Training
1
Preface
2
Insecurity spreads
3
The myth of self-regulated market
4
Security matters
5
Globalization and economic insecurity
5.1
Trade shocks
5.2
Unleashed global finance
5.3
Managing the business cycle
6
Natural disasters and economic insecurity
6.1
Dealing with natural disasters
7
Civil war and post-conflict recovery
7.1
Post-conflict reconstruction
7.2
Foreign Aid
8
Poverty, insecurity and the development agenda
9
Conclusion
As part of my learning experience of peace building and human security,
I wanted to grasp a few concepts on the economic aspect of peace building. The
UN has published the report below which contains excellent data on economic insecurity.
I found this document much more technical than the previous
one. Below are a few concepts from the overview chapter.
1
Preface
Access to a decent standard of living is a legitimate right
of every individual guaranteed by the Charter of Human Rights and the social
contract between a person and the government of his Nation. Minimum needs of health and
well-being are comprised of:
§ food
§ clothing
§ housing
and medical care and necessary social services
§ the
right to security in the event of unemployment, sickness, disability,
widowhood, old age
These fundamental needs are threatened by economic insecurity
resulting from
§ Armed
conflicts
§ Natural
disasters
§ Financial
crisis
The recent financial turmoil in the world economy has
endangered livelihoods in rich and poor countries alike. Unregulated markets
have contributed to increased economic insecurity without providing adequate
social protection. The World
Economic and Social Survey 2008 is
proposing a set of policies, at both national and international levels,
to help communities better manage economic risks, cope with economic insecurity
and secure their livelihoods.
2
Insecurity spreads
Globalization has produced an unfair distribution of wealth:
§ In
advanced countries we observe increased economic insecurity and rising
inequalities with fewer social protections.
§ In
middle-income countries, we observe an accelerated trade liberalization (the
removal of barriers on free exchange between nations) and premature
deindustrialization (the switch from heavy industry and manufacturing to services).
As a consequence, economic diversification and job creation are declining.
§ Developing
countries are dominated by poverty. Growth is stalled by economic insecurity
and political instability and, on occasions, ferocious communal violence.
Besides globalization, new threats have appeared: climate
change, natural disasters, unstable financial markets and volatile capital
flows (the sub-prime crisis). The high demand for agricultural products makes
the prices go up, food security becomes an issue. All these threats evolve
autonomously, beyond political control.
3
The myth of self-regulated market
Markets do not regulate themselves but depend on an array of
institutions, rules and regulations. As part of a global trend, many of the
stresses and burdens of unregulated markets have been unloaded onto individuals
and households, and with few offsetting government responses. In the USA, it is
called the “great risk shift”.
4
Security matters
Economic insecurity arises from the exposure of individuals,
communities and countries to adverse events, and from their inability to cope
with and recover from the costly consequences of those events.
Economists have distinguished between:
§ idiosyncratic risks: generated by
individual and isolated events such as an illness, an accident or a crime
§ covariant risks: which are attached to
events that hit a large number of people simultaneously, such as an economic
shock or climatic hazard, and often involve multiple and compounding costs.
Precautionary savings, or spreading the risk through
insurance contracts, can often suffice, particularly in response to
idiosyncratic threats.
Different approaches exist to deal with covariant risks. It
is primarily the responsibility of national governments to address these threats
by removing underlying vulnerabilities, greatly reducing the exposure of
households and communities, and supporting their recovery if disaster does
strike. In most advanced countries, a mixture of public and private mechanisms
has been used to ensure maximum coverage and protection. In poorer countries,
the mix of options is much more limited, with greater reliance on informal
mechanisms such as family support or moneylenders. In the context of societies
with an increasingly complex division of labour, there is a need for the government
to provide significant investment in prevention, preparation and mitigation
measures, filling the public domain with a dense network of
institutions—arising from a social contract—so that individuals, households,
firms and communities are able to pursue their day-to-day activities with a
reasonable degree of predictability and stability.
5
Globalization and economic insecurity
5.1
Trade shocks
International trades have increased and produced greater
national wealth and insecurity. Developed nation subcontract (“offshore”) manufacturing
and service activities to lower-cost locations, finding vast new sources of
labour in the developing world, particularly in China and India (as illustrated by T. L. Friedman).
There is evidence that this wave of globalization has raised
worker vulnerability in the industrialized countries, heightening inequality
between high- and low-skill workers, dampening employment growth and lowering
the overall share of wages in national income.
