The head of the International Monetary Fund, Kristalina Georgieva, has warned that the global economy risks a return to the Great Depression. Speaking at the Peterson Institute of International Economics in Washington, she referred to IMF experts, who compare the current economic trends to the situation that existed at the close of the 1920s and culminated in the great market crash of 1929.
Georgieva pointed to inequality and financial sector instability as the main reasons for the growing threat to global economic stability.
The Great Depression was a severe worldwide economic recession that started with the stock market crash in the United States in October 1929, and continued until the late 1930s, peaking out between 1929 and 1933.
Apart from the US, the hard-hitting economic downturn also affected Canada, Britain, Germany and France, “and was felt in other countries too.”
Industry, construction, and agricultural production dropped double digits before the first signs of economic recovery appeared in 1939. All this was accompanied by major social upheavals, which played a significant role in precipitating WWII.
The debate about the root causes of the Great Depression continues to this very day. According to some economists, it was the general crisis of capitalism, related to insufficient state intervention and commodity overproduction. Other experts blame the crisis on too much money being in circulation due to excessive emission by central banks. Capital markets were literally showered with money, and dirt-cheap loans encouraged borrowing by businesses, which didn’t worry much about investment profitability. Stocks going through the roof dimmed the people’s view on the real situation on the market. Therefore, the crash was only a matter of time. What the proponents of different approaches agree on, however, is the negative role that financial speculators played in exacerbating the crisis, the inflation of the financial bubble, followed by the collapse of stock exchanges, all of which acted as a “fuse” in the already emerging economic crisis.
Nowadays, more and more international experts are concerned about the prospects of a new global crisis that could hit the world’s financial and economic system in the near future. Some believe that “the global economic crisis is a kind of “sleeping reality,” not yet clearly manifested in the economic activity itself.” Others believe that central banks and governments may “lose control of the situation in the world” already this year.
Macroeconomic and geopolitical factors are equally alarming. International trade is slowing, and it remains unclear how long the present “truce” in the ongoing trade war between the United States and China is going to hold. The WTO’s work is all but blocked by Washington, and the economies of most EU countries are caught between stagnation and recession. Finally, the Chinese economy is slowing down, which, in turn, is undermining the export capacity of many countries, and threatens to bring down prices on commodity markets.
In the financial sector, imbalances of the “unipolar model of globalization,” where capital keeps accruing to a narrow group of countries that issue global reserve currencies. In August 2019, experts with the Higher School of Economics in Moscow predicted that the global economic crisis “will happen sometime 18 months from now.” They pointed, among other things, to a drop in indices, as well as to the so-called “inverted yield curve” of the US government debt market, where yields on short-term bonds are higher than those on long-term bonds. Inflation in almost all of the world’s leading economies is below two percent, and interest rates either fluctuate around zero, or tend to decrease. Instability of the financial sector was mentioned among the primary threats also by the head of the IMF.
Kristalina Georgieva named inequality “between different groups of the population” as another factor that could provoke a crisis.
“This situation is mirrored across much of the OECD (Organization for Economic Cooperation and Development), where income and wealth inequality have reached, or are near, record highs,” Georgieva said, adding that “this troubling trend is reminiscent of the early part of the 20th century – when the twin forces of technology and integration led to the first gilded age, the roaring 20s, and, ultimately, financial disaster.”
According to a Credit Suisse Global Wealth report, released in October 2019, just one percent of “super-rich people,” and one to 10 percent – by the “poorest.”
The problem of inequality is something more and more politicians and economists around the world are worried by today. Speaking at the UN General Assembly, the organization’s secretary general, Antonio Guterres, called the growing public mistrust of public institutions one of the “four horsemen” threatening the world. And one of the reasons for this growing mistrust is that two-thirds of the world’s population lives in countries where the “income gap between rich and poor” is widening. “Ordinary people” are losing trust in the elite, Foreign Policy magazine agrees, and names other reasons for this, including “growing economic and social inequality” and “a lack of prospects for a brighter future.” The magazine believes that if unable to address this problem, the world’s high and mighty will face an “anti-elite rebellion.”
