The Current Economic Crisis, its causes, its impact and possible alternatives

A lecture in honour of the Late Rev. Joseph Wing given during the 33rd Assembly of The United Congregational Church of Southern Africa (UCCSA), 24 August 2009, Molepolole, Botswana.

By Dr Rogate R. Mshana, WCC programme executive for Economic Justice

Let us pray:

Beloved God, creator of heaven and earth, and all the peoples of the earth,

Bring peace and righteousness to all the peoples,

In your grace, may equity and equality grow. As we live by your grace and by the sharing of your very self, deliver us from systems of aggressive and divisive individualism.

Break the chains of selfishness,

Open our hearts to those who need our solidarity. Above all forge us in unity so that all people may believe in you...

Deliver us from the enchantment of the false gods of money, markets and status,

Deliver us from adjusting to unjust systems,

Move our hearts, to act in agape love, so that we may resist the seductions of power and greed and may live in right relationship with all.

God, present in every movement of creation, let us realize that we are part of your creation and help us to live responsibly recognizing the limits of your planet Earth...

Give us this day our daily bread that no one may be threatened by hunger, malnutrition and scarcity. Enable us to share land and food with those who have none and give hunger for justice to those who have power, land, money and bread.

Strengthen us to resist the false attraction of easy answers, magic fixes, abuses of power and the delusion that there is any way apart from justice in which God’s justice can be done.

Deliver us from every evil that degrades creation and destroys people and communities.

Let us be your instruments for peace, justice and integrity for creation.

Because yours is the Kingdom, the power and the glory, for ever and ever. Amen.

Introduction

At the outset, may I take this opportunity to thank the leadership of UCCSA particularly Rev. Prince Dibeela, for inviting me to deliver this lecture in honour of an outstanding ecumenical leader who struggled for church unity and social justice in Southern Africa - Rev. Joseph Wing the first General Secretary of this church. This man challenged all of us “to speak the truth and to shame the devil”. What we need to keep in front of us is that today, speaking the truth requires us to be prophetic and speak out without fear about so called “free market capitalism” and its inherent injustice that could well be termed ‘global economic apartheid’.

“In Christ there is a future” Hope in the midst of an economic crisis, is an appropriate theme especially at this critical moment of global capitalism. By choosing to focus on this theme, the UCCSA is demonstrating its prophetic ministry to a world which is now in crisis.

The World Council of Churches (WCC) has viewed this crisis as not merely a financial and economic one but as crisis that has moral and ethical dimensions that had already begun eroding our societies over a period of time. We are witnessing an era where greed has become the basis for economic growth..[1] It is, therefore necessary, in the understanding of churches, to go beyond short term financial bail out solutions and to seek long term transformation based on sound ethical and moral principles which will govern a new financial architecture. This concern of the WCC has been manifested in many of its assemblies and studies in the 1980s. In 1984, by way of its Advisory Group on Economic Matters (AGEM), the WCC issued a call for a new international financial order based on ethical principles and social justice. This call was sent out again this year, by the WCC to the UN general assembly and the G20. Writing to the chairman of the G20, the WCC’s General Secretary said, “we believe it is time, once again, for such a transformation and for economic systems based on values of honesty, social justice and dignity for all...the need of the hour is to construct a system in which market forces are checked through ethical regulations and oversight, but also by a framework of common values that sets clear limits to excessive and irresponsible actions based on greed”. The signs of the times are indicative of the fact that it is today possible to talk about these radical changes because international opinion and the commitment to cooperation are favourable and there was a spirit of shared responsibility.

However, as we will demonstrate in this lecture, the solutions given by governments regarding the present crisis, thus far, are disappointing. First these solutions will not prevent future occurrence of similar crises and secondly, the G20 which controls about 85% of the world economy is more powerful than the UN with a membership of 192 countries, where democracy is of paramount interest. The G20 is, unfortunately, out to repair free market capitalism not to transform it. Solutions proposed by the civil society and the churches need to be seriously addressed.

Free market capitalism based on neo-liberal economics (meaning less state intervention in the market) is regrettably considered the best system of wealth creation ever discovered by humanity (it is an Anglo-Saxon system). Today, most of us know, it has proved to be unfeasible. It has taken different forms in history in many countries but basically it is about who should control capital – is it the state, the private sector or both in a given nation? At the global level, this debate is ambiguous because there is no global government. Economically powerful corporations, banks and multilateral organizations backed by the equally powerful states that control them in an undemocratic way, rule and influence the world as we are now witnessing. These forces are once again proposing unsustainable solutions to the current crisis.

