Financial crisis and global order

A world in crisis needs a new global order

South China Morning Post

Updated on Oct 11, 2008

The global credit crisis is spinning out of control and there is no end in sight. Yesterday was another dark day for financial markets. Virtually all the world's major indexes took another steep plunge. With fear in the air, investors panicked.

The Hang Seng Index fell more than 7 per cent yesterday, taking its cumulative losses for the week to more than 16 per cent. Other markets in Asia took a similar beating; the Indonesian bourse remained closed. This followed the Dow Jones' 7 per cent dive overnight. All eyes are now on the meetings of the world's finance ministers and policy chiefs in Washington, which began yesterday. Decisive, bold and co-ordinated action from all the major economies - not just the G7 - is desperately needed to stop the world economy from sliding into the abyss. What started as a local problem on Wall Street is now a fully fledged global crisis and there are predictions of a deep recession.

Policymakers in the US and Europe have been lurching from one crisis to another. Each rescue, bailout or interest-rate cut has been interpreted by investors as an indication that things must be going from bad to worse. Far from restoring confidence to markets, people have been spooked. Meanwhile, the leaders of most major emerging economies have sat on the fence. But the meltdown is very much their problem too. With governments intervening massively in the markets, the credit crisis has become highly political. And it is beginning to take on a profoundly social dimension. The poor will suffer in a global downturn, causing further dislocations and possibly unrest in the developing world.

Desperate times require desperate - but imaginative - measures. Belatedly, policymakers are beginning to recognise the need for concerted policy responses. This started with Wednesday's unexpected joint interest rates cuts by the US, Canada and European central banks, along with China. They are finally hearing the calls for united action from Dominique Strauss-Kahn, the International Monetary Fund chief, and Robert Zoellick, the World Bank president. The two institutions, much criticised for their misguided policy recommendations during the Asian financial crisis a decade ago, have shown a sharpened sense of what is needed this time. US Treasury Secretary Henry Paulson is right to convene a G20 meeting this weekend, putting major emerging economies such as China, India and Brazil on a similar footing to their richer counterparts.

But the west, and especially the United States, needs to recognise the realities of shifting world economic power. It can no longer pick and choose when poorer nations are allowed to participate and when to exclude them. As a debtor nation, the US needs massive capital to restore health to many of its leading corporations. It must overcome its nationalism to allow foreign ownership, which most likely will come from sovereign wealth funds such as those from China and the oil-exporting countries. Emerging economies holding US and European debt need to use their large reserves to buy up valuable assets as these debt holdings lose their value. It is in the interests of China and other emerging powers to help stabilise the global situation by shoring up the financial health of the US and the European Union, two of the mainland's largest trading partners. They must be allowed to do so.

The world's markets have endured an extraordinarily turbulent week. No one can say for certain what will happen next. World leaders must not fail when they strive for a solution this weekend.