Transformation through the crisis

Ricardo Lagos Escobar

The current global financial crisis may usher in changes as extensive as those brought about by the fall of the Berlin wall in the twentieth century. Indeed, what we are currently experiencing is the dramatic fall of another wall – Wall street. The fall of the Berlin wall brought an end to a school of thought that viewed the state as the only player in economic life. The current crisis signals the downfall of another school, one based on the idea that a market economy can do away with the state altogether, regulating itself and tending “naturally” towards equilibrium. However, unilateral schools of thought that attempt to simplify the complexity of economic processes do not provide adequate answers. When considering the consequences of the financial crisis, the following should be kept in mind:

1. Making the financial system more accountable
The current crisis does not imply the death of the market economy or of the process of globalisation except in its financial aspect. It should, however, mark the end of a financial system outside public control, lacking in norms, and with a weak and ill-balanced international architecture that has not stood the test of time. Instead of supporting production, the financial system sought to maximise short-term gains, embraced speculation as a virtue, and took greed as its guiding principle. As a result, it has destroyed confidence, plunging the world economy into a lengthy recession. We need to bring an end to this logic, and build more sustainable financial markets that are geared toward the public interest.

2. Renewing the public domain in world affairs
The crisis provides an opportunity to establish an international consensus on a renewed public role in world affairs. Governments intervene when there is a crisis because, in the end, it is entrepreneurs and small and mid-sized businesses who find themselves without access to finance, workers who lose their jobs, emerging economies whose development is interrupted, and people who have only recently crossed the poverty line who are at risk of slipping back below it.

It is the outcome of this crisis – the “afterwards” – that will be decisive. We need to strike a new balance between the logic of the market and that of our citizens’ public interest and between short-term and strategic priorities. We need a new international financial architecture to replace that of Bretton Woods; we need new and better vehicles for international governability; we need to incorporate more voices into world decisions.

Are tax havens an essential part of the world economy? Or are they a grave distortion of the system? Should private agents, with their interests, be allowed to rate other private players? Should executives of large financial companies be permitted to take decisions that seek to benefit from the savings of millions of people? Those are questions that must be addressed by rules to safeguard the general interest.

3. Ensuring social progress remains the priority
The current crisis threatens to reverse the important progress achieved by Latin America in recent years. Between 2003 and 2008, our economies grew more quickly than during any other period in the past 40 years, a remarkable achievement accompanied by increased savings, prudent fiscal policies, and more solid social policies. We have seen the region’s poverty rate drop from 44 per cent in 2002 to 35.1 per cent in 2007. Critical to this success story was the development of a new strategic outlook, which ensured that the economic gains were used to promote sustainable development, democratic consolidation and a greater voice for Latin America in the world.

Today, the strategic debate about Latin America’s future has been diverted by the need to respond to a brutal shock. As governments take action to respond to the crisis, there is a risk of back-slipping, particularly as regards social progress. Losing ground in this area has long-term consequences and destroys social cohesion. Governments must guard against corporate interests and pressures and review budget priorities to allow for emergency measures in relation to housing, infrastructure or public policies targeting the most vulnerable sectors of the population.

4. Transforming the crisis into opportunity
The road ahead will be difficult. Leadership will be needed. Governments will need to be credible and implement short-term measures without losing sight of their core strategic challenges. However, if the correct steps are taken, we may be able to transform this crisis into an opportunity, and achieve progress in areas which we failed to tackle during the boom years.

Regional integration is one example. In difficult times, we can abandon rhetoric, agree on norms that reflect our common interests, and embark on mutually-beneficial cross-border infrastructure initiatives that reduce inter-regional asymmetries. Only this way will we be able to strengthen our region’s international voice and contribute to the creation of more inclusive global governance structures and thereby prevent a re-occurrence of the current crisis.

Ricardo Lagos Escobar is the former President of Chile