The Global Bailout Plan

Spring 2009
Final Research Essays

Article 12 of 12

“The World is flat.” Global communication, due to fiber optics and the Internet, is faster and more efficient than at any other time in history. Today’s world is globally integrated to a tremendous extent, making simultaneous contact with people in all corners of the globe feasible. This has led to unprecedented levels of financial and economic collaboration between countries. Unfortunately, this “flattening” of the world has also contributed to the international financial crisis the global economy is in today. While the problem may find its roots in the sub-prime mortgage failures of the United States, today’s levels of global integration has made this a world crisis. Numerous world economies find themselves in recession, including the traditionally powerful economies of the United States and Japan. The dollar is weakening daily, causing dangerous currency fluctuations. Oil prices are fluctuating and the price for food has soared since 2007. Millions of people are finding it to hard to obtain credit to make big-ticket purchases of cars and homes. Poverty and unemployment rates are increasing drastically in countries around the globe. The world is experiencing its worst financial crisis since the collapse of the Asian markets in the late 1990’s. Some argue that each country needs to solve their own problems nationally and this crisis will play itself out. However, we cannot go about fixing the current financial crisis as individual nations.  The crisis must be addressed as the single globalized world that exists today. A collaborative global strategy, involving developed economies and emerging markets, is imperative to instill balance and stability into the financial system to ensure future economic prosperity.

National Debt Reduction

Reducing or eliminating the national debts of countries must become a top priority in finding a solution to the current financial crisis. While it is true that credit is an important economic tool in financing development and growth, many nations find themselves with debts that are impossible to repay. The United States, the most powerful economy in the world, has accumulated approximately $10 trillion in national debt as a result of a massive trade deficit, numerous wars, and rescue bailouts of failing financial institution. These debts can bury nations with weaker economies, making it impossible to fund economic development and expansion. As a result, defaulting countries are unable to raise capital to repay loans to creditors. Lending nations and institutions are forced to suffer the losses, and consequently, tighten up their lending practices. Then when an emerging third world country seeks credit to fund economic development, loans are nowhere to be found. This cycle makes it nearly impossible for developing nations to obtain credit. Lending nations are afraid to incur losses in potentially bad investments, which can lead to a recessionary economic trend.

Working to reduce national debts will allow countries to fund economic development through revenues and not through credit. While the transition will not be overnight, it will serve as a tremendous boost to the global economy. According to blogger, Anup Shah, the International Monetary Fund can work to reduce debts by introducing a country bankruptcy code (1). The code would allow for the regulated debt restructuring of nations declaring bankruptcy. Such a code would establish regulations as to how much money creditors will receive and in what amount of time. Interest rates can be lowered to ensure easier debt repayment. Bankrupt countries would be able to continue to operate effectively as their debt was restructured formally, ensuring anarchy does not arise. These regulations also encourage more investment in third world and developing nations by reducing some of the rick in such an investment. A bankruptcy code would ensure that countries such as the United States and China would still obtain returns on investments in developing nations such as Nigeria or Mexico. Countries funded by debt cannot hope to be a player in financial markets on a global scale. Instead, if nations can collaborate to eliminate debt between countries, it enables the development of third world nations and opens up the global economy to more players. The expansion of the global economy to include more nations will bring about stability with the new levels of expertise and capital.

Subsequently, reducing national debts allows for investment in third world and developing countries as a result of more discretionary capital. Financing the development of third world countries is vital to a more stable global economy. These developing countries are being hit hard by the current global recession. Overall, there has been a severe decrease in capital inflows to developing countries (Rojas-Suarez 1). African nations are being asked to repay loans but have no source of revenue to do so. Asian markets are suffering from less demand for exports. Latin America has seen significantly less economic growth than projected for 2008 (Shah 1). The current financial crisis has led to steady increases in poverty and unemployment in these nations as social programs and infrastructure are being cut. The United States’ attempt to strengthen the dollar by increasing interest rates has served to devastate developing nations with currencies pegged to the dollar (Shah 1). The continued failure of these developing nations would be devastating to any attempted economic recovery from the current recession.