Increased vulnerability does not translate directly into
greater economic insecurity, if institutional supports and national policies
are available to reduce and absorb the risk (employment insurance). The flip
side of the offshoring of jobs by multinational companies is often low value
added and unstable assembly jobs in emerging markets.
§ East
Asia exports rely less on primary products and resource-based or low-technology
manufacturing: 35% of exports in 2005 against 76% in 1980.
§ This
is not the case for South and Central America: 78% in 2005 against 90% in 1980.
§ Africa
relies more on low value added exports: 83% in 2005. Due to a weakly
diversified economy, African countries are more vulnerable to trade shocks.
Procyclical capital
flows: Movements of money, investments, trades, fiscal revenues that are
affected positively (they grow) with the state of the economy.[1]
The opposite is countercyclical. The example that comes
to mind is a short sale of stocks.
5.2
Unleashed global finance
The weight and influence of financial markets, financial
actors and financial institutions have grown dramatically. There is a growing
level of debt in the household, corporate and public sectors. Today, asset
prices are driven not so much by improved prospects of income gains or losses
as by expectations of price changes. But as balance sheets adopt smaller
margins of safety, the system becomes more and more fragile. Since WW II
reconstruction, we have shifted from an income-constrained to an asset-backed
economy. Increased access of households to credit has meant that consumer
spending can increase, even with stagnant incomes. Indebtness rises and savings
fall. During booms, private sector deficits and borrowing tend to rise; while
during a crisis, external financing is restricted and a sudden increase in the
cost of borrowing is felt.
Because of volatility, episodes of exceptionally rapid
economic expansion can end very suddenly, leading to deep recessions or even
longer periods of stagnation with rising levels of income inequality.
5.3
Managing the business cycle
The policies that emphasized controlling inflation and
restoring fiscal balance are not sufficient. A different approach would
include:
Counter cyclical macroeconomic policies by setting fiscal
targets that are independent of short-term fluctuations in economic growth. The
establishment of commodity and fiscal stabilization funds could also help
smooth out fiscal revenues.
Macroeconomic policies should be supportive of sustaining
economic growth and employment-generation: broader development strategy, fiscal
policies would give priority to development spending, including investment in
education, health and infrastructure, monetary policy such as directed and
subsidized credit schemes, managed interest rates. Maintaining competitive
exchange rates is considered essential for encouraging export growth.
A common response in many developing countries to the
vulnerability associated with sudden stops and reversals of capital flows has
been a rapid build-up of reserves to reduce their debt vulnerability. A buffer
or “self-insurance” carries a high price tag. The alternative will require a
strengthening of regional and global forms of financial cooperation and of macroeconomic
policy coordination between nations.
Multilateral responses are needed to dampen the
procyclicality of capital flows, and provide counter-cyclical finance, and thus
help create a better environment for sustainable growth:
§ Improved
international financial regulation to counter capital flow volatility.
§ Enhanced
provision of emergency financing in response to external shocks.
§ International
Monetary Fund (IMF) facilities should be significantly simplified and should
include more automatic and quicker disbursements proportionate to the scale of
the external shocks.
6
Natural disasters and economic insecurity
More than 7,000 major disasters have been recorded since
1970, causing at least $2 trillion in damage, killing at least 2.5 million
people and adversely affecting the lives of countless others. With improved
warning systems and more effective food and emergency aid, the number of deaths
has declined but the livelihood of communities has suffered economically.
High rates of poverty, high levels of indebtedness,
inadequate public infrastructure, lack of economic diversification, and the
like create the structural backdrop for developing countries as they face the
threat of natural disaster. Under these conditions, families quickly exhaust
coping mechanisms such as use of savings and credit, sales of assets and
migration, and can be forced into more risk bearing survival strategies such as
the taking out of high-cost loans, which only further perpetuate vulnerability.
Fragile food, health and employment conditions slow the recovery and increase
exposure to the next hazard.
6.1
Dealing with natural disasters
An integrated national policy to manage disasters must contain
increased investment in preparation and adaptation so as to reduce the risk of
natural hazards’ turning into disasters and preventive measures designed to
deal with food vulnerability: active support to small and medium-scale crop
agriculture. More diversified economies suffer smaller losses from natural
hazards and recover more quickly.
