Global Trends by Martin Khor

Monday 3 January 2011

A difficult year ahead

2011 has been ushered in with fireworks and hopes for better times across the world.  It will be an interesting but difficult year ahead.

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The new year was ushered in across the world with fireworks and parties.  It is hoped everywhere that there will indeed be a happy new year.

But what that means depends on where you are.  For most people, it will be a year of uncertainty and difficulty. 

A big question mark hangs over the health of the global economy.  So far a depression has been averted despite the collapse of big financial institutions a couple of years ago.

The fire-fighting efforts of world leaders averted a catastrophe, but the crisis is far from over, and is being manifested in different and often unexpected ways.

Who would have thought even a year ago that Europe would become a new epi-centre of the crisis? The dramatic events of 2010 cast a shadow over the future of the euro itself, and the new year will see the unfolding of more of the crisis, as Greece and Ireland try to get out of their quagmire through very painful policies overseen by the IMF, while Portugal, Spain and others try to avoid falling into the same quagmire.

In the new year, the nagging question whether the best way to deal with a country's insolvent debts is to throw good money after the bad will become increasingly acute.

The calls for a different approach will grow louder -- to recognise the need for debt restructuring up-front, rather than to do it only after years of unsuccessful painful policies and social unrest.

In this new approach, the indebted country and its creditors are brought together by an independent and internationally recognised arbiter such as a debt restructuring court with the view that the creditors are paid an appropriate fraction of the loans (taking a “haircut”, or a partial loss).

The country pays what it can (as determined by the court, aided by accounting firms), is protected from litigation by its creditors, provided with new loans in the meanwhile, and gets back to business.

This system, similar to the United States' bankruptcy procedures for companies, but now applied to sovereign debt, was proposed long ago by UNCTAD and even the IMF secretariat, and would have helped many indebted developing countries from undergoing decades of underdevelopment if it had been set up.

It takes a debt crisis in Europe, the world's richest continent, to have a serious discussion going, with the German leader Angela Merkel in the forefront of proposals to ensure that future bail-out loans given

by European countries to others in trouble will include that creditors take a haircut or share in the losses.

The new year will see some progress in establishing the system, though perhaps not in time to save one or two more European countries from old-style bailouts.  The wider significance is to have the new approach spread to also cover the future serious debt problems of developing countries.

Will the world economy recover in 2011?  That is the trillion dollar question, which is difficult or impossible to accurately predict.  In the past few years, most predictions by prominent organisations have turned out wrong, as the crisis took on its own twists and turns.

What is fairly clear is that the Western economies will not be engines of global growth, given the austerity policies and debt crises in Europe, and the Congress-administration wrangling over economic policies in the United States.

Hopes are pinned on China in particular and big emerging economies in general to pull the world into renewed growth.  But their economic weight is still too low to be able to perform this role.  Even if they grow, based on domestic demand, it cannot compensate for the expected slowdown in import growth in the Western economies.

Thus, slow to moderate growth is what the small and medium sized developing countries can hope for.

The tensions in 2010 over currencies and trade balances (especially as between the United States and China) will increase in 2011.  So far, explicit trade protection has been avoided, but the temptation for distressed major countries to move into that dangerous territory will grow in the new year.

On the health front, 2011 will likely see growing concern over the rise of “super-bugs”, or bacteria that have become resistant to multiple antibiotics, like MRSA that affects many hospital patients, and that make many ailments including TB and malaria much more difficult to treat.

Scientists are now warning that unless new antibiotics are found, or the existing ones are used more prudently, we will be entering a post-antibiotic era, in which more and more diseases will be untreatable.  The World Health Organisation is planning to highlight this problem in its World Health Day this year.  

On the environment, there will be new attempts to flesh out a new climate change deal in time for the next big UN climate conference in South Africa in December.  A deal is possible, but chances for a fair deal in which developing countries are given the means to combat climate change and the space to still develop, are slipping away. 

Many other “green issues” will also preoccupy 2011, including water scarcity, combatting biodiversity loss, obtaining benefits from biological resources even as others demand access to these, a debate on what the “green economy” means, and the future global governance of environment.

On the political front, a big issue is whether the Palestinian-Israeli conflict will get anywhere nearer a solution.  The signs are at present extremely pessimistic, and this age-old problem will cast new shadows over world politics this year.

Developments in Afghanistan and Iraq will also be predominant concerns this year, as the deadlines for United States withdrawals get nearer.

And in many countries, probably including Malaysia and Singapore in our part of the world, new general elections will be held, giving citizens the chance to confirm the old or usher in the new.  What is equally important is that the political battles are fought in a fair way, and that is of course easier said than done.

All in all, an interesting but difficult year lies ahead.