Globoeconomic Policies for Overcoming

the Current Global Recession

USA JAPAN

UK

NIGERIA
THAILAND

Sa’idu Sulaiman
Samarib Publishers
GLOBOECONOMIC POLICIES FOR OVERCOMING
THE CURRENT GLOBAL RECESSION

By

Sa’idu Sulaiman
E-mail: saisulaiman@yahoo.com
 ©2009 By Sa’idu Sulaiman

All rights reserved. No part of this book shall be reproduced,

stored in a retrieval system or transmitted in any form by any
means without a prior written permission from the author.

Published in 2009 as an e-book

By

Samarib Publishers
A division of Samarib Ventures Ltd
Plot 326, Sallari, Babbangiji.
Kano, Nigeria.

E-mail: samaribven@gmail.com
CONTENTS FAGE

About the Author i

Preface ii

Introduction 1

Impact of Globalization on Macroeconomic Policy

and Analysis 4

The Nature and Goals of Globoeconomics 8

Lessons from the Great Depression of the 1930s 12

Causes and Manifestations of the Current Global Recession 18

The Response of the G-20 Leaders’ to the Current

Global Recession 22

Addressing the Global Economic Recession with a

Globo-Economic Policy: An Illustration 25

Conclusion and Recommendations 30

References 32
 About the Author

Sa’idu Sulaiman is currently a Chief Lecturer in

Economics at the Sa’adatu Rimi College of Education,
Kano, Nigeria. He obtained a bachelors’ degree in
Education/Economics in 1985, a postgraduate diploma
in management in 1991 and an MBA in 1997. He wrote
a number of books, among which are Researcher’s
Companion (1998), Understanding Finance and
Investment (1999), Understanding Philosophy of
Education (2001), Understanding Book-Keeping and
Accounts (2004) and The Making of Economics: an
Introduction to the History of Economic Thought (2005).
He edited Effective Management of Local Government
(1998) with Dr. Isma’ila Zango Mohammed, Child
Management (2003) with Sunusi M Kani, Leading Issues
in Economic Development and Social Welfare (2002)
with Professor Musa Abdullahi and Islamic Banking and
Finance: General Framework and Case Studies (2003)
with Dr. Bashir S Galadanci.

i
 PREFACE

This book explores reasons from the available literature,

which suggest the growing irrelevance of
macroeconomic policies and analysis in giving direction
to the economies of nations as a result of globalization,
and calls for the adoption of globoeconomic policies,
which incorporate the forces of globalization in
macroeconomic analysis and policy, with a view to
addressing the current global economic crisis generally
identified as a recession. The book also submits that the
recognition by the G-20 leaders at the London summit
that the current global recession requires a global
solution and that prosperity is indivisible indicates the
need for a globoeconomic policy. An illustration on how
to address the global economic recession with globo-
economic policies is also provided. The book concludes,
among others, that protective macroeconomic economic
policies such as tariffs are ineffective in overcoming
global recession; they retard international trade and
promote misunderstanding among nations.
Globoeconomic policies, on the other hand, have the
potentials of moving economic activities of different
nations towards achieving common goals such as price
stability, economic growth and development, curtailing
unemployment, etc., and of promoting
interdependence, peaceful co-existence and mutual
benefits among them

ii
 Chapter One

INTRODUCTION

An economic policy refers to measures taken by

a government to influence the behavior of an economy,
some of these measures operate over the whole
economy and constitute a policy in the sphere of
macroeconomics; others work on a specific part of the
economy and represent a policy in the realm of
microeconomics. Economists differ over the extent to
which government intervention should be allowed in an
economy, some adopt a laissez-faire view and trust the
market forces. Other economists want governments to
remedy the deficiencies of existing arrangements
through eliminating unpredictable changes in economic
activity, curtailing unemployment, promoting faster
economic growth, preventing deterioration of the
environment, etc. ("Economic Policy." Microsoft®
Encarta® 2006 [DVD].