A democratic state which represents the public should actually be the monitor that regulates the failure of markets on the one hand and ensures that practice of ethics and social justice on the other should guide all markets. What we witness in the world is that there is a tendency to discourage this from happening in spite of the fact that the current unregulated system has created several crises in the area of food, jobs, and ecology and has further widened the gap between the rich and the poor between and among nations.

In this lecture I will outline the causes of the current crisis though these are inherent in free market capitalism itself. At the outset may I point out that the critique of free market capitalism does not mean propagating state capitalism as it was practiced by communism. History shows us that this form of governance has not worked either. As churches we are proposing an economy that is people centred and that which takes care of our planet - the economy of AGAPE.[2]. Our main concern should be that the current system is not morally correct and does not promote God’s economy (OIKOS). The Accra Confession of WARC: Covenanting for Justice in the economy and the earth.[3] has also pointed the need for a new economic system.

As Rev. Joseph Wing had said “our first obedience and our highest devotion must be to God. We stand immovably on this eternal rock: what is morally wrong cannot be political right.”.[4] Echoing the words of Rev. Wing, we can also say that what is morally wrong cannot be economically right. A statement such as, “though there is poverty in Africa, economic growth has increased” is both morally wrong and economically wrong. Churches need to be bold to say the truth and shame the devil. This global economic apartheid where 20% of the rich owns more than 80 % of the world’s resources and continues to siphon resources from the poor to the rich must be transformed. This is part of God’s mission that makes economics a matter of faith.[5].

I. Causes of the current crisis

Today’s economic and financial crisis originated in the rich world particularly in the USA. It has been called a financial meltdown, storm or credit crunch. Credit crunch is an economic condition in which investment capital is difficult to obtain. It meant that there was hardly any credit available for investors. Of course this condition is a chronic problem in poor countries and this is why when we speak about the current global financial crisis to a poor person, the question he or she will ask is “what crisis?” The poor, on the other hand, have been living in crisis for centuries. For the rich countries, it created panic and was seen as the worst in recent years and was compared to the 1930 great depression. In other words it was a big crash or a bust...

How did this happen? First and foremost, free market capitalism creates its own crisis. The fallacy that markets can regulate themselves has now been exposed as false. Mr. Allan Greenspan the former Chairman of the US Federal Reserve Bank and a staunch believer of free market has also admitted that markets cannot regulate themselves. The system created a global casino system which rests on virtual wealth. Finance has been detached from real economy. The Indian economist C.T. Kurien uses a metaphorical definition of two planets namely, “Planet Finance” and “Planet Earth.”.[6] Secondly, new financial instruments and institutions were formed to manage this unjust and unfair system that punishes those who produce real assets and rewards those who do nothing except to speculate. Usury has been legitimized and institutionalized. This system has created financial bubbles that have bust. The AGAPE background document at the WCC’s Assembly in Porto Alegre (2006) warned against dependence on deregulated financial markets. Economists such as Korten identify the failure of Wall Street institutions that have perfected the art of creating “wealth” without producing anything of real value. Korten sums this up as creating phantom wealth. His hope is not in Wall Street but on the Main Street..[7] What is this virtual wealth that has caused the crisis?

If one looks at all the money available in the world the following picture emerges:

At the bottom we see real money to be only 1% of liquidity (coins, banknotes) which is only 7% of world’s growth domestic product (GDP). This is followed with what is called broad money (the money which people have in their current accounts used for shopping and paying bills) which is 6% of liquidity and is 80% of the world’s GDP. This system of finance was known for many years. Next, we see 12% of liquidity as securitized debt (mortgages) which is about 145% of the world’s GDP. The highest is 81% of liquidity as derivatives which is 976% of the world’s GDP. Derivatives are financial instruments derived from other financial instruments such as debt. They are actually contracts whose values are based on performance of an underlining financial asset, index or other investment. This scenario is described by Kurien in the form of figures.

Kurien quotes Ferguson’s recent book, [8] Ascent of Money: A financial History of the world in which we can see another picture of the world’s virtual finance clearly in terms of figures. In 2006 the measure of economic output of the entire world was around $47 trillion. The total market capitalization of the world stock markets was $51 trillion, 10 percent larger. The total value of domestic and international bonds was $68 trillion, 50% larger. The amount of derivative outstanding was $473 trillion, more than ten times larger.” Ferguson says we have reached a situation where finance is clearly dominating what is often referred to as “real economy” which produces the tangible goods of everyday life and the services associated with their production. According to Kurien “Planet Finance is beginning to dwarf Planet Earth.[9].

