Jean-Claude Trichet, president of the European Central Bank, recently said the global downturn had “bottomed out.” The Paris-based Organization for Economic Cooperation and Development, a club of the world’s wealthy nations, expressed a similar sentiment indicating that the economic slowdown across the world is moderating. In late April, finance ministers of the G7, a group of rich nations in North America and Europe, signaled global growth might begin by the end of 2009.
According to the OECD’s earlier forecast, the global economy would contract by 2.7 percent in 2009. In the same vein, the International Monetary Fund reported last month on the sorry state of the world’s financial system, saying it would likely be “unusually long and severe, and the recovery sluggish.”
Notwithstanding these pessimistic scenarios, several indicators seem to endorse an optimistic outlook. Public confidence is returning in Brazil, Russia, India and China. The credit crunch is slowing. Private equity is growing in Latin America. The U.S. housing market is beginning to stabilize.
All is not rosy, however. Unemployment in the U.S. will rise further. Many poor countries, already suffering, are likely to be hit harder by the economic downturn, and the targets of the U.N. Millennium Development Goals of reducing poverty and illiteracy will not be met in the near future.
The economic crisis has changed the global landscape. The G7 no longer rule the roost, having given way to the G20, which includes countries with emerging economies. At their London meeting at the beginning of April, this group agreed on a framework to manage the world economy. Rejecting some voices to create new international institutions, they decided to strengthen the existing ones: the IMF, the World Bank, and the World Trade Organization. Their objective is to provide resources to developing countries that are in desperate need of foreign direct investment to grow, and which have dried up.
President Barack Obama declared the G20 meeting “a turning point for the global economy.” The centerpiece of the G20 agreement will pump more than $1 trillion into the financial system, primarily through the IMF, to help the world pull out of recession by stimulating economic growth. The IMF’s resources are to be trebled to $750 billion and its special drawing rights — the reserve currency that permits its members the right to borrow from each other’s foreign currency — will be increased to $250 billion, more than 10 times its current level.
The United States and its model of an unregulated free market system is no longer seen as worth emulating by other countries, yet it continues to be an economic superpower. How long it will remain so will depend upon its capacity and skills to lead. The current crisis has been a wake-up call for the U.S. to put its own economic system in order so that it can provide the necessary global leadership.
Ved Nanda (vnanda@law.du.edu) is director of International Legal Studies at the University of Denver Sturm College of Law.
