For an economy with jobs, growth and social protection: the social democratic response to the financial crisis
XXIV Congress of the Socialist International, Cape Town, 30 August-1 September 2012
A. The implications of the financial crisis and the fragile state of the global economy
The ongoing financial crisis threatens world economic growth and sustainability in all continents. The continuation of instability in the banking system, recession in the Eurozone and slower-than-expected growth in the USA and in emerging economies continue to characterize the state of global economy.
According to the latest data, global growth will slow to 3.5% in 2012 - down by 0.1 percentage points from the April 2012 forecast and significantly lower than the growth of 5.2% in 2010 and 3.8% in 2011. Clearly, the policy action undertaken until present at global, regional and national level was neither timely enough nor efficient enough to address the economic downturn and to allow for a more robust recovery.
Africa faces some of the most challenging economic circumstances. Stable economic growth in much of Sub-Saharan Africa is neither being translated into poverty reduction nor sustainable development. In addition, Africa faces the challenges of Least Developed Countries: food security, basic healthcare, education, and massive lack of access to irrigation, piped household water and electricity. In these circumstances human rights and basic livelihoods are nearly impossible to attain. The global crisis, originating in the North will have a disproportionate impact on Africans, including possible decline in development assistance.
In Europe the economy of the Eurozone shrank further by 0.2% since April 2012, while in the first quarter of 2012 the growth rate was zero. The dogma of further fiscal discipline imposed by the conservative majority in Europe has led to a vicious circle of budget cuts, continuing recession, reduced private consumption and an alarmingly increased unemployment especially among young people.
In the United States, latest data show growth of 2%, lower than expected in the beginning of 2012. Consumer spending has decreased, job creation has slowed, the unemployment rate remains high, while the developments in Europe and slowdown in emerging markets have a negative effect on exports.
Growth has slowed also in a number of major emerging economies, especially Brazil, China, and India, due to an unstable external environment and a decline in domestic demand. Only in the Middle East and in Northern and sub-Saharan Africa is growth expected to remain stable in 2012.
At the same time, the crisis has slowed the progress towards the implementation of the UN Millennium Development Goals, as financial support and development aid for countries is reduced to lower than expected levels. Many developing countries have also seen delays in investment in extractive industries as a result of the financial crisis. It is essential that OECD countries honour and implement their development assistance commitments, in particular those to Least Developed Countries.
Taking into account the above factors, the Socialist International supports a progressive and integrated approach to the crisis, with financial, economic, social, and environmental concerns given equal importance. Only with such an approach can the acute inequality and unfairness that currently defines the global economy be corrected.
Our progressive political family has always been in the forefront of developments since the beginning of the crisis. Back in 2009 our Presidium addressed the G20 Summit, taking place at that time in Pittsburgh, asking for a more balanced and inclusive approach towards the crisis, an approach focussed not on “austerity only” policies but measures that combine fiscal consolidation with jobs and growth.
B. Negative social trends and growing inequality
In combination with the consequences of the global financial crisis, an increased concentration of wealth leads to deeper inequality between countries and within them. In many countries around the world wages have stagnated or fallen and any growth of income coming out of the recovery has gone to the upper 1% of the highest earners. In the United States, for example, this 1% today take nearly a quarter of the nation’s income and control in terms of wealth 40%. Not only have the most vulnerable groups of society seen their condition worsen, but the middle class is shrinking, something that has important political implications.
Our movement has to face a series of policies undermining the social rights that we achieved after years of struggle. Conservatives use the financial crisis to rewrite history and find pretexts to apply neoliberal policies. They blame the welfare state for the crisis and try to dismantle social protection.
However, today it is more than evident that the financial crisis was not caused by excessive government spending. It was not caused by the cost of social security or people not working hard enough. The real causes of the financial crisis were deliberate high-risk policies and actions which directly precipitated the near collapse of the financial system.