What we observe here is that most of the money that circulates around the world is virtual or what Korten called phantom wealth. It is unreal, imaginary, fake and just air. What is disturbing is that on this air that the huge and influential financial institutions have been built and many banks are connected to. Entire economies of the world rest on this system and the lives and livelihoods of millions are entangled with it. This is like a huge balloon full of hot air carrying a little basket with people above the ground. The balloon is now punctured and instead of getting rid of the balloon, the current global political leaders are still pumping hot air into it. The air is rapidly escaping from the balloon and it can’t keep the world afloat. The most disturbing thing is that the crisis was not predicted. Kurien concludes his paper thus, “the message of the meltdown is that while institutionalized greed may sustain the system and even provide some semblance of well-being for a while, it surely paves the way for destruction from within.”[10]

This could be attributed to the fact that in economics, unlike in other sciences, assumptions play a more important role than facts. Classical economics is built on very strong assumptions that quickly become axioms: the rationality of economic agents, the invisible hand and market efficiency. These concepts are so strong that they supersede any empirical observation. For instance the assumption is that liberalization reduces poverty. Empirically this is not substantiated. The reverse has been the case. As Robert Nelson argued in his book, Economics as Religion, the market place has been deified.[11] Today we are faced with a challenge of linking finance to real economy as a solution to the current crisis. This task should, however not be left to economists alone. Ethicists, ecologists, theologians and people on the ground should be involved in working out a just and ethical system.

How the crisis began in the US

The US is the biggest economy in the world. It has created the dollar as a planetary currency. This position gives it leverage to stir other economies in the world. In the late nineties, the US banks and the financial instruments of the government became depositories of the surpluses accrued from petroleum producing countries. Banks were virtually awash with funds and ready to lend to those who needed it. It was at this time that the cheap lending and borrowing with a later rise in interest rates created the debt crisis for a number of poor and middle income countries threatening to default on payments. This financial crisis in the 80s led to the WCC coming up with a call for a new just financial order. Several other financial crises occurred including the Asian one in the 80s as finance became increasingly speculative transforming money into a commodity that can be sold and bought while de-linking it from real production of goods and services.

The US is a property owning society and a number of the people wanted land and housing. Americans however hardly create savings. The country itself lives on other countries’ savings by issuing bonds to finance its excessive consumption. The current crisis began with cheap housing loans offered by banks. Banks provided loans but instead of holding the loan in their books, they packaged them into collateralized debt obligations (CDOs) and sold them to other agencies. These agencies passed them on to others and spread them globally as assets.

Interest rates were brought down and housing loans increased with construction activities leading to land prices going up. The real estate was booming, creating employment and incomes. But as the rate of interest on housing loans came down, banks began to compete to secure more business. Because of low interest rates, it was possible to borrow more from the same monthly payment to pay the old loan and still have some left as a surplus for a vacation or to buy other assets. Others went for a second house as an investment. This system called refinancing rose from $ 15 billion in 1995 to nearly $250 billion a decade later.[12]

The problem started when housing loans came to be at rates below the prime rates of banks (sub-prime lending). Banks believed that land prices will continue to rise and did not bother to scrutinize economic credentials of borrowers and their ability to pay back. The scenario was known as ninja loans - no income, no job no assets. Sub-prime lending which amounted to $ 145 billion in 2001 soared to $ 625 billion in 2005 accounting then for 20% of the loans.[13]

Lack of proper information to borrowers and gradual rising of interest created difficulties for some borrowers to close the mortgages. Defaults emerged and questioned the sustainability of the real estate and housing boom in 2007. In the middle of 2007, the bubble began to burst when information emerged that mortgage hedge funds with two institutions were in problems. The problem, according to Kurien, spread to CDOs linked to subprime mortgages which in turn had its impact on some investment banks. At the end of 2007, well known financial institutions like Citigroup, Merrill Lynch, Lehman Brothers, UBS, and the Bank of America had to announce major write downs. The crash came in the middle of 2008 with Lehman brothers going bankrupt. Some of the WCC’s member churches lost their investments because they had left their funds in this institution. Lehman brothers were outside the banking system (shadow banking) and could not get support from the Federal Reserve Bank of the US. The American Investment Group (AIG), the giant insurance firm operating globally also went under. Attempts were made to redeem the situation through mergers and buyouts but the situation did not stabilize. With this came panic spreading to the stock market which is the altar of free market capitalism. The credit squeeze and layoffs affected the households, particularly those relying in credit cards. Because spending decreased, it led to deflation which turned into recession.