Macroeconomic policy is being used as a tool for

boosting and giving direction to economic growth and
development. As globalization is increasingly affecting
macroeconomic policy and analysis, national economies
are loosing their distinctive qualities, the forces of
globalization therefore, need to be recognized in the
pursuit of economic development.

Prior to the emergence of the Keynesian economics,

economists laid much emphasis on microeconomics.
Keynesian economics, which was founded by John
Maynard Keynes and refined by his followers, gave
direction and impetus to macroeconomic analysis
initially because of its relevance to the problem of the
Great Depression, which affected many nations in the
1930s (Shapiro, 1970). Today economic analysis is
done at two levels. There is microeconomics, which
deals with the study of the economic behaviour of units,
and in some cases, groups of consumers and producers
in their attempt to allocate resources in order to meet

1
certain desired goals. These goals include efficient
allocation of resources, utility and profit maximizing,
cost minimization, etc. Macroeconomics, on the other
hand, is the study of the aggregate economic behaviour
of consumers and producers and of fundamental
economic phenomenon such as inflation, depression and
unemployment with a view to achieving certain desired
economic goals. These goals include price stability,
economic growth and development, obtaining a
favourable balance of payment, controlling exchange
rates, curtailing unemployment, etc.

With the ever increasing influences of globalization on

the economies of nations, macroeconomic variables
such as inflation rate, level of unemployment, growth
rate, etc, in one nation can have influence or be
influenced by similar variables in other nations. It is
therefore naïve to formulate macroeconomic policies for
a single nation without due consideration to what
obtains in other nations.

Efimini (2003) rightly argues that, from the economic

perspective, globalization gives a universal and global
orientation to economic activities and renders state
boundaries artificial in the production of goods of
services.

Keet (1999) depicts how the contemporary world

conceives the global economy in terms of national
economies loosing their distinctive qualities, viability
and relevance, and of the existence of complex
interactions between national economies and the global
economy, among others. This depiction points to the
growing irrelevance of macroeconomics due to the
impacts of globalization on macroeconomic policies and
analysis.

Writing on globalization and national government,

Lipsey (1999) contends that globalization alters
possibilities for international trade because, among
other things, components made anywhere can now be

2
delivered precisely when and where they are wanted
and this makes it possible for parts of a product to be
made in a developing nation and exported to advanced
nations. An American firm can, for instance, go to
Nigeria and establish a tannery and a shoe factory there
and be selling the shoes in America or other countries
of the world. So globalization can alter the direction and
nature of international trade either to the advantage or
disadvantage of a nation state.

Recession is defined as a “decline in economic activity

within an economy, usually characterized by higher
unemployment and less investment in new plants and
equipment” ("Recession." Microsoft® Encarta® 2006
[DVD]).

A more detailed definition of a recession is provided by

the National Bureau of Economic Research (NBER), a
nonprofit organization based in the United States of
America, which is regarded as the official agency for the
measurement of business cycles. According to the
NBER, a recession is “a period of significant decline in
total output, income, employment, and trade, usually
lasting from six months to a year, and marked by
widespread contractions in many sectors of the
economy”( Bonello, 2006).

This book explores reasons from the available literature,

which suggests the growing irrelevance of
macroeconomic policies and analysis in giving direction
to the economies of nations as a result of globalization.
It also submits that the recognition by the G-20 leaders
at the London that the global recession requires a global
solution and that prosperity is indivisible, shows the
need for a globoeconomic policy. The book then calls for
the adoption of globoeconomic policies, which
incorporates the forces of globalization in
macroeconomic analysis and policy, with a view to
addressing the current global economic crisis generally
identified as a recession.

