Worst recession in 100 years?

Martin KHOR

Britain premier Gordon Brown's closest economics advisor warned that the world is facing its worst recession in a hundred years, thus implying it will be worse than the Great Depression of the 1930s.

It was the bleakest scenario yet painted by a senior member of the Western establishment. And in this scenario, the effects of the recession will last 15 years.

The author of this is Ed Balls, one of Brown's closest allies and confidants. He is a senior minister in charge of schools, and for many years had he been the chief economic advisor of the UK Treasury, when Brown was Chancellor.

Speaking at a Labour Party conference in the first week of February, Balls said: "The reality is that this is becoming the most serious global recession for, I'm sure, over 100 years, as it will turn out."

He warned that events worldwide were moving at a "speed, pace and ferocity which none of us have seen before" and banks were losing cash on a "scale that nobody believed possible".

He admitted that financial regulators had failed, saying: "People are quite right to say that financial regulation wasn't tough enough in Britain and around the world, that regulators misunderstood and did not see the nature of the risks of the dangers being run in our financial institutions - absolutely right."

He described the financial crisis as worse than the one in the 1930s and hinted that the far right could gain ground, as they did then.

"The economy is going to define our politics in this region and in Britain in the next year, the next five years, the next 10, and even the next 15 years," said Balls. "These are seismic events that are going to change the political landscape.

"I think this is a financial crisis more extreme and more serious than that of the 1930s, and we all remember how the politics of that era were shaped by the economy."

Balls' comments caused quite a lot of alarm because Brown had been trying to give the impression the government had things under control, even as bad news was emerging about big losses in banks, the latest being Lloyds.

There is speculation that Balls has inside information on how very bad the situation is, which the British government has not yet made known to the public.

The UK Financial Services Authority also gave a warning, but milder, that the recession "may be deeper and more prolonged than expected", and added that the global financial system had "suffered its greatest crisis in more than 70 years".

A meeting was held from 13-14 February in Rome attended by the finance ministers and Central Bank governors of the Group of Seven leading industrial countries to discuss the crisis.

Their statement at the end of the meeting did not contain anything new on measures to manage the crisis. News reports indicate that one major issue in the discussion was the need to prevent protectionist measures, since such measures in one country could lead to retaliation from others.

Accordingly, the statement pledged that "the G7 remains committed to avoiding protectionist measures, which would only exacerbate the downturn, to refraining from raising new barriers, and to working towards a quick and ambitious conclusion of the Doha round".

But while the G7 Ministers pledged to avoid protectionism, a few of their countries were in fact taking protectionist measures.

Meanwhile France announced bailout loans to its motorcar companies, and tied these to their maintaining production and jobs in France, thereby rousing anger from the Czech Republic which now fears that the French car companies' factories in the country may retrench workers or even close. The bigger worry, however, is the US$787bill fiscal stimulus package passed by the US Congress on 13 February.

The bill, which was subsequently signed by President Barack Obama, stipulates that none of the funds appropriated may be used for public works projects "unless all of the iron, steel, and manufactured goods used in the project are produced in the United States".

When a draft of the bill containing this clause was made known, it led to protests from political leaders in Europe and Canada.

President Obama promised that the bill would be amended to avoid protectionism. The final bill adds this line: "This section shall be applied in a manner consistent with US obligations under international agreements."

This is taken to mean that the buy-American principle would not be implemented if it violates rules in the World Trade Organisation or in free trade agreements that the US has signed.

However, there is cold comfort in this because the WTO's multilateral rules do not forbid a country from having measures requiring that spending by the government on its projects should be on locally produced goods and services.

There is a plurilateral agreement on government procurement in the WTO that obliges those who are members to allow the imported products or services from other members to benefit from government spending.

The United States is a member of this agreement, thus it has to allow fellow members to bid for projects under its stimulus package. But there are only a few other members, and almost all of them are from developed countries.

Developing countries will thus not be able to profit much from the expanded government expenditure in the stimulus program, since almost no developing country has signed the WTO's procurement agreement.

- Third World Network Features

The writer is Director of the Third World Network