Kurien writes that pension funds, endowed funds of universities, foundations, religious organizations and many more were also impacted losing anywhere between 20 and 40 percent of their assets within a couple of months.[14]

The crisis was so intense that the government had to intervene to save the system from collapsing. It pumped USD 700 billion (blowing hot air into a punctured balloon!). The problem was not liquidity but the insolvency of many financial institutions. By the end of 2008 the world faced the meltdown. Automobile industries such as the General Motors and Chrysler Motor Company were reported as having gone bankrupt.

Global domino effect of the crisis.

Although the US led the way, the emergence of the shadow banking system, the proliferation of CDOs and prime lending affected those economies that were directly linked to the US. The UK and many countries in Europe were affected because of the complex net work of financial institutions that were transacting with toxic assets. As pointed out by Harisson.[15] the management of debts got out of the control of the banks and affected others. The regulatory authorities lost track of this debt mountain, because it was quickly repackaged in new financial instruments and sold to institutions. Mortgages were wrapped into collateralised debt obligations (CDOs) and sold to others to spread the risk. Reckless lenders mixed poor quality loans (to borrowers who purchased houses built on sand in Florida, for example) with secure mortgages on properties in high value locations in New England. They then off-loaded the packages and pocketed the proceeds.

Instead of a clean-out of the debt, the excesses were concealed in opaque accounting practices and laundered through the world’s financial markets. No one, anywhere in the world, was immune. People who did not engage in real estate speculation on a socially significant scale, for example the Germans were exposed to the virus that has incubated in the US money markets. Germany was affected because her banks invested in financial instruments that contained mortgaged properties from as far afield as San Diego in Southern California, where house prices rose by 22% in 2002 alone. The banks transferred the risks to others and that ultimately meant it was carried by working people through a reduction in the quality of investments held in their pension funds.

The UN.[16] observes that many of the main causes of the crisis are linked to systemic fragilities and imbalances that contributed to the inadequate functioning of the global economy. Major underlying factors in the current situation include inconsistent and insufficiently coordinated macroeconomic policies and inadequate structural reforms, which led to unsustainable macroeconomic policies. These factors were made acute by major failures in financial regulation, supervision and monitoring of the financial sector, and inadequate surveillance and early warning. These regulatory failures, compounded by over-reliance on market self-regulation, overall lack of transparency, financial integrity and irresponsible behaviour, have led to excessive risk-taking, unsustainable high asset prices, irresponsible leveraging and high levels of consumption fuelled by easy credit and inflated asset prices. Insufficient emphasis on equitable human development has contributed to significant inequalities among countries and peoples. Other weaknesses of systemic nature also contributed to the unfolding crisis, which has demonstrated the need for more effective government to ensure an appropriate balance between the market and the public interest.

While the civil society concurred on the long-term causes of the crisis as mentioned by the UN, it stressed that the crisis was not simply the result of developments or “misbehaviour” in the corporate and financial sectors but has been in the making for 30 years or more. It was rooted in contradictions of the current global development paradigm - such as income inequality, in which the richest 1% of the world population received as much as the entire bottom 57%. This was the major cause of economic instability and crisis, as it led to a deficit of global aggregate demand.[17] It was noted that there was a crisis before the crisis namely the jobs crisis even before the financial and economic one hit in 2008. Despite the previous global growth, the global economy has not been capable of creating enough productive employment for the steady entrant into the global labour market. Combined with rising inequalities resulting from stagnant (or declining) real wages in many parts of the world, the global economy depended on the US to act as a “consumer of last resort.” However, since wages were also stagnant if not declining in real terms for the average worker, this has to be accompanied by consumer credit bubble which burst on the housing market and precipated the current crisis.

It is also noted that since the breakdown of the Breton Woods system (that is the global financial institutions – the World Bank and the International Monetary Fund) in the 1970s, the current system of flexible exchange rates and reliance on the US dollar as the defacto global reserve currency, had proven not only highly unstable and inequitable: its inherent deflationary bias was incompatible with global employment.

2. Impacts of the Crisis

The crisis has produced or exacerbated serious, wide-ranging yet differentiated impacts across the globe. Negative impacts are reported mainly from developing countries and within them some have serious problems though they did not cause the problem.

