Austerity Measures Could Lead to Depression

Economic austerity measures imposed by governments could land the world in a Great Depression.

That is the unvarnished warning from two parts of the UN System that usually have very different takes on policy matters: the United Nations Conference on Trade and Development (UNCTAD) and the International Monetary Fund (IMF).

In a new Policy Brief, UNCTAD has explained that warning. It noted that because of lack of consumer demand several advanced economies were “hovering on the brink of a second bout of recession,” but their “political attention" had "turned to ways to cut fiscal deficits and reduce the domestic public debt.” If they continued with that effort it would make it impossible for the private sector to grow and "de-leverage" its own massive debt.

Without “a rapid policy turnaround” said UNCTAD, the world is “in danger of repeating the mistakes of the 1930s.”

“During the Great Depression of the 1930s, the United States had experienced “two sharp downturns in succession.” Recovery from the “first wave (August 1929 to March 1933),” began “after President F.D. Roosevelt took office, in 1933. However, another severe downturn set in during 1937-38. That second downturn, UNCTAD said, was the result of “poor government policy, especially the decision to tighten up fiscal policy too early in the recovery.”

UNCTAD called on countries “threatened by recession and deflation” to “avoid intensified austerity measures because these are unlikely to produce the intended outcomes and could propel the world into a renewed bout of recession, or even into an outright depression.” (It did not address the possibility of hyperinflation if governments continued massive stimulus policies by simply printing new money.)

Given today’s highly integrated world economy, the “impact will not be limited to specific sectors or to well-defined regions.” Further, a “lost decade” for the world economy would “throw into question the ability of democratic governments to tackle the most urgent challenges of our age.”

Not to mince words, that is a warning that a Depression could bring fascist demagogues to power.

Picking Sides For Armageddon

Two United Nations conferences, one in April 2008, the other in 2009 will bring into focus the concepts, priorities and strategies guiding the economic growth of developing countries. One is the 12^th UN Conference on Trade and Development (UNCTAD) to be held in Accra, Ghana; the other is the UN Conference on South-South Cooperation (CSSC), which will convene in Buenos Aires, Argentina, next year. Both are likely to sleepwalk through or entirely ignore the need for decisions on four key issues that will decide whether the world will evolve towards general peace or face a cataclysmic future:

• Environment and Development: If developing countries continue to follow the Western model of development, the global environmental impact will be disastrous. There is no way that the three billion people now living in poverty can achieve anything approaching Western levels of prosperity without accelerating global warming, desertification, pollution of terrestrial and marine habitats, and the increasingly rapid extinction of species (which is already at a rate not seen since the dinosaurs disappeared). A new development paradigm is needed, but that is not on the agenda of either UN conference (or indeed, anywhere else) .

• The Power of China: The growing economic and military power of China is pushing the world into territory that is increasingly hostile to liberal democracy, yet both UN conferences will studiously ignore that dire trend as they celebrate “South-South cooperation for development.” The phrase refers to cooperation among developing countries which now account for some 48 per cent of world GDP estimated on the basis of “purchasing power parity.” Unless there is a creative democratic response to the mutual support system of tyrannical regimes, we face an Orwellian future.

• The Rich Poor Gap: Despite the spectacular economic growth of a number of developing countries some three billion people remain mired in poverty. The rapid economic globalization supporting the growth is widening the gap between poor and rich in every country, developing and developed. Both UN conferences can be expected to make empty declarations on this issue and do little. Unless the problem is effectively addressed we will continue to have a world in which a rich and powerful global elite will be at constant war with an impoverished and disenfranchised underclass.

• An Ineffective United Nations: The United Nations is now as ineffective as the League of Nations was in its long final phase. It was not able to prevent the proxy conflicts of the “Cold War” that killed over one hundred million people, nor has it been able to check the commercial and “ethnic” wars that have continued to kill millions every year after the end of East-West ideological confrontation. It has stood idly by as repeated episodes of genocide have occurred in full view of the world's mass media. The UN, as the repository of hopes for the rule of international law, is critically important to developing countries; but neither conference will say much beyond expressing formulaic support for the organization, and meaningless reform efforts will continue, as they have for over a quarter century. Unless we have an effective peace organization, the trends described in the three previous paragraphs will push the world into ever more destructive conflict. With the continued proliferation of weapons of mass destruction, especially nuclear weapons, it is possible for conflicts to escalate rapidly to a scale at which all civilization will be at risk.

The world's governments are unlikely to act on any of these problems. An effective response must come from ordinary people. See my post of 2-20-08 for suggestions on what can be done.