3
 Chapter Two

IMPACT OF GLOBALIZATION ON
MACROECONOMIC POLICY AND ANALYSIS

Keet (1999) explains that the contemporary world

conceives the global economy in four different ways.
First, the global economy is seen as an international
economic system within which economies of individual
nations have been or are very rapidly being absorbed
and disappearing. This is because the economic system
is characterized by porous borders and limited policy
options that are loosing viability and relevance.
Secondly, it is seen as the sum of complex interactions
between national economies. Thirdly, the contemporary
world conceives the global economy as a complex
combination of national economies or national
economies within regional economies, upon which
transnational economic agents and international
institutions and regulations operate. Lastly, it is viewed
as a dynamic combination of a distinctive supra-national
global economy manifested by the independent
operations of transnational economic agencies and
actors which act upon and interact with the economies
of individual nations and with regional economies while
being uncommitted or unattached to any specific
national economy (all italics indicate the actual words
used by Keet).

From the above, it is indicated that economies of

individual nations are now being absorbed into the
global economy or simply disappearing. Put in another
way, national economies are loosing their distinctive
qualities. It is further indicated that national economies
are loosing viability and relevance. The global economy,
as depicted above, is characterized by complex
interactions between national economies and the global
economy, and complex combinations of national
economies with regional economies, transnational
economic actors and international institutions. The
economy of Germany, for instance, interacts and is

4
acted upon by the European economy, which is a
regional economy and by the global economy and the
international economic institutions such as the World
Bank and the International Monetary Fund (I.M.F.).
Macroeconomic policy in Germany could be less
effective and meaningful without the consideration of
the influences of the European economy and the global
economy. The independent operations of transnational
economic agencies and actors, being uncommitted and
unattached to national economics also have to be taken
into consideration.

Griffin and Khan (1992) have adduced a number of

points that show the impact of globalization on
macroeconomic policy and analysis. First, with the
integration of states into something that is close to a
single economic system, the ability of a nation to
impose its will on other economic factors, notably
transnational firms, is weakened. Second, it has
become more difficult for a country to impose its
authority on persons and entities that fall theoretically,
under its jurisdiction. This is due to increased mobility
of goods, assets and even people across national
boundaries. Thirdly, internalization of currency markets
has made the control of money supply by central banks
of nations more difficult. Fourth, nations find it difficult
to determine nominal rates of interest and the term
structure of interest rates due to the integration of bond
markets. Fifth, transfer pricing, used by large
organizations for transaction between semi-autonomous
divisions supplying components to one another, allows
transnational corporations to shift profit tax liabilities
from countries with high taxation to countries with law
taxation. This affects the fiscal policy of nations. Sixth,
the ability of large corporations to locate and relocate
fixed investment almost anywhere in the world limits
the power of a nation to regulate industry through
taxation, minimum wage regulation, environmental
control, etc. Seventh, international markets have
eroded political sovereignty of nations, as they are

5
unable to act unilaterally in pursuance of economic
goals.

The above seven points indicate the diverse impacts of

globalization on macroeconomic policy and analysis
made to achieve certain macroeconomic goals or
address macroeconomic problems. Even the developed
nations are not free from the effects of globalization on
their economies as Griffin and Khan (1992: 64) argue:

No one would pretend, for example, that

the United States in 1992 is just as
capable of regulating its internal economic
affairs as it was in 1952. It clearly is not:
globalization has made a difference.

To further support the thesis that globalization is

undermining the relevance and effectiveness of
macroeconomic policy and analysis, the views of
specialists in international economists could be of value.
Krugman and Obstafeld (undated) have observed that
the inherent inter dependence of open national
economies sometimes bring difficulties for governments
seeking to achieve macroeconomic policy goals such as
full employment and price level stability. Secondly, after
describing the international economy as comprising
sovereign nations with freedom to choose their own
economic policies, they went ahead to say:

Unfortunately, in an integrated world

economy one country’s economic policies
usually affect other countries as well. For
example, when Germany’s Bundesbank
raised interest rates in 1990 – a step it
took to control the possible inflationary
impact of the reunification of West and East
Germany – it helped precipitate a recession
in the rest of Eastern Europe (Krugman and
Obstfeld, undated, :7).

6
By talking about open national economies and an
integrated world economy, Krugman and Obstfeld are
simply referring to the global economy, which operates
within the context of globalization. Their views also lend
support to the thesis that globalization limits the
relevance and effectiveness of macroeconomic policy
and analysis.