The following are noted by the UN:

Increasing unemployment (50 million jobs lost this year according to the International Labour Organisation), poverty and hunger
Deceleration of growth, economic contraction
Negative effects on trade balances and balance of payments
Dwindling levels of foreign direct investment (a fall of 54% in the first quarter of 2009 according to UNCTAD)
Large and volatile movements in exchange rates
Growing budget deficits, falling tax revenues and reduction of fiscal space
Contract action of world trade
Increasing volatility and falling prices for primary commodities
Declining remittances to developing countries
Sharply reduced revenues from tourism
Massive reversal of private capital flows
Reduced access to credit and trade financing
Reduced public confidence in financing institutions
Reduced ability to maintain social safety nets and provide other social services, such as health and education
Increased infant and maternal mortality
Collapse of housing markets
Debt levels of man developing countries are over 150% of GDP.

The latest estimate of the United Nations indicates that the world’s gross product will fall by 2.6 percent in 2009, the first such decline since the Second World War.

The crisis threatens to have calamitous human and developmental consequences. Millions of people all over the world are losing jobs, their income their savings and their homes. The World Bank estimates that more than 50 million people have already been driven into extreme poverty, particularly women and children. The Food and Agriculture Organization of the United Nations projects that the crisis will contribute to a rising number of number of hungry and undernourished people world wide to a historic high of over one billion. Developing countries will suffer more than the developed countries. These countries that have no role in causing the crisis have suffered the most “collateral damage” according to Martin Khor, with a loss of 6 percentage points of gross national income, as their economic growth is expected to fall from 8.3% in 2007 to 1.6% in 2009 on average..[18]

Its impact on Africa

Almost all of the negative impacts mentioned above apply to Africa as well. Africa was, however not seriously affected in the beginning by the financial crisis due to the fact that there was a low level of financial integration with the world markets, in the first place. It is now affected, however, due to the shocks and disturbance coming from the global economy through international markets which are vehicles of transmission to national economies. According to the International Trade Confederation Africa Region (ITUC), in Africa the effects of the crisis have spread through four main markets: The goods and services markets, capital markets, exchange markets and labour markets..[19]

In goods and services markets there was are fall in external demand for agricultural raw materials and minerals and fall of prices of most of these products since 2008:

Source: Graph made by R. Mshana from the International Trade Union Confederation figures.

In the services sector, tourism has decreased.

As far as capital markets are concerned albeit the low level of financial integration, the small part existing was hit by the contagion in the continent decreasing the value of the stock markets as shown in graph 2:

Source:Graph made by R. Mshana from the International Trade Union Confederation figures..

The effect on Africa is more significant than that experienced by developed countries such as USA 31.71%, France 35% and Japan 35%. Egyptian and Nigerian investors lost on an average more than half of the assets they invested over a period of six months by the end of July 2008. This was coupled with the falling trends in international flows of private and public capitals because of the fall in financial direct investments (FDIs).

In money markets, African countries are facing depreciation of exchange rates especially against the US dollars or euro. From the end of July 2008 to end of March 2009, the currencies of the following countries depreciated:

Source: Graph made by R. Mshana from the International Trade Union Confederation figures..

At the same period the Euro depreciated by 10% only. The depreciation of currencies of most of these countries was said to be attributed to the impact of the financial crisis on raw materials and foreign exchange reserves.

In the labour market, the most affected are migrant workers but in many African countries, unemployment for young people has always been a chronic problem,

Impact on African economies

The fall in the prices of raw materials exported by Africa is caused by the global recession. This fall has wiped some of the gains made previously in development. The export and import growth rates are expected to lose 7% and 4.7% respectively. In South Africa for instance, exports dropped in 2008, following the fall in the prices of precious metals, one of the countries’ main sources of wealth. In Botswana the production of diamond has fallen by 50% due to the fall in its price in the international market. In Zambia 65.8% fall in the price of coal has led to a considerable fall in reserves..[20] As far as economic growth is concerned in conventional economics, the continents growth rate should fall from 5.4% in 2008 to 3.3% in 2009. According to the World Bank, the flows of private capitals meant for Africa have disappeared after rising from USD 30 billion in 2002 to USD 53 billion in 2007, causing projects to be cancelled, delayed or postponed.

Remittances by migrants: according to The International Trade Union Confederation (ITUC), 77% of the remittances by migrants amounting to USD 20 billion come from the USA and Western Europe.

Source: Graph made by R. Mshana from the International Trade Union Confederation figures..

According to ITUC, recent surveys have indicated that the official remittances by African migrants will fall from almost USD 1,100 million in 2008 to USD 800 million in 2009 - a fall of about 27% - this can be translated in USD 300 million in real money terms.

