Dr. Lopez Claros, international economist, examines financial crisis and implications for global governance

Dr. Lopez Claros, international economist, examines financial crisis and implications for global governance

Dr. Augusto Lopez-Claros

Dr. Augusto Lopez-Claros, an international economist and a member of the Baha’i community, gave a lunch-time talk at the BIC, examining the global financial crisis and its implications for global governance. The crisis in the financial system, which experienced fifty years of economic growth, has led to widespread questioning of the sustainability of our economic system. In an article for the Financial Times (11 March 2009), economist Amartya Sen argued that the question is "not so much about the end of capitalism as about the nature of capitalism and the need for change." Sen highlighted that Adam Smith talked about the importance of "broader values for the choice of behavior, as well as the importance of institutions." Dr. Lopez-Claros went on to address weaknesses in the financial sector; new challenges arising from the crisis; current mechanisms for international cooperation, and future prospects for global governance.

Addressing Financial Sector Weaknesses

The financial crisis exposed underlying weaknesses in the financial sector. Among them: flawed regulation of banking institutions and too little regulation of the shadow banking system (such as investment banks and hedge funds). The focus, however, should not be on regulating only the banks but rather—as noted by the IMF—"all activities that pose economy-wide risks." This means that insurance companies and institutions selling mortgages should also be "covered and known to a systemic stability regulator with wide powers." Such powers would, for example, extend to disclosure requirements and discouraging the emergence of mega-banks. However, Dr. Lopez-Claros cautioned, there is a real danger that financial sector weaknesses will not be adequately rectified, leaving the door open for future crises. Vested interests are hard at work to prevent many reform proposals. Also, as the crisis abates and other topics rise to the top of the political agenda, more "exciting" topics may be at the forefront of people’s minds.

New Challenges

In the second part of his talk, Dr. Claros explained how the crisis has given rise to a new set of challenges. The first of these is the question of fiscal sustainability. Countries incur large fiscal deficits to bail out their financial institutions and stimulate their economies. High levels of public debt constrain government policy (as they are less able to invest in areas such as education and infrastructure) and weaken the governments’ ability to respond to future economic crises. This situation is exacerbated by a further challenge facing many of the larger economies—namely ageing populations and low fertility rates that threaten the sustainability of pension systems. Governments that borrow heavily to stimulate the market risk undermining their credibility, causing investors to leave. Governments should therefore invest carefully, in areas such as infrastructure and environmental protection and conservation.

Outdated Mechanisms for International Cooperation

Existing mechanisms for international cooperation, as many have noted, have proven entirely inadequate for the global challenges that we face. This includes financial challenges, but also climate change, growing income disparities, massive violations of human rights, uneven distribution of benefits of international trade, terrorism, and so on. These major planetary problems are being neglected because we do not have institutions that are strong enough to deal with them—all leading to a crisis of governance. Existing mechanisms do many good things, but they are not capable of solving the problems at hand: treaties are too slow to address urgent problems; international conferences raise awareness but lack adequate follow-up mechanisms; UN agencies are under-resourced; and the G7 and G20 lack global legitimacy.

The financial crisis has highlighted the need for an international institutional infrastructure. Some, such as Gideon Rachman (in a Financial Times article, 9 December 2008) see in the financial crisis the possibility—even the plausibility—of something more than just cooperation between countries, of some form of a world government. However, notes Dr. Lopez-Claros, it is unlikely that we will see a quick move in this direction. At the moment, governments seem more inclined to try to recreate the conditions of 2003-2007 than to move in the direction of better mechanisms of governance. As seen by the establishment of international cooperation in the 20th century, it may be necessary for humanity to collectively experience the full extent of the shortcomings of the current economic and political system. Yet, the future may hold many surprises (such as the unknown consequences of climate change), among them major changes in human priorities, values, and consciousness.