The question is whether the problem of inequality is more of a political nature, or whether it becoming a macroeconomic factor that determines the situation and prospects of the global economy. In an interview with Business FM, Alfa Bank chief economist Natalya Orlova said that “inequality is a concern for everyone, it really is the main economic problem the world is facing today.” Indeed, the unsolved problem of inequality can become a leading factor in a new phase of a global economic downturn. “The problems of inequality did not arise yesterday, so we do not know how long it will take to turn into a precursor of an economic crisis and an economic crisis itself,” Orlova added.
Proponents of this standpoint link the problem of inequality to the spread of populism with populist politicians coming to the fore in Europe and South and Central America. Many Asian leaders are also ranked by experts as populists. US President Donald Trump is often called the world’s number one populist who has been waging a trade war with the world’s second economy, China, for two years now. Together, these two countries account for at least 35 percent of the global GDP, and the financial and economic escalation between Washington and Beijing is already reflecting badly on the economic performance of most countries of the world. Thus, populist trends in world politics pose new threats for the economy, as they increase uncertainty.
The crisis of social trust, caused by the growth of inequality, negatively affects the mood in the business community as well. The overall psychological atmosphere and the opinion that millions of people have about the existing situation play a crucial role in the economy, as John Maynard Keynes said. When the mood in society is far from optimistic, this inevitably affects the “state of mind” of businessmen and financiers, and even a small push or a combination of several small “shocks” is enough for the economy to start going under, just like it happened in the early 1990s. According to Bob Moritz, chairman of the PwC international consulting company, chief executives around the world are showing record levels of pessimism that are much lower than what they did in 2018. This is not so much due to the new problems the global economy is facing today though. “What is new here is the scale and speed these problems are growing at.”
There are optimists, however, who are convinced that “there will be no Great Depression, of course,” although they admit that we still should brace up for a possible recession. There are no objective prerequisites for a global economic meltdown since the growth, especially in the stock markets over the past 20 years, is primarily associated with the advent of new technologies, which require “fewer production facilities” to ensure previous volumes of production. As for the problem of inequality, critics claim that it is being unnecessarily demonized by left-wing political forces around the world, who are playing on voter’s fears.
Meanwhile, the problem of inequality is more complicated than left-minded people tend to think. “There is reason to talk not just about some smoothing, but about a dramatic reduction in global inequality levels over the past few decades.” Moreover, the “level of inequality” directly depends on how it is measured. For example, inequality in terms of “consumption” is usually several times smaller than when measured in terms of “income.” Finally, “establishing a quantitative measure of inequality does not contain any direct normative and political implications.” Abject poverty is certainly a challenge for society, “but there is no challenge in increasing the Gini coefficient from 0.40 to 0.45.” The relationship between inequality and the dynamics of social conflicts is less obvious though. According to numerous studies, social conflicts are not so much caused by objective income gaps between the poor and the rich, as by the subjective perception of the situation by society the dynamics of “demand for redistribution” depend on.
Still, most economists worldwide are confident that economic growth directly affects inequality, which can be reduced with the help of redistribution mechanisms. This opinion is echoed by some international economic organizations, with UN experts arguing that technological progress not only stimulates economic growth “and creates new opportunities,” but also increases inequality due to the uneven “access to technology in different countries.”
Finally, we should also keep in mind the fact that present-day imbalances are accumulating in stock markets, just like they did in the late 1920s. Their uprush could lead to a short-term crisis by the end of this year, or in early-2021, for example, after the presidential election in the United States. Experts at the Higher School of Economics Market Research Center point to the so-called Juglar cycles, “the phenomenon of the average cyclic wave, followed by a crisis.”