Economic activities and employment: The most affected sectors by the economic crisis are agriculture, mining, tourism, textiles and manufacturing. There have been many job loses according to ITUC, which have direct negative effects on worker’s living standards: the following examples are cited:

South Africa: 36,500 jobs have been lost in the automobile industry;

Botswana: 5,000 jobs lost in the diamond industry.

Kenya: The hotel occupancy rate has fallen;

Liberia: 1,500 jobs are threatened in mines;

Mozambique; reduction of more than 20% of investments in the tourism industry;

DRC: 300,000 jobs have been lost;

Tanzania: Tourism revenue has fallen by 20%

Zambia: More than 3,000 jobs have been lost in the copper industry

More than 10,000 TV subscriptions have been cancelled, causing 1100 job losses in 22 African countries.

Thousands of jobs have been lost in the agricultural sector.

Prior to the crisis

Africa has always been characterized by difficulties in development because of colonial and then neo-colonial exploitation. It is the least developed continent on earth. The crisis has exacerbated this exploitation. Although it is about 13% of the global population, it contributes only 2% of global GDP and less than 1% of the global industrial added value. Its share in global exports does not reach 2% of exports from developing countries. Africa receives only 5% of flows of Foreign Direct Investment (FDIs) and its debt burden is 80% of GNP. The scenario is worsened by capital fight (invest one dollar in Africa and take 7 dollars out).For over three decades Africa has been trading with Europe but while Europe benefited, Africa suffered. The Current Economic Partnership Agreements (EPAs) between Europe, Africa and the Caribbean are not good in helping Africa develop either.[21]. It is disappointing that our African leaders did not put enough efforts to resist them. Thanks to all those African churches and their partners in Europe who gave their statements against EPAs.

Unemployment affects between 20 and 40 percent of the labour force. Poverty is at an average of 35 to 60 percent of inhabitants who have no access to education, water, sanitation, power and information. There are glaring inequalities with high discrepancies between the sexes. For instance in Botswana according to UNDP, 47% of the population lives below the poverty line of one dollar a day. The richest 20% of Botswana earn almost 60% of the total national income. The poorest 20% get merely 4% of the national income. Unemployment is 16%..[22]

3. Possible alternatives

There are alternatives proposed by rich countries such as the G20, the UN, the civil society and most importantly in this context by the World Council of Churches. The UN Conference of June 2009 made several proposals in its Outcome Document, referred to earlier. The G20 also came up with proposals and a stimulus package. The importance of the UN initiative is that for the first time, the UN involved all member countries to address the economic crisis. The proposals range from those that are aimed at addressing the structural aspects of the crisis, which I will call transformative proposals and those that are aimed at short term fixes which I will call reformative proposals. The major critique of the UN conference like the G20 is that it did not pay heed to the need for a radical transformation of the international financial architecture. The proposals reached do not reflect a substantive discussion of root causes of the financial crisis.

Reformative (UN):

Stabilizing the financial markets and restore confidence in them and counter falling demand and the recession.
Counter the impact of the crisis on the most vulnerable populations and help to restore strong growth and recover lost ground in their progress towards Millennium Development Goals.
Avail short term liquidity and long term development financing for developing countries, especially the least developed countries.
Focus on creating jobs, correcting imbalances, designing and implementing environmentally and sociable development paths and having a gender perspective.
Safeguarding economic, development and social gains.
Ensuring long-term debt sustainability of developing countries without unwarranted condionalities
Rebuilding trust in the financial sector and restoring lending
Promoting and revitalising open trade and investment and rejecting protectionism.
Fostering an inclusive, green and sustainable recovery, and providing continued support for sustainable development efforts by developing countries.
Strengthening the role of the United Nations development system in responding to the economic crisis and its impact on development.
Reforming and strengthening the international financial and economic system and architecture, as appropriate, to adapt to current challenges.
Fostering good governance at all levels, including the international financial institutions and financial markets.
Addressing the human and social impacts of the crisis.

The UN acknowledges the role of the G20 summit which was held in London on 2 April 2009, and recognizes its commitment to make available an additional USD 1.1 trillion aimed at revitalizing the world economy. Out of this amount however only USD 50 billion was targeted to low-income countries. The countries resolved to strengthen the role of the UN and its member States in economic and financial affairs, including its coordinating role. They committed themselves to accelerate their collective recovery from the crisis through improved transparency, eradication of corruption and strengthened governance. They urged countries that have not ratified or acceded to the United Nations Convention against corruption to do so and vigorously implement it. An ad hoc working group of the UN General assembly was set up as a follow-up mechanism of the conference.