As a result, the need to correct growing national and global inequality is not just economic but social. Growing inequality has unleashed around the world a sense of injustice, a sense that those responsible for the crisis have not been adequately held accountable for the irresponsibility of their actions, a sense that they continue to enjoy their benefits while ordinary citizens who suffer from the crisis are paying the bill.
C. Priorities for the progressive movement
1. A Progressive Fiscal Policy
In order to fight inequality and increase social justice, a more progressive fiscal strategy is necessary; a strategy that at the same time could help stabilise the economy. For this reason an increase in aggregate demand is required. This can been achieved through the deployment of several mechanisms and innovative financing tools including: a bank levy or increased income tax on high earners, redistributing wealth from the top to the bottom; the introduction of a Financial Transaction Tax (FTT); a new global reserves system that could provide developing countries with access to financing, giving them purchasing power and helping to drive demand by using resources that would otherwise be idle; and by establishing new financial institutions such as development banks and green banks that could create new credit mechanisms, enabling credit to flow once more and provide more liquidity to ensure the resources meet public needs.
2. The need for a paradigm shift - addressing austerity only strategy
For many governments and international institutions all over the world, austerity is presented as a remedy for the crisis, although so far it has failed to result in growth in all cases where it has been explicitly tried as a policy. There is no example of a large economy recovering as a result of austerity. Today, it is more evident than ever that austerity has failed to resolve the fiscal problems in the most developed economies and led in many cases to deeper recession, higher unemployment and lower tax revenues.
A new path beyond austerity is needed. There needs to be an approach that secures growth and shields the economy against speculative attacks. At this moment of low growth and high unemployment, it is crucial to expand investment, stimulating growth and ensuring that the economy is better prepared for the future.
Moreover, what we need today is a bold approach based on a new culture of solidarity, solidarity that works separately and simultaneously at different levels: economic, political and social. Otherwise, any government that acts alone risks being crushed by markets and ratings agencies. Common action and creative initiatives are needed to bring about a paradigm shift from the failed austerity policies; that is the only way to a sustained recovery.
3. Strengthening regulation for a more transparent financial system
Effective regulation of the banking sector is the only way to prevent a return to the excessive risk taking and unethical practices that were rife in many financial institutions. A number of countries have started to separate speculative trading from retail banking, a trend that needs to be supported.
In the short- and medium-term more action is needed in order to prevent becoming once more hostages of speculative attacks that threaten the stability and sustainability of our economies. Strict regulation of hedge funds and all shadow banking activities are steps in the right direction. The International believes that a new regulatory structure needs to be adopted in order to mitigate the risks that hedge funds pose to the global financial system. This will only be possible if regulators are granted the effective means with which to enforce strict financial rules.
We should also address the issue of rating agencies that operate with a total lack of oversight. Until there is better regulation and oversight of them, they will continue to pose a serious and immediate threat to global financial stability.
There is a pressing need to dismantle tax havens, close loopholes and create automatic tax record exchange systems. Only under the auspices of a new Global Financial Architecture can this take place, one that significantly increases transparency and strengthens enforcement of the regulations. According to recent reports at least 21 trillion dollars of untaxed private wealth was invested in global tax havens in 2010. The figure, derived from offshore assets under management deposits and custody assets of the top 50 individual banks globally, is equal to more than a quarter of the global GDP.
4. A new Global Financial Architecture
As the continuing crisis evidences, the prevailing economic model needs to be adapted to current challenges. To do so we need a new Global Financial Architecture that will provide global institutions that can guarantee stability and risk management.
A new multipolar Global Financial Architecture should create a new regulatory framework that ensures the safety of the financial system; protects consumers; maintains economic stability; and guarantees access to finance for all, in particular through the institutionalisation of a more accessible system based on solidarity. A new regulatory framework can only be successful if there is adequate enforcement of regulations.
In the longer term, investment in the future is needed in order to reduce injustice and guarantee intergenerational fairness. For members of our political family it is also about ensuring that our vision of a Global Welfare Statehood is guaranteed for present and future generations.