“The year 2021 will mark 12 years since the crisis of 2008-2009. These 12 years are the middle wave and are the harbingers of a crisis. It is during this 12-year cycle that all financial bubbles are inflated in.” There is always hope, however, as most experts admit that modern economic science is still unable to predict the exact timing and depth of the next global crisis.
From our partner International Affairs
China Development Bank could be a climate bank
Development Bank (CDB) has an opportunity to become the world’s most important
climate bank, driving the transition to the low-carbon economy.
CDB supports Chinese investments globally, often in heavily emitting sectors. Some 70% of global CO2 emissions come from the buildings, transport and energy sectors, which are all strongly linked to infrastructure investment. The rules applied by development finance institutions like CBD when making funding decisions on infrastructure projects can therefore set the framework for cutting carbon emissions.
CDB is a major financer of China’s Belt and Road Initiative, the world’s most ambitious infrastructure scheme. It is the biggest policy bank in the world with approximately US$2.3 trillion in assets – more than the $1.5 trillion of all the other development banks combined.
Partly as a consequence of its size, CDB is also the biggest green project financer of the major development banks, deploying US$137.2 billion in climate finance in 2017; almost ten times more than the World Bank.
This huge investment in climate-friendly projects is overshadowed by the bank’s continued investment in coal. In 2016 and 2017, it invested about three times more in coal projects than in clean energy.
scale makes its promotion of green projects particularly significant. Moreover,
it has committed to align with the Paris Agreement as part of the International Development Finance
Club. It is also
part of the initiative developing Green Investment Principles along the BRI.
This progress is laudable but CDB must act quickly if it is to meet the Chinese government’s official vision of a sustainable BRI and align itself with the Paris target of limiting global average temperature rise to 2C.
What does best practice look like?
In its latest report, the climate change think-tank E3G has identified several areas where CDB could improve, with transparency high on the list.
The report assesses the alignment of six Asian development finance institutions with the Paris Agreement. Some are shifting away from fossil fuels. The ADB (Asian Development Bank) has excluded development finance for oil exploration and has not financed a coal project since 2013, while the AIIB (Asian Infrastructure Investment Bank) has stated it has no coal projects in its direct finance pipeline. The World Bank has excluded all upstream oil and gas financing.
In contrast, CDB’s policies on financing fossil fuel projects remain opaque. A commitment to end all coal finance would signal the bank is taking steps to align its financing activities with President Xi Jinping’s high-profile pledge that the BRI would be “open, green and clean”, made at the second Belt and Road Forum in Beijing in April 2019.
CDB should also detail how its “green growth” vision will translate into operational decisions. Producing a climate-change strategy would set out how the bank’s sectoral strategies will align with its core value of green growth.
CDB already accounts for emissions from projects financed by green bonds. It should extend this practice to all financing activities. The major development banks have already developed a harmonised approach to account for greenhouse gas emissions, which could be a starting point for CDB.
Lastly, CDB should integrate climate risks into lending activities and country risk analysis.
One of the key functions of development finance institutions is to mobilise private finance. CDB has been successful in this respect, for example providing long-term capital to develop the domestic solar industry. This was one of the main drivers lowering solar costs by 80% between 2009-2015.
However, the extent to which CDB has been successful in mobilising capital outside China has been more limited; in 2017, almost 98% of net loans were on the Chinese mainland. If CDB can repeat its success in mobilising capital into green industries in BRI countries, it will play a key role in driving the zero-carbon and resilient transition.
From our partner chinadialogue.net
Oil-Rich Azerbaijan Takes Lead in Green Economy
Now that the heat and dust of Azerbaijan’s parliamentary election on February 9thhas settled, a new generation of administrators are focusing on accelerating the pace of reforms under President Ilham Aliyev, who has ambitious plans to further modernise its economy and diversify its energy sources.
Oil and gas account for about 95 percent of Azerbaijan’s exports and 75 percent of government revenue, with the hydrocarbon sector alone generating about 40 percent of the country’s economic activity. Apart from providing oil to Europe, Azerbaijan successfully completed the Trans-Anatolian Natural Gas Pipeline (TANAP) with Turkey in November 2019 to transfer Azerbaijani gas to Europe.