Investment in the Developing World

In order to successfully stimulate this new global economy, investments in third world and developing nations must be made to prevent their failure. The most effective foreign investment in developing nations is in infrastructure development. A fully developed national infrastructure is essential to the economic well being of nations. Investments in infrastructure would allow third world nations the luxuries of developed nations, such as functional utilities, a developed manufacturing sector, and effective means of transportation. An effective infrastructure would improve upon existing industries and greatly increase the gross domestic product of developing nations. Unemployment and poverty continue to plague developing nations because of a lack of jobs and job security. However, infrastructure development would create millions of jobs. New jobs would increase the purchasing power of citizens in third world countries, flooding their economies with demand for commodities and increasing their ability to create quality, affordable goods. This would allow developing nations to compete more effectively on a global scale, as well as providing stability to an ailing global economy. Nations that are able to make such investments must do so or these potential economic benefits cannot be reaped. If economically sound nations continue to allow troubled countries to fail, an economic stimulus will be impossible. While it is true that the risk involved with investments in developing nations has historically been high, these investments are vital to an economic recovery. Furthermore, political and military implications could arise in these nations as a result of economic collapse, creating an unstable and dangerous global environment. Political uprisings would devastate any attempts at economic development within a nation, while discouraging foreign investments. Without foreign investment, third world countries cannot build formidable infrastructures and expand economically. Foreign infrastructural investment in developing countries will allow these nations to compete globally, pulling millions of people out of poverty and providing a positive stimulus to a recessionary globalized economy.

Global Financial Reform

In addition, reforming the international financial system as a whole has become necessary to induce an economic recovery and ensure a more stable global economy. More countries have to play significant roles in the global economy, and many feel they are entitled to that. Many Asian nations, such as China and Japan, are “flexing their muscle” globally to show that they mean business. They are approaching the European Union with proposals for a joint venture in response to the financial crisis, hoping to be on the forefront of global financial policy-making. Elevating the status of emerging nations to the frontlines of globalization and the global economy will create a more stable economy. The increase in expertise, opinions, and capital will help to keep the global economy prosperous and successful, and will work to maintain success.

Moreover, credit rating agencies are in desperate need of reform. One reason for the crisis that exists today was the failure of these institutions to correctly calculate risk associated with loans given out by financial institutions, leading to the sub-prime mortgage crisis (Smick 123). Credit rating agencies must be more strictly regulated. Improving their ability to assess risk in lending and investment will create a safer, more stable economic environment. To do so, governments must instill incentives for agencies to perform well (Smick 123). The success rate of a credit rating agency can be tied directly to a corporate tax break from the governing country, providing motivation for better research and analysis within credit rating institutions. These tax breaks would garner more accurate ratings for creditors to use, allowing for safer lending practices and a decrease in loan defaults. Since the financial crisis resulted from faulty credit ratings for mortgage applicants, improving the credit agencies that provide these ratings would be vastly beneficial to the global economy.

French President Nicolas Sarkozy has made it well known that the World Bank and the International Monetary Fund, the two governing financial bodies of the world, need reform, and he is correct. The missions of these institutions have grown outdated. The World Bank’s mission to combat global poverty has played itself out. While reducing poverty is important to an economic recovery, it is the current financial system that allowed for staggering rates of poverty to exist in the first place. Instead, the World Bank can allocate its resources towards vaccine and alternative energy research (Einhorn 1). Investments by the World Bank in those arenas would help to bring about two of the most economically promising possibilities in today’s world. Both are sure to be trillion dollar industries if successful inventions come to fruition. However, no institution has ever put a significant enough amount of money into research and development, due to the perceived risk in both. Not only would money from the WB aid in research, but it will also encourage other institutions to follow suit and invest in vaccine and alternative fuel research and development. Additionally, the World Bank can cut down third world countries’ reliance on its funds by phasing out their loaning practices over a period of years. For example, it can eliminate its 15-year lending initiatives in 10 years in 2018, eradicating all of its loans in by 2033 (Einhorn 1). This, in effect, would give developing countries, such as Vietnam and Brazil, a deadline for self-sustainable commercial development. These countries would be forced to invest in infrastructure and development, enabling them to be self-sufficient and economically sound.

