russia.

Experts often talk about the regional nature of these economic zones and markets, bearing in mind that they will be formed primarily on a geographical basis. For example, the Asian market with its center in China, or North American market with its center in the United States. However, in our opinion, this is somewhat narrower approach. Under the regional market to be understood not only geographically, but also the principle of extraregional trade and markets tied to a regional market.

For example, the Asian zone may include not only the countries of Southeast Asia but also Africa and Latin America, look at them through the export of its natural resources and imports of Asian industrial products. China in recent years very active in conducting foreign trade and foreign policy strategy based on this understanding of the regional market. Beijing, on the one hand, seek to integrate Southeast Asia, ASEAN, the Far East around its economy, on the other hand, is trying to more closely tie Africa and Latin America countries to the Asian market.

Especially good is evident in the recent past. China allocates substantial funds to help African and Latin American countries in exchange for rights to develop oil and minerals, as well as guarantees for the purchase of raw materials and marketing its products.

A negative consequence of such policy of regionalization can be a struggle for consuming markets and sources of supply of raw materials not only between different developed countries, but also between the consolidated regional markets. As a result, it can also lead to the exit policy of economic protectionism to a new level – from national to regional.

From a financial point of view, with the strengthening of economic regionalism can be said about the potential destruction of a single financial space based on the dollar and a new financial plan for regional spaces with their own current units.

For experts, this topic already exaggerated for five years again becomes extremely relevant, especially since the politicians of different levels are more often talk about the need to impose their own regional currencies to protect themselves from the crisis.

Financial analysts believe that the emergence of regional currencies along with the process of economic regionalization could also provoke the above discussion on the fate of the dollar and prospects of establishing a single world currency controlled by the UN. They point out that if the United States will not be able to guarantee the security of investments of China, Russia, Japan, Arab and European countries in their public treasury bonds, there it could rise spontaneous process of the dollar off in favor of other currencies and the decline in purchases of American bonds. This topic of Washington's ability to respond to this challenge (the guarantee of foreign deposits) is also the subject of widespread debate unfolding in the analytic environment.

Another topic attracts the attention of experts is the future of the international pricing of basic commodities and especially oil. During the crisis the commodity-exporting countries are losing significant amounts of foreign exchange because of falling prices for their goods. One of the reasons for the loss many experts saw the inequity system of pricing for raw materials based on the dominance of a number of Western and Asian stock markets.

The main argument of the unjust nature of the stock markets’ operation is that price for the commodity determines not a supplier but the buyer. That is nonsense. In addition, the stock markets have strong speculative component which threatens the stability of economic development of the exporting countries. Because of speculators exporting countries can not predict the development of the market and the prices of their raw materials which lead to problems with budgeting, implementation of planned infrastructure projects and pose a threat to social stability.

In this context, the suppliers offer to cut off speculators and shift the balance in the pricing to the suppliers by creating their own trading platforms or by setting a single fixed price for the commodity. It is also proposed, in particular in the oil field, to introduce as a standard their own oil grades against existing oil grades of WTI (New York Stock Exchange) and Brent (London Exchange) for which the price will be determined.

At this moment the struggle in the international pricing system has only just begun and is likely as rise the economic crisis and problems with suppliers the fight will be more updated.