Monday, November 24, 2008

Global Trends 2025: Globalization and the Crash of '08

Here is the next installment of my review of Global Trends 2025. This excerpt examines how the 2008 financial crisis may affect world relations.

Globalization at Risk with the 2008 Financial Crisis?

As with most of the trends discussed in this report, the impacts from the financial crisis will depend heavily on government leadership. Proactive fiscal and monetary policies probably will ensure the current panic and likely deep national recessions will not turn into an extended depression, although reduced economic growth could slow globalization’s pace, increasing protectionist pressures and financial fragmentation.

The crisis is accelerating the global economic rebalancing. Developing countries have been hurt; several, such as Pakistan with its large current account deficit, are at considerable risk. Even those with cash reserves—such as South Korea and Russia—have been severely buffeted; steep rises in unemployment and inflation could trigger widespread political instability and throw emerging powers off course. However, if China, Russia, and Mideast oil exporters can avoid internal crises, they will be in a position to leverage their likely still sizeable reserves, buying foreign assets and providing direct financial assistance to still-struggling countries for political favors or to seed new regional initiatives. In the West, the biggest change — not anticipated before the crisis — is the increase in state power. Western governments now own large swaths of their financial sectors and must manage them, potentially politicizing markets.

The crisis has increased calls for a new “Bretton Woods” to better regulate the global economy. World leaders, however, will be challenged to renovate the IMF and devise a globally transparent and effective set of rules that apply to differing capitalisms and levels of financial institutional development. Failure to construct a new all-embracing architecture could lead countries to seek security through competitive monetary policies and new investment barriers, increasing the potential for market segmentation.

- This report is highly optimistic that these "proactive" measures will have a lasting positive effect on the world economic system. From my layman's viewpoint, the measures seem anything but proactive and coordinated, and very well could do more harm than good.

- I agree that there will certainly be calls for more protectionism and isolationism here in the US in the near term.

- A big question is how low commodity prices will drop, and how long they will stay there. (See deflation) Big energy producers will have fewer options with declining oil and gas prices. This could exacerbate internal strife in these nations.

- The nationalization of financial institutions certainly concerns me as well, and it is not clear that the financial sector is where these intrusions will end.

Other Global Trends Posts:
Global Trends 2025
Global Trends Update
Global Trends Update II
Globalization and the Crash of '08
Demographics of Discord
Timing is Everything
Winners and Losers in a Post-Petroleum World
Scarcity in the Midst of Plenty
Final Thoughts

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