Page 2 of 3 CHINA AND THE GLOBAL CRISIS, Part 2 Beijing holds key to prosperity
By Henry C K Liu
decades to take effect. The claim that US actions so far are having an impact
on reviving the economy is misleading. The US Congress is up in arms about the
ineffective and misdirected measures taken thus far by the Bush administration,
which had asked and received a blank check of $700 billion to arrest the
crisis. Yet the Bush administration remains unable to find ways to help the
general public directly or even to force banks receiving billions of easy
government money to lend to the needy public.
The US economy has been on a sharp decline since August 2007 with no bottom in
sight. The president's reassuring remarks underscores his detachment from
economic reality. Thus far, every emergency action taken by the Federal Reserve
and the
Treasury without the framework of an overall strategy bought only fleeting
reprieve in the stock market before it continues it steady fall. The Dow Jones
Industrial Average can conceivably fall toward 4,000 before this crisis is
over. All the measures urged by the US on its trade partners were focused on
keeping the international financial system from imminent total meltdown.
Long-range reform has yet to begin. And it cannot begin before a consensus is
reach among trading nations on the true nature of the problem which may not
surface before many more summits. The next summit G-20 is scheduled for April
2009, when the US will be represented by the then president Barack Obama and
his new economic team.
Still, Bush went on to call for long-range reforms to "establish principles for
adapting our financial systems to the "realities of the 21st century
marketplace". Yet what is needed is reform of the lethal "reality" of this
failed market. Still, it is premature to talk about long-range reform when the
full energy and resources of the government are needed to focus on putting out
a raging fire emergency that threatens to destroy the entire financial system.
Bush continues to assert the illusion that "history has shown that the greater
threat to economic prosperity is not too little government involvement in the
market, it is too much government involvement in the market" - to long applause
from the New York audience of business executives. He cited the case of Fannie
Mae and Freddie Mac as an example, notwithstanding that had these
mortgage-guarantee agencies remained government-owned rather than privatized in
1968, their current problem with structured finance would not have surfaced.
The president said: "There is a clear lesson: Our aim should not be more
government - it should be smarter government."
Yet this is a false alternative: smart government is always necessary, big or
small. Anyway, Bush is leaving office with a major part of the financial sector
nationalized for a period that may last decades before they can be privatized
again. Private financial entrepreneurship has been put under emergency house
arrest in the US. Investment banking has totally disappeared from the US
financial landscape, with all investment banks turning themselves into
regulated banks owned by bank-holding entities in order to receive government
bailouts. The net effect of government bailouts has been to keep private
capital off the market.
While admitting that market failures are no longer deniable, and that "voices
from the left and right are equating the free enterprise system with greed and
exploitation and failure", the president continues to argue that "the crisis
was not a failure of the free market system. And the answer is not to try to
reinvent that system". He went on with a standard defense of market capitalism
yet neglected to address the problem that the global financial market cannot be
free without getting rid of currency hegemony.
Showing his ideological conceit, Bush asserts that "free market capitalism is
far more than economic theory. It is the engine of social mobility - the
highway to the American Dream." He cites technological inventions as evidence
of his ideological fixation. It is true that the US socio-economic system has
produced much that benefited mankind, yet inventions are not unique to US
capitalism. Historically, inventions also were made under feudalism, communism
and even fascism. Bush concludes that "today, the success of the world's
largest economies comes from their embrace of free markets".
By now, a case can be easily made with solid evidence that the failure of the
world's market economies comes from their incriminate embrace of unregulated
free markets. Most Americans do not consider it part of the American Dream to
allow executives of failed corporations to walk off with obscene bonuses when
corporations under their management suffer billion in losses that lead to
layoffs of ten of thousand of workers whose hard work had been wasted by
mismanagement.
Brazilian President Luiz Inacio Lula da Silva said after the November 15 White
House Summit that he was gratified emerging countries like Brazil were be given
a role in restructuring the global economy. He also said the Group of Eight
[the US, Japan, Germany, the UK, France, Italy, Canada and Russia] was no
longer relevant in today's globalized world. Indian Prime Minister Manmohan
Singh said the crisis served as proof that countries which were excluded in the
past must be included in the future. Mr Singh added that whatever economic
model be chosen to deal with the current international crisis, it would have to
be genuinely multilateral and reflect the changes in the global economic
reality. It is clear that the emerging economic economies which have for years
been demanding a greater say in international affairs, sense that the time has
finally come to assert their just claim.
In the spirit of cooperation, Chinese President Hu Jintao accepted the US
invitation to the White House meeting and took an active part in the
summit-related activities in a constructive attitude, worked together with all
the parties for the achievement of a pragmatic outcome, and to move the
international community to deal with the global financial crisis in a timely,
comprehensive and effective manner.
Along with other leaders, Hu attended the welcome banquet hosted by Bush for
the participating leaders on the evening of November 14 at the White House; the
summit discussions and the working lunch on November 15; and held bilateral
meetings with the leaders of other countries.
While economic relations between China and the US are of great importance, it
is still only one component of China-US relations in which China seeks a
peaceful and constructive strategic partnership with the US on the basis of
equality and mutual benefit.
Acknowledging that the White House Summit will be critical for the future of
the existing global economy, Hu urged leaders: "When coping with the financial
crisis, the international community should pay particular attention to the
damage of the crisis on developing countries, especially the least developed
countries, and do all it can to minimize the damage."