7
 Chapter Three

THE NATURE AND GOALS OF GLOBOECONOMICS

Sequel to the growing irrelevance and ineffectiveness

of macroeconomic policy and analysis, we require
another level of economic analysis that will suit the
circumstances brought by globalization. This means that
macroeconomic analysis could be ineffective if made
with reference to a single country without considering
other economic actors and forces in the global
economy.

Griffin and Khan had used the term “global macro

economy”* probably as something to receive the
attention of economists instead of the Keynesian
macroeconomics, but they failed to provide its definition
and goals. Krugman and Obstfeld (undated), the two
scholars of International Economics, have also talked
about the importance of what they termed
“international macroeconomic policy coordination”.
Perhaps this could be construed as their own yearnings
for something that can at least supplement if not
replace macroeconomic analysis due to the influences of
globalization.

It could be better for economists to come up with new

a concept in referring macroeconomic analysis that
reflects globalization instead of “global macro-
economy”, or the “international macroeconomic policy
coordination”, as policy coordination deals with
coordinating macroeconomic policies already formulated
by individual nations without necessarily taking the
forces of globalization into consideration. Coordination
should start at the level of policy conception and
formulation, and continue up to the levels of policy
implementation, appraisal and review. When the
Leaders of the Group of Twenty (G-20), held an initial
meeting in Washington on November 15, 2008 on the
current recession, they declared that the major
underlying factors that lead to the current situation
were, among others, inconsistent and insufficiently
8
coordinated macroeconomic policies, and inadequate
structural reforms (Online Wall Street Journal.com,
2008).

The term globoeconomics could serve as a new concept

to refer to the third level of economic analysis, the first
and second being microeconomics and macroeconomics
respectively. Globoeconomics has been simply defined
as

the study of macro-economic variables and

policies of a nation, region or the entire globe
as they influence or are influenced by
macroeconomic variables and policies of
other nations or regions as a result of
globalization (Sulaiman, 2005::55-56)

Globoeconomics involves the study of macroeconomic

variables of a nation as they relate and interact with
similar variables in other nations. It also studies
macroeconomic variables in regional economies such as
the European or Asian economies as they relate to and
interact with similar variables in individual nations,
other regional and sub regional economies and in the
entire global economy. Thirdly, as the world is
increasingly emerging as a global village,
globoeconomics studies macroeconomic variables in the
entire global economy, for instance, attempts can be
made to determine the global inflation rate, global level
of output, unemployment, etc, with a view to achieving
desired economic goals such as eradication of global
poverty, promoting global welfare and increasing global
consumption and sales of certain goods and services.

Globoeconomic policies are macroeconomic policies

that take in to account the forces and requirements of
globalization from the time they are conceived and
formulated to the time they are implemented,
coordinated, appraised and reviewed. Globoeconomic
policies have the potential of moving economic activities
and goals in the entire world towards a unity of purpose
and benefits. This is because it is characterized by
9
interdependence, which is analogous to the
interdependence existing among parts of the human
body, for instance, a faulty fiscal policy in an African
country can exacerbate depression, and this can lower
demand for both domestic and foreign goods thereby
affecting sales, productivity and employment in the
domestic economy and in the economies of nations
trading with that country.

Globoeconomics analysis should aim at achieving the

following major goals:

(a) Providing a fair and comprehensive

description of economic phenomenon in
individual nations, regions and at the global
level by taking into account the prevailing
forces of globalization. Economic
phenomenon such as exchange rate, level
of capacity utilization, level of sales, growth
rate, etc, should be described in the context
of globalization.

(b) Formulating policies, designing of models

and strategies for moving the economies of
nations, regions and the entire globe
forward; and minimizing their economic
problems on the bases of achievements
made in relation to the first goal.

(c) Globoeconomics, because of its tendency to

move economic activities towards a unity of
purpose, should promote interdependence,
peaceful co-existence and mutual benefits
among nations.