Furthermore, reform of the International Monetary Fund is necessary in lieu of the current financial downturn. The IMF must redistribute their quota shares to compensate for emerging markets (Stiglitz 1). Many developing nations do not hold much weight within the institution due to their lack of quota shares. A redistribution of voting power would align the IMF with the newly globalized economy more effectively so that it may deal with problems with more diverse opinions and better information (Kenen 3). Asian countries are a large proponent of this because they believe they are underrepresented in global financial institutions. Empowering the emerging markets in Asia would vastly expand on the world’s source of capital and financial expertise. The IMF must work to eliminate the stigma that if countries go under, or a nation makes a bad investment, that they will be bailed out. This institution can no longer be a safety net for nations; it must be an instrument to promote economic growth and stability. The Fund can establish new regulations regarding their lending practices to prevent countries from implementing superfluous fiscal policies. By increasing the interest rates on loans, the IMF will discourage countries from seeking the Fund’s credit and encourage nations to develop their own self-sufficient sources of revenue. Also, the IMF must not allow member nations to implement protectionist policies. Embargos and tariffs discourage trade between nations and reduce investment in developing nations. These policies must be abolished in favor of an open trade agreement to stimulate the ailing economy. Free trade agreements such as NAFTA and the Latin American Pacific Arc have been tremendously successful, allowing member economies to expand without being hindered by protective tariffs. Reducing global tariffs, or eliminating them altogether, would stimulate more trade between nations and a more steady flow of capital. Investments will increase and transparency of assets in the global market will increase. All of this leads to an economic boost, desperately needed in the wake of the sub-prime mortgage crisis. Reforming the World Bank and the International Monetary Fund to implement more appropriate policies for today’s recessionary economy would provide an effective universal set of regulations and stimulate global economic interaction and growth.

Alternative Energy Development

The most effective and important method for stimulating our recessionary economy is in alternative energies. Reliance on oil has been a damper to economic development since the Industrial Revolution. During the summer months of 2008, oil prices hit $140 a barrel, the highest ever (Friedman 72). The world empowers oil cartels such as OPEC to tremendous sums of money as a result of its dependence upon their oils. OPEC holds an immense amount of economic influence because they hold the key to the functioning of all economies-oil. Therefore, if OPEC feels it has been wronged in any way, they stop production and raise their prices. Western economies are forced to pay the exorbitant sums to fuel their countries, or the financial system shuts down. Nations must collaborate to end the monopolistic practices of OPEC by eliminating dependence on oil. Oil revenues often times contribute to the same forces that are trying to eradicate western influence in the Middle East. The developed world’s reliance on oil has funded the radical Islam sect that has terrorized many parts of the globe for decades. The Institute for the Analysis of Global Security has said that “if not for the west’s oil money, most Gulf States would not have had the wealth that allowed them to invest so much in arms procurement and sponsor terrorist organizations” (Friedman 91). Terrorism has a tremendous economic impact, as the United States saw after 9/11 when the stock market suffered its largest single day loss ever. Also, in countries dependent on the sale of oil, democratization, true capitalism, and freedom tend to be subdued or non-existent. This trend has existed in areas like Russia and Latin America, where human rights violations continue to plague the nations’ citizens. Thomas Friedman, New York Times columnist and three-time Pulitzer Prize winner, attributes this to what he calls the “First Law of Petropolitics.” He writes, “As the price of oil goes up, the pace of freedom goes down; and as the price of oil goes down, the pace of freedom goes up” (Friedman 80). Oil-producing nations limit civil rights, and repudiate the entrepreneurial spirit that built today’s globalized economy. Without entrepreneurship, rapid economic growth will not occur, subduing the potential for innovation and improvement in the global economy. The economic influence of OPEC and other oil-producing nations must be eradicated by investing considerable sums of capital into alternative fuel research and development.

Regrettably, the burning of fossil fuels is also having adverse effects on the environment. Agriculture is slumping as the average temperature of the Earth is increasing, altering ecosystems and causing changing weather patterns. Extinctions are occurring at 1000 times the natural rate, and sea levels are rising due to melting polar ice caps. This is due to the release of greenhouse gases during the burning of oil, coal, and natural gas. The deterioration of the global environment will have devastating effects on the economy, as agricultural economies suffer huge losses. Certain livestock will be unable to feed as grasses die out in pastures due to increased temperatures. Forest fires have become more prevalent as the Earth has heated, causing millions of dollars of damage as they burn. Biofuel research will come to a screeching halt as suitable areas for growing such possibilities as corn and palm trees diminish on the Earth’s surface. The food source of the human race will decrease as the population of the planet increases, leading to food wars in under-developed nations. The research and development of massive scale, clean energy sources will help to reduce the effects of global warming on agriculture and reinvigorate vanishing ecosystems.