G20 Responding to the WCC General Secretary’s letter 16April 2009

The details of the proposals by G20 representing 85% of the World’s Gross Domestic Product can be found at http://www.londonsummit.gov.uk/en/ the following are its main proposals as communicated to the WCC by the Chairman of the G20.

Restoring growth and jobs by delivering a USD 5 trillion fiscal expansion, to raise output by 4% by the end of 2010, commit to take whatever action is needed to secure a faster return to growth. IMF to assess regularly the actions taken and required (IMF had proved to be a failure previously)
Additional resources: One trillion dollars through IMF, other International Financial Institutions (IFIs) and trade finance to help kick start the global economy, meet balance of payment needs and provide social support for countries in crisis (very little of this is located for poor countries).
Help for the poorest: agreements worth 50 billion dollars in support for the poorest countries including special Special Drawing Rights, IMF gold sales and trade finance. A firm recommitment to achieve aid promises and support for a World Bank vulnerability fund.
Stopping the next crisis: creating a new financial stability board to spot risks, agreed regulation of credit agencies and hedge funds, new commitments on capital and new rule on pay and bonuses.
Crack down on tax havens: agree to take action against tax havens including tough actions to use in future against those that don’t come into line. The organization for Economic Co-operation and Development will publish the list.
Governance: agreement to reform mandates and governance of IFIs to make them more accountable, more representative and more effective including heads of IFIs appointed on merit. (We would rather look for new institutions in the 21^st century rather than trying to reform the old ones which have proved to be ineffective.)
Kick start trade: no new trade barriers before the end of 2010 and rectify any measures taken with public World Trade Organization (WTO) monitoring. Additional 250 billion dollars to support trade finance and close the global trade finance gap, including 50 billion through a new World Bank programme. Renewed focus to WTO deal and use G8 to drive progress. (We are worried about repetitions of the same neo-liberal economic policies of these institutions).
Greening the future: commitment to use fiscal stimulus for low carbon investment, identify and work together on policies for green growth and reach a new climate change agreement at Copenhagen. (We are worried about the G20 commercializing ecology).
G20 commit to meet again later this year with strict monitoring by IMF, WTO and Financial Stability Board of the commitments made.

Close observation reveals that G20 have put themselves as drivers fighting against global recession despite the fact that they are part of the problem. Their stimulus package is more than 40 times the amount needed to eradicate poverty and address climate change but most of this money went to save institutions which were responsible for the crisis in the first place. The lack of mentioning the role of the UN G192 is alarming. The proposals they made are to repair the current destructive system instead of transforming it democratically. Much more radical proposals are offered by churches and the civil society as seen below. The proposals are mainly following a transformative approach.

Transformative: These proposals are derived from the WCC and some civil society organizations and those made in the letter of the WCC general secretary to G20 and the UN General Assembly’s president.

First and foremost the transformative approach addresses the problem mentioned earlier of the creation of virtual wealth which has enriched some but harmed many, creating poverty, unemployment, hunger and death; widening the gap between the rich and poor; marginalizing peoples, eroding the whole meaning of life and destroying eco-systems. The financial crisis indicates the immorality within a system that glorifies money and dehumanizes people by encouraging acquisitive individualism: This greed-nurtured culture reduces the value of human life, erodes the moral and ecological fabric of human civilization, and intoxicates our psyche with materialism.[23]. The financial crisis is a manifestation of a moral and at the same time, systemic crisis. A transformative approach addresses this crisis as an issue of justice that will stop impoverization and ecological destruction.

The Advisory Group on Economic matters of the WCC meeting in May 2009 proposed a framework for a new ethical, just and democratic financial architecture with four main points. They said that it must:

be grounded on a framework of common values – honesty, social justice, human dignity, mutual accountability, and ecological sustainability;
account for social and environmental risks in financial and economic calculation;
reconnect finance to the real economy; and
set clear limits to, as well as, penalize excessive and irresponsible actions based on greed.

The letter of the WCC general secretary to both the UN General Assembly and the chairman of G20 raised the following proposals which are more transformative than reformative.

