From the year 2007 to 2011, the global economic system as a whole learned some of its toughest lessons and faced the hardest of times since the great depression of the 1930s. All of this started with irregularities in the US housing market and following credit crunch; then came the demise of Lehman and the chaos in the financial markets which triggered the global downfall in the growth rate, literally acting as fuel for a global recession.

This crisis was transported through various channels across the globe, creating a situation very close to the great depression where the pace of growth actually faded dramatically, where trade stumbled, financial markets dried out, and of course global unemployment bloomed.

A conceptual analysis of the empirical evidence from the period between 2007 to 2011 presents two broad cases of distinction. In the first case we were struggling to put the US economy back on track with the help of financial bailouts to corporations and financial institutions. In the second case we found that international institutions are providing a series of bailouts, creating a firewall against default by some countries in the Eurozone.

Death by Debt

Rapid, large scale accumulation of public debt poses a repugnant and most grievous threat to a national economy because it paralyses the eligibility of a country to secure any assistance in the future by the international community. It is nothing but financial death for a nation because it kills the natural basis of the financial system. The banking industry may collapse, lowering the value of domestic currency, causing irreparable damage to banks invested in the sovereign debt of the defaulting nation and worsening the potential global credit crunch.

Today economies, markets, and institutions are so interconnected and interwoven that any event or activity that can trigger a potential negative extreme, will have a direct and strong impact on other economies. For example, a drastic increase in public spending in China will probably increase demand for natural resources in Australia — and many more sophisticated illustrations can be easily found.

Bailouts and Future

How far can we really rely on bailouts? It all depends on how much we are prepared to mend the gaps between revenues and expenditure in government finances. In simple words, bailouts provided to any country does not mean that fiscal disparities are eliminated. In fact, bailouts often only act as the respirator of an ailing economy at its death bed.

In the case of the Eurozone debt, with the complications and assistance extended by the International Monetary Fund (IMF), it is a matter of diplomatic dynamics and not a real resolution that can be relied upon in the future.

IMF and other global economic and financial intuitions should draft a policy recommendation that virtually limits any reliance or mere assurance of a bailout by other nations in the future.

Image Courtesy of    DoraBakoyannis

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The World Economic Forum (WEF), based in Geneva, have been meeting up for their yearly convention on January 25 and will be concluding the exclusive gathering on January 29. The WEF was established in 1971 and is an independent international organization formally designed to improve the state of the world and organize annual meetings in Davos to discuss, debate, redefine, and rebut many of the world’s most pressing economic and political issues.

Every year in snow-covered Davos, WEF organizes a meeting hailed as a convergence of the elite, from the world of business, governance and academics engaged in finding strategic solutions to global economic problems and perhaps acting as a counsel of change.

This year, the theme is “The Great Transformation: Shaping New Models” which have be organized in the backdrop of eurozone fiscal fissure, tussle for reform and installation of democracy in the Arab world, slow and sensitive global growth, and lastly, the unending enigma of capitalistic disorder.

Assume the world is a stage. We have seen many despotic characters fall in the Arab world, and many characters emerging with ponderous levels of debt on their backs, casting a shadow of  imminent instability to the global economy. Also, the world witnessed a few Asian players taking the lead in the economic game, and there has been a transformation in the totality of the economic and political picture of the world.

Nonetheless, it will be intriguing to see at this juncture, as the European monetary union is on the verge of collapse due to fiscal disorder and as capitalism is brutally blamed for excessive greed, what transformation WEF can bring or advocate in Davos.

The co-efficient of congress 

Due to several fundamental changes occurring in the world, we have lost sight of where the world is going. Professor Klaus Schwab, the founder of WEF, stated that we clearly need new models for global, regional, and national business decision-making. According to him, new models are needed to account for the fundamental power shifts that have already happened and continue to take place. Additionally, the following are also needed:

1. New models are needed to acknowledge that we live together in a multicultural, multi-ethnic, and multi-religious world.
2. A model is needed to seriously address the social impact of globalization and new waves of technological innovation.
3. Another model is needed for job creation.

As correctly recognized by Professor Schwab, there is a need to review the distribution of power in the world, such as new shifts in balance of economic power from west to east, so there can be a greater variation in attendees. Countries which were not a part of this gathering in the past have been invited for the 2012 edition and this time around, the WEF is welcoming people from the Arab world, including Egyptian presidential candidates, the Tunisian prime minister, and the Libyan interim prime minister.

Speaking to journalists near the forum’s headquarters, Professor Schwab stated recently, “Capitalism, in its current form, has no place in the world around us.” Sharan Burrow, General Secretary of the International Trade Union Confederation said, “It is too optimistic to say we need a new system. The system is not working because of extraordinary greed, extraordinary inequality and attacks on workers’ rights that are leading to a crash in demand.”

Income inequality is rampant in the world today, according to a report published by the Organization for Economic Cooperation and Development (OCED). Wage gaps between the rich and the poor have reached their highest point in 30 years.

It has been observed that job creation is the key to eliminating the disparities in people’s incomes as well as sluggish growth rate and most importantly social unrest, so there is hope that the WEF meeting at Davos can inspire the reconstruction of a defunct system of capitalism by introducing far reaching changes.

Image Courtesy of   http://www.flickr.com/photos/worldeconomicforum/

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“This will be the year Britain sees the world and the world sees Britain,” UK Prime Minister David Cameron said in his New Year’s speech to the British nation.

Many believe that 2012 will be a year of economic uncertainty for the United Kingdom. Indeed, with the rising unemployment rate and the European financial crisis, nothing is certain. “There are fears about jobs and paying the bills,” the prime minister said in the New Year video message. “I know how difficult it will be to get through this — but I also know that we will.” This year seems to be a critical year for the global economy as the euro enters its most vital year to date.

Recently, Mr.Cameron vetoed a proposal to issue an EU financial transactions tax, saying that “Unless the rest of the world all agreed at the same time that we are all going to have some sort of tax then we are not going to go ahead with it.” However, according to the Wall Street Journal, the Prime Minister said that the government’s plan to lessen the country’s budget deficit will result in some protection from the current euro-zone debt crisis, stressing that changes need to be made in order to seize growth opportunities outside of Europe.

The Guardian reported that the economy is expected to expand by merely 0.7% this year. Tony Dolphin, the chief economist of the Institute for Public Policy Research (IPPR) said,

“If the economy does find itself back in recession, it is likely to have to find its own way out of it. There are ultimately only three solutions: the government decides to increase public spending or overseas demand for UK output increases substantially, or UK households and companies are given some reason to spend more.

The first is not going to happen, the second is extremely unlikely, and so we are left with the third. But with no prospect of tax cuts or lower interest rates, it is not clear what in the short term the catalyst for more spending by the private sector will be.”

Despite the current economic situation, there are still several reasons to be hopeful. London will be hosting the Olympic games from July 27 to August 12. The Britons will also be celebrating the Queen’s Diamond Jubilee this June, marking Queen Elizabeth II’s reign of 60 years.

The Prime Minister believes that regardless of the struggles the country is facing, 2012 will be a turning point for the UK. He said, “It must be the year we go for it—the year the coalition government I lead does everything it takes to get our country up to strength.”

Rosli Othman / Shutterstock.com

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