One action that could be quickly implemented to better
assist countries affected by disasters would entail introducing a simple
mechanism for extending a moratorium on debt servicing through, for example,
improvements made to the Paris Club process.
There is a need for a well-funded facility that could not
only provide sufficient financing quickly and automatically to countries hit by
disaster, but also begin to perform the much more demanding task of investing
in disaster reduction for the longer term.
7
Civil war and post-conflict recovery
Fragile societies are vulnerable to a multiplicity of
threats ranging from natural disasters and food shortages to financial shocks,
rising inequality, and badly handled elections, any of which could tip them
into widespread, and even genocidal, levels of violence. Armed conflicts
between States have given way to civil wars fought principally within national
borders. Conflicts last longer in poor countries, up to nine years compared to
two to three years in the 1970s. The State cannot pay for the recovery due to
military spending, decline in investments and fiscal revenues, capital flights due
to insecurity.
7.1
Post-conflict reconstruction
Conflicts tend to be recurring in unstable zones. Such
societies do not have the luxury of meeting the goals of security,
reconciliation and development in a measured or sequenced manner, but must
begin the recovery process on all fronts by repairing trust in public
institutions, creating a unifying national identity. Accordingly, building a
durable peace will require active economic policies, including unconventional (adaptive)
macroeconomic measures.
7.2
Foreign Aid
Reliance on external support is unavoidable. However, aid to
post-conflict countries often tapers off prematurely and, often, at the very
moment when countries have rebuilt institutions and are in a better position to
absorb aid and spend it effectively. Steps are being taken by the international
community within the context of the Development Assistance Committee (DAC) of
the Organization for Economic Cooperation and Development (OECD) and the Peace
building Commission to ensure stable and adequate aid flows for sufficiently
long periods of time to rebuild credit and financial markets. Corruption and accountability
must be addressed.
8
Poverty, insecurity and the development agenda
Poverty and insecurity can be combatted by sustained rapid
growth and expansion of formal employment (regular wage, by opposed to a part
time job).
Economic diversification remains among the most successful
means to insure against insecurity. Rural growth is likely to reduce poverty
faster than urban growth, with increased support to agriculture, small farmers.
Labor-intensive manufacturing and a more sophisticated service sector will also
need to be encouraged. Pro-poor macroeconomic policies can be used to manage
“commodity cycles”, like stabilization funds, competitive and stable exchange
rates, low and stable real interest rates, stable fiscal revenues for filling
the infrastructural gaps.
In recent years, microfinance has become the policy of
choice. Microcredit has expanded to include micro savings and micro insurance,
showing success in alleviating poverty amongst women. India has recently
adopted a workfare scheme that guarantees 100 days of employment in a year to
all those who wish to participate. Recipients receive benefits under the
conditions that they improve their job prospects by receiving training.
Cash transfer programs (from government to communities) promote
specific development objectives, such as school attendance by children and use
of health services.
9
Conclusion
The data from the World Economic and Social Survey 2008 may be
interpreted as follows:
Markets cannot be left to their own devices in respect of
delivering appropriate and desired levels of economic security. Just what
combination of regulation, mitigation, protection and relief is required will
depend on the kind of threats being faced, and on the local capacities and
resources that can be mobilized, as well as on local preferences and choices.
Multilateral approach includes:
§
A renewed Bretton Woods. Counter-cyclical
macroeconomic measures and financial regulation need to be revived. The level
and terms of access of developing countries to IMF resources, especially
compensatory financing mechanisms designed to assist in coping with external
shocks must be reconsidered.
§
Revisiting the Marshall Plan principles. An
international target in the aid field is that of raising official development assistance
(ODA) to 0.7% of (DAC member) donors’ gross national income.[3]
Meeting the target is important, but it will not be sufficient. international
assistance must provide immediate and generous support for national development
priorities.
§
A global New Deal. Regarding global food policy,
further agricultural trade liberalization, compensatory financing mechanisms
and social safety nets should be designed to help food importers. One
suggestion entails a minimum basic income in the form of a cash grant to all
households. United Nations organizations have begun examining the concept of a
“global social floor” [4]
designed to provide a minimum level of security in line with the principles of
the Universal Declaration of Human Rights.
The responsibility for the choice and mix of policies
required to guarantee prosperity, stability and justice, remains, of course,
with national institutions and constituencies, but in an increasingly
interdependent world and on a fragile planet, building a more secure home is a
truly international endeavour.
Hanuman
Hanuman