However, the development and implementation of effective alternative energy sources within a few years is not feasible. To counteract this, steps must be taken now to reduce the carbon output of nations around the world. The first step has been taken by many nations when they signed the Kyoto Protocol. This conference called for a 5.2% reduction in greenhouse gas, primarily carbon dioxide, methane, and nitrous oxide, emissions of member countries by 2012 (Kyoto Protocol 1). Unfortunately, this reduction is not ambitious enough to reduce the authority of OPEC and better the global climate condition. A more effective approach would be the adoption of a hybrid system of cap and trade permits, carbon taxes, and an international climate control governing body. National governments should levy a tax based on the carbon output of individuals and corporations. Such a tax would discourage the unnecessary and excessive use of energy, reducing the need for fossil fuels to run utility centers and factories. Companies would be forced to run more efficiently to avoid a heavy carbon tax, beneficial to the company as well as the economy as a whole. Moreover, a system of “carbon permits” should be introduced to combat greenhouse gas emission. These permits would set a limit on the poundage of carbon a corporation can emit in a certain length of time. As the system progresses, the number of permits issued should be lessened as well as the amount of carbon allowed by each permit (McKibbin, Morris, and Wilcoxen 5). This will serve to phase out greenhouse gas emissions, as well as encourage businesses to research and develop cleaner energy alternatives and practices to run a more efficient business. Permits would be tradable between corporations, as some might reduce carbon emissions much quicker than others. “Clean” corporations would not be forced to buy a scarcely used permit; they would have the option of selling it to a less efficient, “dirtier” company (McKibbin, Morris, and Wilcoxen 5). However, permits cannot be traded between corporations of different countries. To prevent shocks to the system as a whole, these cap and trade permits must be contained nationally so if one country’s system fails, the entire system does not fall into disarray (McKibbin, Morris, and Wilcoxen 6). An international governing body would also be set up to monitor the trading of permits, as well as the true carbon emissions of these corporations. Without such a body the entire system would fail, as companies would disregard the permits and continue to operate “dirty” as they do now. While this is a feasible solution in the near future, it cannot be a permanent one.

The real solution to the economic crisis with relation to energy is in alternative, clean fuel sources. Lois Quam, the managing director of alternative investments at Piper Jaffray, proclaims that “the green economy is poised to be the mother of all markets, the economic investment opportunity of a lifetime, because it has become so fundamental” (Friedman 172).  Investment in alternative fuels is not only necessary; it is a viable option for a tremendous economic boost to the global financial system. The potential revenues in alternative, cheap energy sources would be vast, as countries and large corporations would shell out trillions of dollars for an effective option. However, the investment capital has not been enough to fund an effective research and development venture into alternative energies. Wind and solar power are still too expensive and inefficient to become a viable option as they stand now. Nations need to collaborate on an expansive effort to make these options workable on a global scale. The money saved on oil will number well into the trillions, not to mention the tremendous impact on the climate of a cleaner energy source. Additionally, clean energy will enable billions of people access to cheap and reliable energy. The world’s poorest today live without electricity, or unreliable access to it. By developing cleaner, cheaper energy, disadvantaged populations all over the world will be able to achieve more economic prosperity and become contributors, not inhibitors, to the good health of the global economy. The implementation of clean energy will also create millions of jobs. The infrastructure necessary to build and run new energy facilities will require a vast amount of new employees, creating an additional economic stimulus. The development of clean, cheap alternative energy sources would provide a tremendous boost to an ailing global economy and lay the foundation for sustainable global prosperity.

Conclusion

The global economy is experiencing unprecedented times. Consequently, it requires unprecedented levels of global integration and collaboration to repair a failing financial system. Today, global cooperation cannot be desirable, it must be imperative, or the world runs the risk of a historic economic meltdown. National debts must be reduced to encourage safer investments in developing nations. The two largest financial institutions in the world, the World Bank and the IMF, must be reformed to create and lead a new globalized economy, not fix and repair an ailing one. The development of alternative energies must occur to deter reliance on fossil fuels and enable billions of people access to clean and cheap energy. All of these add up to an economic stimulus that could pull the world out of the deepening recession it is experiencing now. Not only do they promise to reboot our economy, but also set the foundation for a time of prolonged global economic prosperity like the world has never experienced before.

Bauman, Yoram. Paradigms and the Porter Hypothesis. Rep.No. 28 Jan. 2004. 2 Dec. 2008 <http://smallparty.org/yoram/research/porter.pdf>.

Einhorn, Jessica. "Reforming the World Bank." Foreign Affairs. Jan.-Feb. 2006. Council on Foreign Relations. 2 Dec. 2008 <http://fullaccess.foreignaffairs.org/20060101facomment85103/jessica-einhorn/reforming-the-world-bank.html>.