These goals cannot be achieved if there is no fair play in

the global economic game and competition, and if weak
nations are not assisted to utilize resources at their
disposals and in line with their socio-cultural
peculiarities and economic needs.

10
The unity of purpose which globalization should
facilitate needs to be achieved through peaceful (not
forceful) means.

11
 Chapter Four

LESSONS FROM THE GREAT DEPRESSION OF THE

1930s

There are number of lessons to be drawn from the

Great Depression of the 1930s that could be helpful in
addressing the current recession. A summary of an
article by Robert S. McElvaine entitled “Great
Depression in the United States", is made here for the
purpose of drawing lessons from the Great Depression
of the 1930s. The summary covers the causes of the
Great Depression, its impact and finally the government
responses to it.

The Great Depression that began in the United States of

America had been described as the
worst and longest economic collapse in the history of
the modern industrial world. It existed from the end of
1929 until the early 1940s and spread to most of the
world’s industrial countries. The Great Depression was
caused by a number of deep problems in the modern
economy that were building up through the “prosperity
decade” of the 1920s, they include the following:

a) After the World War 1 (1914-1918), Americans

turned away from international issues and social
concerns and toward greater individualism. They
laid emphasis on getting rich and enjoying new
fashion, new inventions, etc.

b) The self-centered attitudes of the 1920s seemed

to fit nicely with the needs of the economy, which
produced vast quantities of consumer goods.
Advertising methods were used to persuade
people to buy such relatively new products as
automobiles and such completely new ones as
radios and household appliances, even though
income was unevenly distributed.

12
c) During the 1920s, workers got a relatively small
share of the wealth produced, between 1923 and
1929, manufacturing output per person-hour
increased by 32 percent, but wages grew by only
8 percent while corporate profits went up by 65
percent in the same period.
As a result of these trends, many people who
were willing to listen to the advertisers and
purchase new products did not have enough
money to do so. This led to another innovation—
‘credit’, an attractive name for consumer debt,
which allowed consumers to “buy now, pay later.”

d) American farmers—who represented one-quarter

of the economy—were already in an economic
depression during the 1920s, which made it
difficult for them to take part in the consumer
buying spree. But after the world war, they found
themselves competing in an over-supplied
international market. As Prices fell the farmers
were often unable to sell their products for a
profit.

e) After World War 1 the United States became the

world’s chief creditor as European countries
struggled to pay war debts and reparations,
American bankers lent heavily and unwisely to
borrowers in Europe, especially Germany. These
huge debts made the international banking
structure extremely unstable by the late 1920s.

f) The United States maintained high tariffs on

goods imported from other countries, at the time
it was providing foreign loans and trying to export
its products. This combination could not be
sustained, if nations could not sell their goods in
the United States, they could not make enough
money to buy its products or repay loans. All
major industrial countries were also advancing
their own interests without regard to the
international economic consequences.

13
 g) The rising incomes of the wealthiest Americans
led to a rapid growth in the stock market,
especially between 1927 and 1929, prices of
stocks were rising far beyond the worth of the
shares of the companies they represented.
Investors bought millions of shares of stock “on
margin,” a risky practice similar to buying
products on credit. There was a stock boom but it
could not last. In late October1929, the market
nose-dived as investors began selling stocks. On
October 29, in the worst day of the panic, stocks
lost $10 billion to $15 billion in value.
The stock market crash announced the beginning
of the Great Depression, but the deep economic
problems of the 1920s had already converged a
few months earlier to start the downward spiral.

Impacts Made by the Great Depression

The Great Depression saw rapid declines in the

production and sale of goods and a sudden, severe rise
in unemployment. With little consumer demand for
products, hundreds of factories and mills closed, and
the output of American manufacturing plants was cut
almost in half from 1929 to 1932. Businesses and banks
closed their doors, people lost their jobs, homes, and
savings, and many depended on charity to survive. In
1933, at the worst point in the depression, more than
15 million Americans—one-quarter of the nation’s
workforce—were unemployed. Jobless men sold apples
and shined shoes to earn a little money.

