Tokyo Correspondent
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THERE are three basic types of earthquakes: those that shake doors and rattle windows, those that cause a few buildings to lean or fall over, and those that destroy just about everything in sight.
The financial and economic crisis that erupted last year was of the second type but it may yet morph into the third. And maybe that is what is needed to achieve real reconstruction of the global economic system.
The system has been shored up by massive underpinning with monetary and fiscal stimuli but ominous subterranean rumblings suggest that there are more shocks or eruptions still to come. Liquidity is flowing again (in a limited way) within domestic financial systems but it is not flowing across national borders, while international trade and investment remain badly disrupted.
When the crisis erupted, causing demand to collapse in advanced economies and export and output in emerging economies to follow suit, the internal response seemed impressive. The G-20 vowed to maximise economic stimuli, which each member country did, although within its own national borders and with an eye to domestic constituencies rather than the international community.
The G-20 also vowed to eschew protectionism in order to ward off another Great Depression. Governments did not resort to trade protectionism but adopted more subtle forms of financial protectionism, while markets did their part by beating a retreat from the world's emerging economies.
This is where we find ourselves now: on the brink of a closing down of the global economy. Pascal Lamy, head of the World Trade Organization, will voice such concerns at this week's G-8 summit in Italy, pointing to a sharp contraction in world trade and to slumping levels of business and portfolio investment in emerging economies from economically advanced nations.
Some may see such things as mere 'aftershocks' of last year's earthquake but they look more like warnings of a new and more globalised quake.
In a paper presented last month to the G-20, the Washington-based Institute of International Finance (IIF) warned of an impending 'fragmentation of the international financial system' as a result of post-crisis government actions.
In return for pouring billions of dollars of taxpayer money into shoring up domestic financial institutions, governments have urged those institutions to lend or invest at home rather than abroad.
This 'home bias' in the flow of funds is sowing the 'seeds of fragmentation and disintegration of the global financial system', and carries a particular threat of 'credit-rationing' for emerging markets, the IIF said. Sans credit, sans trade and sans investment, emerging markets will (like Shakespeare's figurative elderly, balding and toothless man) be 'sans everything', including hope.
Where else in the world can we look for signs of hope? Not to advanced economies it seems, because there, the 'green shoots' of economic recovery that were widely described in the spring time have withered again with the onset of summer. Joblessness is still rising, bringing predictions of a 'jobless recovery', and consumption is stagnant in the US, Europe and Japan.
Even stock markets seem to have given up hope. It is easy to see how, in this situation, disappointed expectations of a global recovery could engender a pessimism that feeds upon itself, creating a fresh dip in global demand and output, thereby hitting global trade and investment even harder.
We would then have a recovery trajectory that looked more 'L-shaped' than 'W-shaped'. In fact, it might not even be that good if the horizontal axis of the 'L' proves not to be the floor of recession.
Is there any hope to be had at all? Yes, in a perverse sort of way, there is. The worse things get in the short-to-medium term, the better they could get in the longer term. It's all a matter of seeing things in the proper perspective, and at present, too many people and policymakers are viewing events through the prism of the past rather than through the telescope of the future.
They are trying to restore the status quo ante, to get banks lending again, consumers consuming again, trade flowing again, investors investing again and so on. At each sign that this frantic search for security in past patterns of activity is succeeding, market spirits lift, only to slump again when the economic body refuses to be resuscitated.
Then there are calls for yet more monetary or fiscal stimuli, taking central banks and governments closer to bankruptcy. The fact is that the old order cannot be revived because it was based upon a myth.
This myth was that a sustainable base of consumption could be built upon a relatively small part of the world's total population, provided that the haves were kept gorged with sufficient volumes of credit, while the (majority) have-nots lived on the proverbial 'dollar a day'.
Leaving aside the social inequity of such a model, it is financially unsustainable, as we have seen. Global efforts have to be directed now not to shoring up the ruins of the old model but to creating a new one, using agricultural reforms, infrastructure building, a re-pricing of labour, more international aid and so on to bring about a better balance between rich and poor countries and communities.
This is not so much a matter of redistributing wealth as creating new wealth by giving the poor the means to help themselves. But unfortunately, it looks as though there might need to be a second earthquake, in order to clear the ground - intellectually as well as physically - before any such fundamental reconstruction of the global economy can get underway.
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