UN warns of a new global financial crisis
A stark official report from the UN has warned of looming economic disaster, prompted by huge debts in the developing world. For some this means the entire capitalist system is under threat.
In 2008, ‘credit crunch’ was the Oxford Dictionaries’ UK word of the year. The phrase was indeed on millions of lips as the year drew to an end.
The world had just witnessed its most destructive economic meltdown for 79 years. Millions were unemployed or homeless. The suicide rate was rocketing in Europe and North America. Cheap credit was a crucial cause: people, countries and banks could not pay back money they owed.
A similar process may be underway now. In a new report, the UN Conference on Trade and Development (UNCTAD) has voiced its alarm about global debt levels. Shortly after the last crash, countries in the developing world borrowed large amounts of money at low interest rates. Now falling commodity prices and currency depreciations have strained their ability to repay their bills.
This is already having an impact. Several countries have sought help from global institutions. Growth has fallen significantly. Corporate debt levels now exceed $25 trillion in emerging economies.
And the outlook is ominous. If US interest rates rise from the current abnormally low levels, indebted countries’ costs will go up. If many loans have to be written off, nobody will be immune; even developed countries have higher debt-to-GDP ratios than in 2008.
UNCTAD suggests the capitalist economic orthodoxy — where goods and services are traded freely, and countries and companies take responsibility for paying back their debts — is under threat. Since 1980 profits have gone up, but private investment has decreased, suggesting capital is being concentrated in fewer hands.
‘If policymakers fail to mitigate the negative impacts of unchecked global market forces, protectionism could trigger a vicious downward spiral,’ says the report. It calls for a ‘global new deal’ with investment in strategic sectors; controls on capital flows; a potent industrial policy; and assertive decisions from developing nations.
Would such a radical, systemic change mean that the global economic system is under threat?
Yes. This is simply the latest sign that capitalism is failing, say some. An ever-tinier group of people is gaining control of it and enriching itself; others are left impoverished or at least at the whim of a brutal cycle of boom and bust. This cannot be sustainable. Another crash will be the prompt for radical change.
Wrong, say others. Capitalism has been beneficial: the capitalist era has seen rapid scientific, medical and technological advances. The problems are caused by excessive controls and interference by governments and multinational institutions, and cumbersome rules which only small companies have to follow. The answer is to free up markets even more.
- Would you take on long-term debt to pay for something you needed in the short-term?
- Is global capitalism under threat?
- Summarise this article in your own words — using no more than five sentences.
- Prepare a two-page memo. Write one page on the causes of the 2008 financial crisis, explaining at least three key reasons why it happened, and one page on how likely it is that something similar will happen again soon.
Some People Say...
“There is no such thing as a truly free market.”
What do you think?
Q & A
- Do these deals involving powerful people in faraway places affect my country?
- Money and people now move around the world. So if one country or a major company fails to pay its debts back, it can start a chain reaction. Other companies and countries may be unable to pay other people or may call in their own debts, fearing they may lose them.
- How does that involve me?
- In these circumstances, companies may go bust or stop spending money. That means they are less likely to pay their employees — making it harder for you to get a job, and meaning other people may not have money to pay you for doing your job. Governments also lose tax revenue, meaning they have to borrow and pay money back later, cut spending or raise taxes. This may mean you paying more and / or cuts in services you care about.
- A study in the British Journal of Psychiatry in 2014 said the crisis had caused 10,000 extra suicides in Europe and North America.
- With interest rates low, banks lent people mortgages which they would be unable to repay if rates went up. European banks borrowed too much on US markets. And banks and hedge funds bought risky assets.
- Large amounts
- Developing countries’ external debt stocks alone rose from $2.1tn in 2000 to $6.8tn in 2015. Overall debt levels rose by over $31tn between 2000 and 2014.
- Raw material, such as oil and metals.
- Reductions in value.
- The IMF’s Heavily Indebted Poor Country initiative has given financial assistance to 36 countries.
- UNCTAD predicts for this year: global growth 2.3% (it was 4.1% in 2010); growth in Africa 2.8% (6.7% in 2010).
- The debts which could start a downturn are much larger than in either 2008 or 2009, when Greece’s debt problem came to light.
- Profits rose to 36% of GDP, up from 30% in 1980. Private investment fell from 21% to 17%. So more money is being hoarded.