Many banks had made loans to businesses and people

who now could not repay them and some banks had
also lost money by investing in the stock market. When
depositors hit by the depression needed to withdraw
their savings, the banks often did not have the money
to give them. This caused other depositors to panic and
demand their cash, ruining the banks.
As people lost their jobs and savings, mortgages on

14
many homes and farms were foreclosed. Homeless
people built shacks out of old crates and formed
shantytowns, which were called “Hoovervilles” out of
bitterness toward President Herbert Hoover, who
refused to provide government aid to the unemployed.
The plight of farmers, who had been in a depression
since 1920, became worse, already low prices for their
goods fell by 50 percent between 1929 and 1932. While
many people went hungry, surplus crops couldn’t be
sold for a profit.

Government Response to the Great Depression

The initial government response to the Great

Depression was ineffective, as the then President of the
United States, Herbert Hoover, was adamant that the
economy was sound and that prosperity would soon
return. To him, the basic need was to restore public
confidence so that businesses would begin to invest,
expand production and provide jobs and income to
restore the economy to its former level. Businesses,
however, saw no reason to increase production while
unsold goods congested their shelves. By 1932
investment had dropped to less than 5 percent of its
1929 level. President Hoover was
convinced that a balanced federal budget was enough
to restore business confidence; he wanted to cut
government spending and raise taxes. But this policy
served only to reduce demand further.

Hoover and most of his Republican Party firmly

supported protective tariffs to block imports and
stimulate the American economy by increasing sales of
American-made products. In 1930 the Hoover’s regime
enacted the Hawley-Smoot Tariff, which established the
highest average tariff in American history. It became a
devastating blow to European economies, which were
already sinking into depression. Other nations hit back
by raising their own tariffs. This helped to worsen and
spread the depression by lowering the volume of
international trade, for instance, in 1929 and 1932 the
total value of world trade went down by more than half.
15
Like Hoover, leaders of other nations were determined
to balance their budgets by raising taxes and slashing
government spending. By the election year of 1932, the
depression had made Hoover very unpopular; this made
it easy for the Democratic presidential candidate
Franklin Delano Roosevelt to become next president of
the United States.

Within days of his inauguration, Roosevelt called

Congress into a special session, during which many
pieces of emergency legislation were passed. He quickly
lifted the nation’s spirits with the rapid and
unprecedented actions of the New Deal. He also
declared a nationwide bank holiday, closing all banks to
stop panicky depositors from withdrawing money. After
few days, he reassured Americans that all banks that
were allowed to reopen would be safe.

The New Deal involved a wide variety of programs

aimed at reducing unemployment, assisting businesses
and agriculture, regulating banking and the stock
market, and providing security for the needy, elderly,
and disabled. Under the Agricultural Adjustment Act of
1933, the government wanted to raise farm prices by
paying farmers not to grow surplus crops.
The New Deal also tried to increase demand through
pumping large amounts of money into the economy
through public works such as schools, dams, and roads,
and relief measures.

Roosevelt never accepted the new ideas of British

economist John Maynard Keynes, who argued that
intentionally unbalancing the budget to a significant
degree would boost demand to the point where
recovery would take place. He refused to create an
unbalanced budget on the scale Keynes advocated until
World War II forced it upon him. Once the government
started spending at the levels Keynes had
recommended, the depression came to an end. With the
outbreak of World War II in Europe in September 1939,
the U.S. government was spending large amounts of

16
money to produce ships, aircraft, weapons, and other
war material. The increase in government spending
stimulated industrial growth, unemployment also
declined rapidly.

