LIGHT AT THE END OF THE TUNNEL

What do the next couple of years have in store for the world economy? It was this burning question that the economic forum in Astana, which tends to a broad "Eurasian view" on problems of global development, tried to provide an answer. Among such problems was the world financial-economic crisis, which has snowballed into a world social crisis that is embracing many of the developed states. The creation of the G20 group has substantially extended the span of dialogue on reform of the world economy. At the same time, four years after the first summit of the anti-crisis "20", the format does not seem sufficient.

The post-crisis recovery of the world economy is inconstant and is taking place in conditions of continuing instability on the financial markets. Many of the basic flaws in the world currency-financial system, which led to the outbreak of the global economic crisis of 2008-09, have still not been rectified. Because of these systemic shortcomings the world currency-financial system is in need of large-scale and fundamental reform. Accordingly, economists are warning that the world can expect nothing good in the next couple of years.

View from Kazakhstan

Speaking at the fifth Astana economic forum, Nursultan Nazarbayev, the president of Kazakhstan, set out his concept of the development of civilization in the 21st century. Nazarbayev doubts that the G20 today is capable of offering the world the anti-crisis measures it needs. Furthermore, the one-dimensional nature of this format and the shortage of positive measures to rescue national economies, which are tantamount to fighting a fire with petrol, are leading to an even greater extension to the crisis situation: "Each new billion dollars is capable of creating a billion new social problems and is like fighting a fire with petrol, as they say."

In the opinion of the Kazakh leader, with whom, incidentally, Nobel economic prize winners agreed, mankind today possesses huge potential both for successful development and also for self-destruction.

The Kazakh president proposed using the G-Global project, the principles of which he set out in five points, as a platform for dialogue. According to him, the international community can develop constructively only if there are no revolutions, in conditions of equality, mutual tolerance, global transparency and multi-polarity.  The successful renewal of the global architecture can only be evolutionary.

As the "Arab Spring" has shown, revolution merely slows down the development of society. It pushes the economy and social development backwards, complicates inter-state relations and engenders even more problems, Nazarbayev believes.

In the 21st century the division of countries into great and secondary, the driving and the driven, has become outdated. The inertia of domination of some over others does not help progress. This is a blind alley for everyone, Nazarbayev believes. He proposed creating a system of global administration that would take into account the interests of the developed and the developing countries. Moreover, international relations should be built on the basis of tolerance and trust. At the same time, relations between states should be tolerant irrespective of their geo-political weight, influence, historical experience and level of development of their economy and society.

Compliance with international transparency is also a necessary condition of the development of mankind.

Nazarbayev believes there should be no double standards in the world that would degrade nations - large, medium-sized or small. There must be maximum openness and transparency in international affairs…Only then will the global economy develop more successfully and the prosperity of each people be higher, the president said.

And, in the Kazakh president's opinion, the final principle of global development in the 21st century is the creation of constructive multi-polarity.

The creation of a multi-polar world is a trend of global development in the 21st century, but the question is what mutual relations between the poles will be like. Will it be honest, bona fide competition or will the world become a field of bitter political-ideological confrontation and an arena of a new arms race? The only alternative to these challenges and threats is the formation of constructive multi-polarity.

All these principles will be the basis of a new international G-Global format which was proposed at the end of last year by the Kazakh president as an alternative to the G8 and G20.

As far as Nazarbayev's proposals over many years about introducing a world reserve supranational currency are concerned, in the opinion of Robert Mundell, Nobel economic prize winner, it could appear within if not 10, then 20 years. "The world needs a world reserve currency," he said. "I think that in the course of the next if not 10, then 20 years such a world reserve currency must emerge. It does not have to be the monetary unit of a certain country: it could be privileges of short-term borrowing from the IMF. It is possible to establish the content of such a privilege, for example, in the form of six troy ounces of gold."

Five risks

Let us remind ourselves again that the basic topic of discussion at the forum in the Kazakh capital on 23-24 May was to save the eurozone because, according to IMF forecasts, an improvement in the situation with foreign debts in the developing countries is not expected before 2016.

According to a study by the Eurasian Bank's Centre for Integrated Research, the debt crisis in Europe is a long way from being resolved, and it could take up to 10 years to create the mechanisms to stabilize the situation. Yevgeniy Vinokurov, a director of the centre, during the sixth conference of finance ministers of the CIS countries, which was also held during the fifth Astana economic forum, listed the five basic risks for the CIS countries in the medium-term.

The first was a deepening of the debt crisis in the eurozone. The second was that there could be an outbreak of a crisis of trust caused by correlation in the US plans for medium-term budget consolidation at a federal level, which is expected no earlier than 2014.    

The third risk is that a debt crisis is possible at the level of town councils, cities and states in the USA. This subject merits closer attention bearing in mind the crisis in the eurozone, because debts in the States exceed the absolute sum of state debts in the eurozone. The point is that the States in its budget system is able to shift the burden of the crisis at the level of the town councils, promptly re-classifying the tax base. Thus, one may expect exacerbations of the crisis precisely there because this element of the crisis in its scale could roll over to a debt crisis in the eurozone.

The fourth risk is the "heavy landing" of the Chinese economy in 2013-14. China has already begun to sag - growth of GDP in the first quarter of 2012 was 6.6% compared with 9% in 2011. Even the liberalization of the yuan will not save China in the short term - the process of liberalization will take 10-20 years. Nevertheless, in the opinion of most experts, in the next few years the world will see an ever increasing domination of the developing, growing markets over the developed world. The reason for this is that growing markets are more stable for development, John Ferraro, global chief operating officer of Ernst & Young, believes.  