Yet, with an eye on the future, the country has also begun to take huge strides in renewable energy. Solar and wind power projects have been installed, with their share in total electricity generation already reaching 17 percent. By 2030, this figure is expected to hit 30 percent.
Solar power plants currently operate in Gobustan and Samukh, as well as in the Pirallahi, Surahani and Sahil settlements in Baku.
The potential of renewable energy sources in Azerbaijan is over 25,300 megawatts, which allows generating 62.8 billion kilowatt-hours of electricity per year. Most of this potential comes from solar energy, which is estimated at 5,000 megawatts. Wind energy accounts for 4,500 megawatts, biomass is estimated at 1,500 megawatts, and geothermal energy at 800 megawatts.
President Aliyev has supported the drive for renewable energy. He signed a decree in 2019 to establish a commission for implementing and coordinating test projects for the construction of solar and wind power plants.
Azerbaijan’s focus on renewable energy has drawn interest from its European partners, with leading French companies seeking to invest in the country’s solar and wind electricity generation.
Azerbaijan is France’s main economic and trade partner in the South Caucasus. According to French ambassador Zacharie Gross, “the French Development Agency is ready to invest in Azerbaijan’s green projects, such as solid waste management. This would allow using new cleaner technologies to reduce solid waste. This is beneficial for the environment and the local population.”
“I believe that one of the areas that have greatest development potential is urban services sector. An improved water distribution system can reduce the amount of water consumed, improve its quality, and also solve the problem of flood waters in winter,” the French ambassador added.
Azerbaijan is currently a low emitter of greenhouse gases that contribute to climate change. According to the European Commission, the country released 34.7 million tons of CO2 into the atmosphere in 2018, i.e. just 3.5 tons per capita. This is lower than the norm adopted by the world: 4.9 tons.
In contrast, in 2018 Kazakhstan generated 309.2 million tons of CO2, Ukraine generated 196.8 million tons,Uzbekistan101.8 million tons, and Belarus 64.2 million tons.
And the amount of carbon dioxide emitted by Azerbaijan has been consistently falling. In 1990, Azerbaijan emitted 73.3 million tons, but in 2018 this had dropped to 34.7 million tons. By 2030 the country plans to reduce its annual greenhouse gases emissions by a further 35 percent.
Measures taken by the government include the early introduction of Euro-4 fuel standards in Azerbaijan, with A-5 standards to be introduced from 2021. An increasing number of electric buses and taxis are now transporting passengers in the main cities.
Another key step is the clean-up of the environmental degradation caused by over 150 years of oil production. Azerbaijan’s state oil company SOCAR is helping to recover oil-contaminated lands in Absheron Peninsula, particularly in the once critically contaminated area around Boyukshor Lake. This involves the removal of millions of cubic metres of soil contaminated with oil.
Azerbaijan is also reducing the amount of gas it wastes in flaring. In a study funded by the European Commission, Azerbaijan ranks first among 10 countries exporting oil to the EU in the effective utilisation of associated petroleum gas.The emission of associated gases decreased by 282.5 million cubic meters from 2009 through till 2015. This is expected to fall further to 95 million cubic meters by 2022.
The government is also encouraging large-scale greening of the land. In December 2019, a mass tree-planting campaign was initiated by First Vice President Mehriban Aliyeva to celebrate the 650thanniversary of famous Azerbaijani poet Imadeddin Nasimi. 650,000 trees were planted nationwide, including 12,000 seedlings that were delivered by ship to Chilov Island.
A 2018 survey, carried out in cooperation with Turkish specialists, found that forest area is 1.2 million square meters in Azerbaijan, i.e. 11.4 percent of the total area of the country.A new requirement was introduced last year to halt deforestation and to reduce the negative impact of business projects on the environment.
