Tackling the global economic and environmental crises

The immediate causes of the global economic crisis lie in the US banking system, but the longer term causes arise from policies implemented by governments around the world over the last thirty years.

Community leaders in the Solomons meet to share ideas for community training & development projects.

Called neoliberalism, or the Washington Consensus, these policies removed social regulation, redistributed income to the rich, promoted huge growth in both corporate and consumer debt and contributed to global warming and other environmental damage. They assumed that economic growth could be endless, ignoring the history of boom and bust cycles in market economies. Global inequality also increased, with over two billion people now living on less than US$2 per day.

In developed countries, governments cut company taxes, wealth taxes and income taxes for high income earners, but introduced consumption taxes which hit the poor, who have to spend most of their small income on basic necessities - leaving little, if anything, to save. Governments cut spending on health, education and welfare, and privatised many services. In Australia, legislation like Work Choices reduced basic working standards. The International Monetary Fund (IMF) and the World Bank then forced these policies onto developing countries in return for loans.

The justification was that benefits would "trickle down" to lower income groups. In fact, these policies fostered a culture and practice of greed which undermined community values and increased inequality.

Furthermore, privatisation and deregulation of banks created giant global banks focused only on short-term profits. The finance sector grew much faster than the rest of the economy, driven by corporate and consumer debt. Falling real wages and casualisation of labour, especially in the US, meant that living in debt was often the only option for low income earners.

A critical factor of the crisis was the massive growth of high risk or sub-prime mortgage loans in the US housing market, which began after interest rates fell in 2001. Millions of low income Americans had no access to affordable housing as the government cut public housing programs.

US banks offered mortgages to low income people at initially low interest rates. But hidden in the fine print was a shift to higher rates that they could not afford. The banks gambled that rising house prices would cover the cost of defaults. By 2008, sub-prime loans were 20% of the US housing market.

The banks then converted the risky loans into securities, which were rated as safe investments by ratings agencies and sold globally. This created contaminated time bombs in the global financial system.

As the higher interest rates kicked in over 2007-8, millions defaulted, leading to sharp falls in US house prices. Families were left homeless as their houses were sold.

Ratings agencies then downgraded the value of the banks' securities. Banks and other investors suffered huge losses, leading to collapses. Banks stopped lending to each other and to their customers. Share markets plunged in value, leading to losses for superannuation schemes and retirement incomes.

Globally, we are now in a deep economic recession, with falling production and rising unemployment and predictions worsening on a weekly basis. In 2008, global production fell by 6%. In 2009, global trade flows are predicted to fall by 9%, and global job losses are now predicted to hit 200 million.

Given the inequalities of wealth and power in the global trade system, the impacts of the global crisis are hitting developing countries hard, but in varying ways. Many of the poorest countries are net importers of food, and suffered badly from food price rises in 2007-8. Others which export commodities or manufactured goods have seen both demand and prices fall.

As unemployment rises around the world, temporary migrant workers are losing their jobs, adding to poverty and unemployment in their home countries. Nations which are dependent on aid for essential public expenditure may face cuts in that aid as richer countries tighten their purse strings.

The crisis has undermined neoliberalism and the myth of self-regulating markets. Governments are now discussing how, not whether, to regulate markets and use government spending to create jobs and maintain consumer demand, at national and global levels.

Unions are advocating that the crisis is an opportunity to reject neoliberalism and regulate the global financial and trading system so that they support, not undermine, social and environmental goals. Governments should not simply rescue banks and reward greed, but must actively reshape the financial system and prioritise support for low income people. This would mean fundamental changes in the policies of the IMF, the World Bank and the World Trade Organisation (WTO), to support genuine development and fair trade. Governments must invest in job creation in health, education, public transport, energy conservation and renewable energy. For details on these policies see the Global Unions London declaration to the G20 summit, April 2009, found at www.ituc-csi.org

© Union Aid Abroad - APHEDA 2003.

Last Modified: Tuesday, 12-May-2009 16:36:29 EST
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