Set a process for democratization of all global finance and trade institutions.
Deter destabilizing currency speculation by transforming and strengthening regulatory institutions.
Develop a practice of ethics and justice that can guide financial markets in the world.
Establish international permanent and binding mechanisms of control over capital flows and capital flight.
Design an international monetary system based on a new system of reserves, including the creation of regional reserve currencies in order to end the current supremacy of the US dollar and to ensure international financial stability.
Prohibit hedge funds and over-the-counter markets, where derivatives and other toxic products are exchanged, without public control.
Eradicate speculation on commodities, primarily on food and energy, by creating public mechanisms that will monitor speculative behavior.
Dismantle tax havens, sanction their users (individuals, companies, banks and financial intermediaries) and create an international tax organization to combat tax competition and evasion.
Establish a new international system of wealth sharing by creating mechanisms for global taxes (on financial transactions, polluting activities and high income) to finance global public goods.
Cancel illegitimate debt; address unsustainable debts of impoverished countries; and establish a system of democratic, accountable, fair sovereign borrowing and lending that serves sustainable and equitable development.
Set up an International Bankruptcy Court with authority to cancel odious and other kinds of illegitimate debt and to arbitrate debt issues (AGEM09).
Ensure that this crisis will not lead to the reduction of the official development aid to poor countries.

Most of these proposals should be worked out within a strengthened United Nations. The proposals to have a UN Economic Council is paramount for a new economic system.

Other proposals include: treating finance as a public service making loans available for small and medium enterprises, farmers and especially the poorest through, for example micro-financing in support of not-for-profit enterprises and the social economy. There is also need to support regional initiatives that decentralize finance and empower Southern peoples to exercise control over their own development through such bodies as the Bank of the South, An Asian Monetary Fund, and the Bank of ALBA in Latin America.

It is essential to work for a new paradigm of economic development and re-conceptualization of wealth to include relationships, care and compassion, solidarity and love, aesthetics and ethics of life, participation and celebration, cultural diversity and community vitality. This will involve responsible growth that recognizes human responsibility for creation and for future generations - an economy of life (WCC, AGEM09). Its achievement requires the participation of all people not just the rich countries.

[1] The WCC general secretary’s letter to Gordon Brown, the G20 chairman in 2009, 27 March 2009

[2] See Alternative Globalization Addressing People and Earth (AGAPE) WCC Publications, reprint Geneva 2006

[3] See Accra Confession, World Alliance of Reformed Churches, 2006, www.warc.ch

[4]Steve de Gruchy and Desmond Van der Water, Spirit Undaunted; The life and legacy of Joseph Wing, Cluster Publications, Petermaritzburg, 2005;142

[5] See Christian Faith and the World Economy Today: a Study Document of the World Council of Churches, WCC Publications, Geneva 1992.

[6] C.T. Kurien, Inter-planetary Economics: The Meltdown and Beyond: a Popular Exposition, 2009 (unpublished)

[7] Korten, David, C, Why Wall Street Can’t be Fixed and How to replace It: Agenda for a New Economy, From Phantom Wealth to real Wealth, Berret-Koeller Publishers, San Francisco, 2009

[8] Ferguson Niall, the Ascent of Money - A Financial History of the World, London, Allen lane 2008

[9] Kurien 2009:1

[10] Kurien 2009: 25

[11] J. P. Bauhaus, Economics needs a scientific revolution, in nature, vol.455:1181 (2008) quoted in Roel Aalbersberg, Lift your lamp above the bushel: The role of the Ecumenical Movement in facing the global Financial Crisis 2009:4 ( unpublished)

[12] Kurien 2009:10

[13] Kurien 2009:10

[14] Kurien 2009:11

[15] Fred Harrison, Boom Bust: House Prices, banking and the depression of 2010, Shepheard-Walwyn Publishers, Ltd, 2^nd Edition November 2007:xi

[16] See UN Conference on the World Financial and Economic Crisis and its Impact on Development: Draft Outcome Document A/CONF.214/3, New York, 24-26 June 2009:5

[17] UNCTAD Public Symposium on "The global economic crisis and Development - the way forward", 18-19 May 2009 in Geneva

[18] South-North development Monitor (SUNS) #6725 Tuesday 23 June 2009:25

[19] ITUC- Africa and the Troubles of Global financial crisis: A Contribution to the trade union debates and responses: ITUC-Africa’s prospection: economic and social Policy department-Executive bureau-Nairobi 7-8 May 2009

[20] ITUC 2009:7

[21] "EPA does not give sufficient opportunities for businesses in LDCs to develop to levels where they can compete favourably with their counterparts in the EU and that is critical to the development of a country like Ghana." Nobel Prize winner economist Joseph Stiglitz, Accra, 8 July 2008 www.ipsnews.net Joel Konop, Challenges 2006-2007 Poverty in Botswana

[22]

[23] WCC Advisory Group on Economic Matters’ (AGEM09) Proposed Statement on Just Finance and Economy of Life, July 2009, WCC ( unpublished)