Hu reaffirmed that China will deepen reform and open wider to the outside
world, deliver steady and relatively fast economic growth, and play a
constructive role in ensuring global economic stability.
"Steady and relatively fast growth in China is in itself an important
contribution to international financial stability and world economic growth,"
he noted, telling other participating leaders that "the Chinese government has
adopted measures to boost economic development, including lowering the required
bank reserve ratio, cutting the deposit and lending rates, and easing the
corporate tax burdens." China has also introduce measures to subsidize and
encourage consumer spending.
"As a responsible member of the international community, China has taken an
active part in international cooperation to deal with the financial crisis and
is playing a positive role in maintaining international financial stability and
promoting development of the world economy. Stability of international
financial markets and sustained development of the global economy are crucial
to the wellbeing of all countries and people," Hu said, calling all to overcome
difficulties through concerted efforts and to contribute to maintaining
international financial stability and promoting global economic growth.
"The international financial crisis has now spread to the entire globe, from
developed countries to emerging markets, and from the financial sector to the
real economy. To effectively deal with the financial crisis, all countries
should strengthen market confidence and intensify coordination and
cooperation," he said.
To deal with the crisis, Hu said major developed countries "should undertake
their due responsibilities and obligations, implement macroeconomic policies
that are conducive to economic and financial stability and growth both at home
and internationally, take active steps to stabilize their own and the
international financial markets and safeguard investors' interests. At the same
time, all should enhance macroeconomic policy coordination, expand economic and
financial information sharing, and deepen cooperation in international
financial regulation so as to create necessary conditions for stability in both
domestic and international markets."
Hu urged the international community to draw lessons from the ongoing financial
crisis and through consultation undertake necessary reform of the international
financial system. "Reform of the international financial system should aim at
establishing a new international financial order that is fair, just, inclusive
and orderly and fostering an institutional environment conducive to sound
global economic development." He called for reform to be conducted in a
comprehensive, balanced, incremental and result-oriented manner to seek a
balance among the interests of all parties. All reform measures should
"contribute to international financial stability and global economic growth as
well as the wellbeing of people in all countries."
To cope with the crisis, President Hu said efforts should be focused on three
aspects:
Effective measures should be adopted to prevent the further spreading of the
crisis and help the market to regain confidence;
Efforts should be made to minimize the adverse impact upon the real economy so
as to avoid a global recession;
Pushing ahead with the reform of international financial systems so as to avoid
the recurrence of similar crises.
Hu said that at present, "the global economy is stalling, instability and
uncertainty are increasing, the situation is serious and complex. All countries
should adjust their macroeconomic policies to stimulate economic growth through
fiscal and monetary means and to control speculative opportunism in energy and
food markets. The international community should reject all forms of trade and
investment protectionism and to complete the Doha round negotiation."
The Doha Development Round is the current trade-negotiation round of the World
Trade Organization (WTO) which commenced in November 2001. Its objective is to
lower trade barriers around the world to increase trade globally. As of 2008,
talks have stalled over major issues of agriculture, industrial tariffs and
not-tariff barriers, services, and trade remedies. The most significant
differences are between developed nations led by the EU, the US and Japan and
the major developing countries led and represented mainly by India, Brazil,
China and South Africa. There is also considerable contention against and
between the EU and the US over maintenance of agricultural subsidies that acts
as trade barriers.
The negotiations collapsed on July 29 over issues of agricultural trade between
the US, India, and China. In particular, there was insoluble disagreement
between India and the United States over the special safeguard mechanism (SSM),
a measure designed to protect poor farmers by allowing countries to impose a
special tariff on certain agricultural goods in the event of an import surge or
price fall.
Hu said that to ensure international financial system reform to adhere to a
comprehensive, balanced, progressive and effective approach, China proposes
four key reform initiatives: 1. Strengthen international cooperation on supervision and regulation of
financial markets to perfect the international supervisory and regulatory
system, to establish a standardized code of conduct for rating agencies,
increase global efforts to monitor capital flows, to expand supervision and
monitor capacity and strengthening regulation over various financial
institutions and intermediaries to improve transparency of financial markets
and their products.
2. Promote international financial architecture reform, decision-making
level and creation process, elevate the representation and voice of developing
countries in international financial organizations, speedily establish a world
wide, especially for the major international finance centers an early warning
system, improve internal control of international financial organizations to
establish timely and high effect crisis rescue process to enhance the ability
of international financial organizations to thoroughly discharge their
responsibilities. 3. Encourage regional financial cooperation to increase flexible mutual
assistance ability, to strengthen regional financial infrastructure to fully
facilitate the effectiveness of regional relief funding.
4. Improve the international currency regime to steadily promote the
steady diversification of the international monetary system to provide the
common support of the stability of the international monetary system.
The four reform initiatives proposed by China broaden significantly the agenda
proposed by the White House Summit, particularly its call for currency
diversification in the international monetary system. A stable exchange rate is
not only beneficial to trade, but it is also fundamentally critical to global
financial stability.
Every financial crisis since the 1971 collapse of the Bretton Woods fixed
exchange-rate regime has been caused by exchange rate instability. Exchange
rate policies cannot be substitutes for structural economic adjustments
necessary for mutually beneficial trade between two economies. Nor can
exchange-rate policies be substitutes for sound domestic monetary or economic
policy. Above all, the international monetary regime must be free from currency
hegemony which distorts the cross-border flow of funds and restricts the use of
sovereign credit for financing domestic development.
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