The fifth risk is an increase in prices for food and energy resources. "This risk is of a positive nature for the region, but for a whole number of CIS countries it could rebound on them," Vinokurov said.

In assessing the risks of global instability the CIS countries were split into three groups which differ from each other in their economic structure, the structure of their balance of payments and the level of their tax revenue.

The first group includes the oil-exporting countries - Azerbaijan, Kazakhstan, Russia and Turkmenistan, the second includes the economies of Armenia, Kyrgyzstan, Moldova and Tajikistan, which are united by two basic characteristics - relatively small size and large imports of energy, which allow for the transmission of risks - and the third the economies of Uzbekistan, Belarus and Ukraine. In the opinion of the head of the centre, these discrepancies between the three groups predetermine the channels of the negative impact of external shocks on the economies of the countries.

Experience in overcoming the crisis

Despite the global instability and the search by the world powers for ways of rescuing themselves from the crisis situation with minimum losses, Turkey is making every effort by 2023 to join the first 10 countries with the strongest economies.

Turkey is even prepared to give a lesson in overcoming the consequences of the world financial crisis. Turkish Prime Minister Recep Tayyip Erdogan said at the forum that through its monetary-financial and social policy of incentives his country could be an example for many whom it is prepared to assist and support in overcoming the global crisis.

He believes that the measures taken by the G20 countries have prevented the further expansion of the economic crisis. He proposed that the countries most affected by the crisis should accelerate the reforms of their financial and economic system.

The Turkish economy, he said, had experienced serious reforms over the past 10 years, and as a result of the implementation of a policy of stability the impact of the crisis on the country's economy was very small. In the past two years (the period of the greatest impact of the crisis) Turkey has created 3.5 million new jobs in the country. The country today has already moved to stable development of the economy. The speed with which the Turkish economy has grown and its stability strengthened is underlined by the fact that whereas 10 years ago Turkey's gross national income was $230bn, now this figure is $775bn, the prime minister said. At the same time, per capita income has increased from $500 to over $2,400.

Without creating extra debt Turkey continues to pay off its debts. And at the present time its debt to the IMF has been reduced from $22bn to $1.9bn. Turkey is also a most attractive country for capital investment, which is shown by its expansionary measures in this direction. The volume of foreign investments in the Turkish economy is $16bn.

For his part Kazakh President Nursultan Nazarbayev is also confident that it is precisely his country's rejection of external borrowing that has helped them survive the world financial crisis. "Easy credits are a trap, one must simply stop living on debt and credits, and that is what we are doing," Nazarbayev said.

In order to carry out new projects during the crisis Kazakhstan intends to use only funds from the special National Fund which receives revenue from the oil and gas sector. The reserves of this fund, together with those of the National Bank, amount to $86bn.

Eurozone must be rescued

Meanwhile, the Obama administration and China are worried at the situation in Europe (following a Greek withdrawal from the eurozone), but the leaders of the European countries are hoping to reach a truce in order to calm the financial markets before the European summit in June.

Former British Prime Minister Tony Blair claims that Europe needs fundamental structural reforms and the key for Europe is a coordinated policy for its future economic growth. The economy needs to be balanced with policy, especially in the eurozone, which needs fundamental structural reform, Blair believes.

In his opinion, Europe has no other alternative than to travel the path of fundamental structural reforms in such fields as social security, pensions, the labour market… "If we can balance macro-economic growth and macro-reforms we will have a good chance of getting out of this crisis," he summed up.

EBRD President Thomas Mirow is more optimistic. He believes that the eurozone has the best chance of surviving, but to do so it needs rigid coordination of fiscal and budget policy of the EU countries and general monitoring by the European Commission.

"Here we must create single budget, finance-and-credit and economic alliances, but today there is no political will and political preconditions for creating these alliances, and this is because of the mistrust by the political elite of one European country of the national sovereignty of another, which in the end led to the economic crisis," Mirow said. "At the present time it is necessary to balance the weak aspects and the EU is taking the appropriate measures in accordance with the specific features of each country."

This uncertainty concerning the degree of solidarity within the EU and the eurozone arose because of the way they tried to resolve the question of the debt crisis in Greece, Ireland and Portugal.

According to Italian Prime Minister Romano Prodi, Europe is today entering a new phase of the crisis, and bearing in mind the ratio of GDP and exports of the countries of the European Union to the world economy, its situation on the whole will depend on how the situation in Europe pans out.

Despite this, the collapse of the eurozone must not be allowed to happen. If Greece drops out, then it will be followed by Portugal, Spain, Ireland, Italy and so on, Prodi believes. Although the Greek economy constitutes only 2 per cent of the European economy, the thinking is that if there is no solidarity between the European countries, the collapse of the eurozone will be inevitable.

But a long-term strategy may become essential to get out of the crisis, although time will be needed to draw one up, which the eurozone doesn't have. "If our bank rates are constantly being raised, for example, as in Greece, then we have no time and opportunity left for reforms, because such high bank rates will destroy the financial system," Prodi said.

Finally the participants in the forum came to the opinion that the time has come to shape a fundamentally new world currency-finance system and to create a permanent body of world currency regulation based on the Council of Central Banks of the G20 with the aim of easing the volatility of the currency market and creating opportunities for urgent and coordinated response to the leading world currency exchange rates. At the same time the reform of the world financial system must provide for mechanisms for regulating the movement of short-term capital between countries.