For a country with the 20th largest oil reserves in the world, Azerbaijan could well have chosen to stick to a hydrocarbon future. But it has instead dared to think beyond oil and gas in its energy, transportation, economy and environment. The country is setting a template that should inspire other large oil producers to emulate.
China-US: How Long Will the Phase One Agreement Hold?
Although the recently signed Phase One agreement between the US and China has put a halt to the ongoing trade war between the two global economic superpowers, it cannot be viewed as a long-term solution. At its best, it is a temporary truce. The language of the eighty-six page document, including its ambiguities and the unrealistic promises upon which the entire agreement is based, suggests that it is based on two unreconcilable compromises between the two parties.
Some of the main highlights of the deal include: China must give an action plan on “strengthening intellectual property protection” and it must reduce the pressure on international companies for “technology transfer.” China has promised to increase the purchase of goods and services from US by $200 Billion over two years. Other key points include easy access to Chinese markets. The 15th December tariffs of $160 Billion have been delayed in December 2019. Tariff rates on $120 bn of goods (imposed on September 01, 2019) have been reduced from 15 to 7 percent although tariffs of $250 Billion at a rate of 25 percent will remain.
The 86 page document, when analyzed, displays an ambiguity in its language, as well as the absence of any enforcement plan and dispute settlement process. Therefore, whenever an issue might arise (and it will) there is a likelihood the deal may implode. For instance, whilst mentioning enforcement of payment of penalties and other fines, the word “expeditious” remains unclear. What is the time period and how will enforcement be accomplished? At another point, while referring to China to send a case for criminal enforcement the word “reasonable suspicion” which can be based on “articulable facts” makes it very abstract. Chad Brown, a trade expert in an article for Business Insider, says that there is no specific way mentioned in the document to penalize the party who violates any provision. Moreover, there is no body (like WTO) that will take decisions but is rather left to the USTR and discussions with Chinese counterparts – a recipe for confusion.
Then there are the promises. But we have to consider different variables. But if it turns out that China carries out its promise to buy crude oil, LNG and coal, the global commodity markets will feel the heat – in a negative way. Under the agreement China will buy an additional $52 bn of energy products in the span of coming two years- 418.5 Billion in 2018 and $33.9 in 2021. This year China will have to buy about $27 Billion energy purchases from U.S. To put this in context, China imported 14 million barrels of oil in November 2018 which is its highest ever. Assuming that China buys the same amount for 12 months it would yield only $9 to $10 billion in revenue! In a similar calculation for coal and LNG, Clyde Russell, in an article for Reuters, concludes that in order to fulfill the above target (of $27 Billion) China would have to double the amount of these imports from US!
Moreover, the Phase One agreement has a snapback clause which implies that upon quarterly reviews if the Chinese side isn’t holding true to their promises the agreement can become null and void.
Even if China fulfills its promise, the purpose wouldn’t be served: the US. deficit won’t reduce significantly. The US trade deficit with China for the first 10 months of 2019 was $294 Billion – in other words, roughly 40 percent of the country’s total trade gap. However, for the same period, Chinese sold goods more than four times that amount (or about $382 bn). China will need to half its exports to the U.S. for a “meaningful” drop in the deficit – something that seems highly unlikely.
Also, the US might even end up more dependent on China. Increased demand for US oil will spike its prices and might trigger other suppliers of China to increase their output in order to fight for the market share. The global energy and commodity markets could face disruption. Similarly, Brazil and other countries, beneficiaries of this trade war, can decrease soy bean prices in order to retain their market share, giving farmers in the US a tough time.
As the U.S. Treasury Secretary, Steven Mnuchin, said that tariffs can remain in place even after a Phase Two agreement, we, therefore, have to be patient and observe the trajectory of Phase One trade agreement carefully. Chinese promise of $200 bn purchases, the lack of a proper dispute resolution mechanism and technical loopholes in language puts the future of the agreement in doubt.
Both sides are keeping some cards in their deck; we have yet to witness the end of this trade-war saga.
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