Sustainable Development: The Best Crisis Prevention & Mitigation Strategy
Delivered at II World Anti-Crisis Conference, ADB's 47th Annual Meeting of the Board of Governors in Astana, Kazakhstan
Your Excellency, Mr. Bakhyt Sultanov,
Deputy Prime Minister and Minister of Finance,
This anti-crisis forum, organized by the Government of Kazakhstan, the Eurasian Economic Club of Scientists, and the Reinventing Bretton Woods Committee, is a good opportunity for us to reflect on the most appropriate crisis prevention and mitigation measures, not only at the global level, but for Central Asia and the wider Asia-Pacific region.
We have come a long way since the Bretton Woods Conference in June 1944 . There have been important learnings about which anti-crisis measures work, and which do not, for the Bretton Woods institutions, our Member States, and the wider business community.
During the 70 years since the creation of that institutional architecture, we have seen global economic growth and prosperity, backed by structural transformation, and driven by free markets, the rising role of multinationals, and the impetus of the private sector, backed by a lot of capital flow.
We have also seen the growth of world trade, backed by increasingly interlinked production, and global value chains. Cross-border capital flows have reached new heights, peaking at almost US$ 12 trillion (about 20 per cent of global GDP) prior to the current crisis , with foreign direct investment (FDI) helping to generate new avenues for wealth and job creation, and lifting out of absolute poverty, since 1990, more than half the proportion of people living below the poverty line.
So there has been some good news, but recurring economic, financial, and natural crises, have been rude reminders that we have still not been able to nurture a safe and secure planet. In fact, vulnerabilities have grown under the stress of rising population, changing demographics, globalization, interdependence, and protectionism.
I would like today to highlight three aspects which will be key in our future efforts to reduce the incidence and development impact of such crises: First, some macroeconomic lessons we have learnt; second, a selection of equally important financial system lessons; and finally, the role of sustainable development, which I believe is the best crisis prevention and mitigation measure available today. Of course, the architecture of sustainable development is being debated, deliberated, and consulted at the United Nations General Assembly.
Lessons Learnt: Macroeconomics
Starting in the early 1980s, we witnessed a period of great moderation, where macroeconomic fluctuations were muted. We were then hit by a great recession, commonly identified as a quadruple sequence of back-to-back crises in commodities, finance, economies, and sovereign debt .
Professor Lawrence Summers, the President Emeritus of Harvard University, once observed that: “Every financial crisis is different and involves its own distinctive elements. There are, however, some elements that are common […]. ” I would argue that one of these common elements is the need to widen our diagnostic approach to such crises.
In 2011, during the height of the crisis, a group of leading global economic thinkers, convened by the IMF, offered some perspectives on how we might re-examine conventional economic theory and principles. We also have the school of new economic thinking at the World Economic Forum, where there are many debates underway.
Developments during the crisis also brought some interesting issues to the fore, such as some of the new understandings that:
- Adopting interest rate rules, and setting rates policies, will not guarantee stable output;
- Monetary policy as applied in recent years, while helping reverse cyclicality, has its limits, and requires simultaneous application of fiscal stimulus programs to increase aggregate demand, focusing such spending on job generation and social safety nets;
- Public debt sustainability is critical, with financial institutions’ balance sheet exposure requiring careful management to constrain sovereign debt within prudent limits; and
- Capital account management is key, with inflows and outflows creating volatility, triggering currency fluctuations, and even talk of “currency wars.”
Lessons Learnt: Financial System Considerations
As regards lessons learnt in the financial system, there has also been much renewed debate regarding, amongst others:
- The role of finance in propagating and dampening macroeconomic fluctuations;
- Systemically important institutions, which privatised gains through excessive leveraging, but which socialised losses and ruined public finances;
- Risk build-up in the financial system, the rise of shadow banking, the incentive frameworks of the major financial players etc.; and
- The lack of understanding amongst regulators and supervisors about the damaging effects of exposures, as well as the need for stronger supervisory approaches and systemic risk assessment frameworks.
Sustainable Development & Inclusive Growth
So, turning to issues of sustainability and growth: the growing stress of crises, as well as the existing and emerging challenges facing our globe, have been discussed extensively over the past year or so within the United Nations, and in line with the Rio+20 mandate, we are now close to formulating the main contours of a new sustainable development agenda in which all Asia-Pacific countries are playing a very important role.
Within this context, there is an attempt to take an integrated perspective on economic, social and environmental issues and reflect on effective means of implementation of the emerging agenda. There is an increasing recognition that pervasive poverty and growing inequalities, social inequity, and environmental degradation must also be addressed if we are to reduce the worst impacts of the cycles of boom and bust.
Take just one example: the impacts of global climate change. Unless we work to integrate climate change mitigation and adaptation into every aspect of our future development planning, we risk losing the hard-won socio-economic gains already made, and jeopardise our ability to end extreme poverty, hunger, and deprivation.
Going forward, therefore, adoption of the sustainable development agenda will serve to facilitate crisis prevention and mitigation – a central theme of both the World Anti-Crisis Plan, which we are discussing today, and the broader United Nations efforts to place sustainability at the heart of the post-2015 development agenda.
A key prerequisite for sustainable development is inclusive growth. We have already experienced periods of great moderation and great recession. The countries of the G20, representing about 85 per cent of global gross domestic product, over 75 per cent of global trade, and two-thirds of the world’s population , are now embarking on a conceptual framework for a great transition, focusing on achieving strong and sustainable economic growth, with an initial aim to increase global GDP by more than 2 per cent over the next five years, and job generation, stimulating trade competitiveness, product innovation etc. are part and parcel of the structural reforms to achieve this 2 per cent target.
At least as important however, especially for regions such as Asia and the Pacific, will be how the non-G20 countries will position their approaches going forward, which is another reason why today’s session is so important. Apart from a focus on raising inclusive growth, we must agree on what other crisis prevention and mitigation measures are needed.
To conclude, the late American author and world peace advocate, Norman Cousins, once said that: “Man[kind] is not imprisoned by habit. Great changes […] can be wrought by crisis - once that crisis can be recognized and understood.” So I reiterate my initial message, that we need the right diagnostics.
The 1944 Bretton Woods Conference forged our financial architecture, and shaped the modern global economy. With the emergence of new economic powers, and a changing development paradigm, our shared challenge today is to use the global financial crisis to strengthen multilateralism and make the fundamental shifts needed to leave no one behind; transform economies for jobs and inclusive growth; build peace and effective, open and accountable institutions for all; forge a new global partnership; and to put sustainable development at the core of it all.
I thank you.