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Statement on the global financial crisis

14 November 2008

A call for a new international financial architecture

The World Council of Churches and the overall ecumenical family are deeply concerned with the current global financial system which has continued to generate poverty and create massive unemployment. On November 15 the leaders of 20 nations and the major multilateral financial institutions will gather behind closed doors in Washington, D.C. to attempt to fix the current crisis by remaking the rules of global finance. This group includes many of the people, governments and institutions whose policies are responsible for the current financial meltdown. It has been dubbed "Bretton Woods II". The WCC is concerned about the effectiveness of such a meeting limited to a small portion of the world's countries, when the issue involves drawing up a new financial architecture in the 21st century.

The crises that accentuate the current global financial system (debt crisis, sub-prime mortgage crisis, currency crisis, banking crisis and capital market crashes) have now been particularly severe in industrial countries while their effect is spreading rapidly to developing countries. The US economy contracted by 0.3 percent between July and September, the biggest drop in GDP since 2001. For the first time in 16 years, the UK's gross domestic product sank by 0.5 percent during the same period. Germany is now officially in recession and the rest of the Euro-zone countries and Japan are thought to be already in recession.

Consumer spending in major economies is down sharply, while unemployment is up. The US shed 760,000 jobs in the first nine months of the year, while 164,000 people lost their jobs in the UK between June and August. These figures are expected to rise, and many other OECD countries are also bracing for significant job losses. According to the UN general secretary, this crisis is threatening the achievement of the Millennium development goals that calls for 16 billion US dollars. Efforts to avert climate change and financing for development are now in danger of reduced financing. This global crisis demands participation of all, not only a few, governments.

This problem has resulted into a variety of inconclusive debates on how to bring about an international financial reform. The industrial countries continued to define austerity measures as a panacea for poor countries instead of addressing the failure of the whole system. This was a time when the industrial countries remained stable and prosperous. The time has come now to address this issue seriously. Economists differ regarding the causes but it is a fact that history is punctuated by financial crises while the evolution of the international regulatory framework has not kept pace with the globalization of financial markets. In other words, the fact that the industrial countries were secure should neither deter efforts for drawing a global regulatory framework nor give an impression that industrial countries will regain their prosperity and be secure with mere cosmetic short term reforms while global financial inequality is ignored and left to be solved by markets alone.

The ambition of the upcoming G20 meeting is rather low. With the host of the meeting leaving the White House in January, a divergence of perspectives on what should be done to fix the financial crisis, and the lack of solid and inspiring proposals on how to reform the financial system, a 5-hour meeting could at best be a crisis management summit. It is therefore unlikely that the G20 meeting will effectively address the questions; it is more likely that the meeting will result in further inadequate actions by financial institutions that fail to deal with financial volatility, nor will they succeed in designing guidelines for just and stable system for all countries and peoples.  The WCC has always called for the need for a financial architecture which will qualitatively regulate the growth in massive movements of capital. To achieve this change, a solid process that takes on board all global actors and civil society is imperative. Civil society groups and many governments have called for a process that is much more inclusive of other nations and the peoples of those nations. 

The Need for a New International Financial Architecture 

The global financial meltdown - with the U.S economy at its epicentre - has , more than anything else, debunked the neo-liberal economic myth that deregulated financial markets are "efficient". In 2005, the WCC background document on Alternative Globalization Addressing People and Earth (AGAPE) observed: "No international financial institution…is able or willing to control the USD 1.9 trillion worth of currencies that are traded everyday. Financial speculation dominates trade in goods and services, diverting resources from long-term productive investments and areas of greatest need. Financial markets are also increasingly unstable, with speculative bubbles and financial crises." The problems of external debt and capital flight as well as the recent bail out of troubled banks and insurance institutions in the US and Europe- an amount exceeding that needed to eradicate poverty around the world, make exceedingly clear that the prevailing international financial system is one based on injustice: it is a system wherein the global poor are essentially subsidizing the rich. It also imperils previous international pledges of financial support for addressing the food crisis and climate change mitigation and adaptation in poor countries. It is therefore patent that nothing less than a paradigm shift is needed.

Our churches and the wider ecumenical family are called to intensify their advocacy work at various levels calling their governments to push for a new international financial architecture. Such a process should be inclusive observing the following proposals:

  • Debates on new financial architecture should include representatives of all developing countries and members from the civil society including religious communities;

  • Deter excessive, destabilizing currency speculation by strengthening regulatory institutions;

  • Give national and regional central banks more control over monetary policy;

  • Develop a multilateral approach on common standards to define the tax base to minimize tax avoidance opportunities for both transnational corporations (TNCs) and international investors;

  • Establish a multilateral agreement to allow states to tax TNCs on a global unitary basis, with appropriate mechanisms to allocate tax revenues internationally;

  • Support for the proposal for an International Convention to facilitate the recovery and repatriation of funds illegally appropriated from national treasury of poor countries;

  • Creatively, with the civil society and faith communities, work out an innovative system in which justice can be central in all global financial transactions.

  • Create, within the auspices of the UN an arbitration mechanism to resolve problems of debt.

  • Apply a Currency Transaction Tax to curb short-term volatility of capital movements and exchange rates.

  • Set a process of democratizing all global finance and trade institutions.

The search for international solutions for the unjust financial system could be complemented by national efforts to control financial markets. It is necessary to take seriously the danger of foreign financial dependence. During the earlier period of dramatic financial volatility, when banking crashes, Foreign World Debt defaults and stock market collapses were common, John Maynard Keynes responded:

I sympathize with those who would minimize, rather than those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel-these are things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible and above all, let finance be primarily national.

Keynes, the leading economist of the 20th century, was not merely advocating nation-state control of finance because of concerns over volatility. At stake was nothing less than economic policy sovereignty. Implied in his statement was that the whole management of the domestic economy depends upon being free to have the appropriate interest rate without reference to the rate prevailing in the rest of the world. Capital controls is a corollary to this. These insights apply equally to lower and middle income countries today, as to Britain during the 1930s. De-globalization of finance therefore represents a serious and laudable financial situation, as opposed to chaotic, destructive and self-contradictory international financial flows, in part by restoring national sovereignty via capital controls. Realistically, there must be a dramatic change in how domestic finances are raised, lent and spent which requires envisaging how international financial power relations can be radically and feasibly overhauled-simply so as to open the space for the reclamation of national financial sovereignty.

Rev. Dr Samuel Kobia, WCC general secretary