Friedman, Thomas L. Hot, Flat, and Crowded : Why We Need a Green Revolution and How It Can Renew America. New York: Farrar, Straus & Giroux, 2008.

"Global Financial Crisis 2008." FT.com. Financial Times. 2 Dec. 2008 <http://www.ft.com/indepth/global-financial-crisis>.

Gokhale, Jagadeesh. "Long-Term Implications of the Financial Crisis." 14 Oct. 2008. Cato Institute. 2 Dec. 2008 <http://www.cato.org/pub_display.php?pub_id=9726>.

Kanaan, Taher, and Nader Kabbani. "Global Economic Crisis: Mixed Forecasts for Jordan and Syria." Interview with Navtej Dhillon. Brookings.edu. 1 Dec. 2008. Brookings Institution. 2 Dec. 2008 <http://www.brookings.edu/interviews/2008/1201_jordan_syria_dhillon.aspx>.

Kenen, Peter B. Reform of the International Monetary Fund. Rep.No. 29. Council on Foreign Relations. May 2007. 2 Dec. 2008 <http://www.cfr.org/content/publications/attachments/imf_csr29.pdf>.

Krugman, Paul. "What to Do." Review. 18 Dec. 2008. New York Review of Books. 2 Dec. 2008 <http://www.nybooks.com/articles/22151?>.

Kyoto Protocol. 2 Dec. 2008 <http://www.kyotoprotocol.com>.

Madslien, Jorn. "IMF and World Bank: Is Reform Underway?" 22 July 2004. BBC News. 2 Dec. 2008 <http://news.bbc.co.uk/1/hi/business/3914961.stm>.

McKibben, Warwick J., Adele C. Morris, and Peter J. Wilcoxen. Working paper No. 28. Global Economy and Development, Brookings Institution. Nov. 2008. Brookings Institution. 2 Dec. 2008 <http://www.brookings.edu/~/media/files/rc/papers/2008/11_climate_change_morris/11_climate_change_morris.pdf>.

Rahn, Richard W. "What is Economic Stimulus." The Washington Times 3 Dec. 2008. 3 Dec. 2008. Cato Institute. 2 Dec. 2008 <http://www.cato.org/pub_display.php?pub_id=9816>.

Rana, Madhukar. "The Global Financial Crisis: Its Economic Impact on Nepal." TelegraphNepal.com. 12 Nov. 2008. 2 Dec. 2008 <http://www.telegraphnepal.com/news_det.php?news_id=4349>.

Rojas-Suarez, Liliana. "U.S. Financial Crisis Will Mean Slower Growth, Rising Inequality in Developing World." Global Development: Views from the Center. 22 Sept. 2008. Center for Global Development. 2 Dec. 2008 <http://blogs.cgdev.org/globaldevelopment/2008/09/us_financial_crisis_will_mean.php>.

Shah, Anup. "Global Financial Crisis 2008." Global Issues. 7 Dec. 2008. 7 Dec. 2008 <http://www.globalissues.org/article/768/global-financial-crisis>.

Smick, David M. The World Is Curved. New York City, NY: Portfolio, 2008. 1-275.

Soros, George. "The Crisis and What to do About It." Review. 4 Dec. 2008. New York Review of Books. 2 Dec. 2008 <http://www.nybooks.com/articles/22113?>.

Stiglitz, Joseph. "Global Crisis--Made in America." Spiegel Online International. 12 Nov. 2008. 2 Dec. 2008 <http://www.spiegel.de/international/business/0,1518,590028,00.html>.

Uchitelle, Louis. "Crash Course: Just What's Driving the Crisis in Emerging Markets." 29 Jan. 1999.New York Times.2 Dec. 2008 <http://www.nytimes.com/library/world/global/012999econ-crises.html>.

"World Bank to Help Mitigate Impact of Global Financial Crisis on Africa’s Development." 19 Nov. 2008. The World Bank. 2 Dec. 2008 <http://web.worldbank.org/wbsite/external/countries/africaext/0,,contentmdk:21984811~pagepk:146736~pipk:146830~thesitepk:258644,00.html>.

Xepapadeas, Anastasios, and Art De Zeeuw. Journal of Economics and Management. 20 Oct. 2008. 2 Dec. 2008 <http://www.cserge.ucl.ac.uk/xepapadeas%201999.pdf>.