The Lessons to be Learnt

a) Cutting government spending and raising taxes

are not the appropriate measures for overcoming
depression, they serve only to reduce demand
further, and subsequently increase unemployment
and misery. Government should increase demand
by creating an unbalanced budget as the British
economist John Maynard Keynes, recommends.
This is done to with a view to pumping large
amounts of money into the economy through
public works such as schools, dams, and roads,
relief measures, increase in wages and salaries,
provision of loans to industry, lowering interest
rates or even abolishing them.

b) Protective macroeconomic economic policies such

as tariffs are ineffective; they retard international
trade and promote misunderstanding among
nations.

c) Collective global measures need to be taken by

nations through meetings of leaders, economists
and executives of businesses on measures that
would stimulate demand and economic activities
in each nation based on its resources, capacities
and areas of specialization.

d) There are limits to which businesses should be

providing goods to people on credit for the sake of
earning interest and recording high sales. It is
better to empower people to make purchases with
their own money, and when necessary, to provide
credit facilities to people with abilities to pay
debts.

17
 Chapter Five

CAUSES AND MANIFESTATIONS OF THE CURRENT

GLOBAL RECESSION

Causes of the Current Global Recession

When the Group of Twenty (G-20) leaders held an initial

meeting in Washington on November 15, 2008, on the
current recession, they identified its roots causes which
include seeking higher yields by market participants
without an adequate appreciation of the risks and
failure to exercise proper due diligence during the
period of strong global growth, growing capital flows,
and prolonged stability earlier this decade. Other causes
are weak underwriting standards; unsound risk
management practices; increasingly complex and
opaque financial products; and resultant excessive
leverage combined to create vulnerabilities in the
system. In addition, policy-makers, regulators and
supervisors, in some advanced countries, failed to
adequately appreciate and address the risks building up
in financial markets. According to the G-20 leaders, the
major underlying factors that lead to the current
situation were, among others, inconsistent and
insufficiently coordinated macroeconomic policies, and
inadequate structural reforms (Online Wall Street
Journal.com, 2008).

As Uwah (2008) recounts, Nancy Pelosi, the speaker of

the US House of Representatives, during her opening
speech to flag off a debate on the $700 billion bailout
package for the financial industry sent to Congress by
President George W. Bush, blamed the crisis on the
carefree attitude of the regulators of America’s financial
system. The regulators of the system were derelict in
the guise of free market principles. But when the crisis
threatened to envelop the entire globe, they discarded
these principles and went for Keynesian intervention as
a solution. The cause of the current credit squeeze is
almost similar to that of 1929. There has been a free
18
flow of credit in the American system in the past few
years to the extent that people who are not
creditworthy were provided with a sub-prime mortgage
facility. Sub-prime mortgages carry a higher risk to the
lender as they are offered to people with financial
problems or who have low or unpredictable incomes.
Higher interest rates are charged on Sub-prime
mortgages because of the high risk.

Some of the Manifestations of the Current Global

Recession

The National Bureau of Economic Research (NBER),

which uses key monthly indicators of economic output,
including employment, industrial production, real
personal income, and wholesale and retail sales - to
determine when economic growth has turned negative,
declared that the US entered a recession in December
2007, and that the "decline in economic activity in 2008
met the standard for a recession"
(http://news.bbc.co.uk/2/hi/business/7759470.stm, 16
December 2008)

The Business Cycle Dating Committee of the NBER, in

its deliberations, relied on a number of monthly and
quarterly economic indicators published by government
agencies. The Committee reports, among others, that
“industrial production peaked in January 2008, fell
through May 2008, rose slightly in June and July, and
then fell substantially from July to September.” The
October value of the industrial production index lingered
a substantial 4.7 percent below its value in January
2008 (http://www.nber.org/cycles/dec2008.html).

The global financial turmoil seen during 2008 has led to

extreme volatility on the world's stock markets. Stock
market indices such as the British FTSE 100, the
French CAC 40, the German DAX, the Japanese Nikkei
225, the American Dow Jones Industrial Average and
S&P 500 Index, the Indian Sensex, the Australian All
Ordinaries and the Hong Kong Hang Seng Index
continuously declined as the following graphs indicate:
19
Fig. 1 Dow Jones Industrial Average: Jan-Dec 2008

Fig. 2 Nikkei 225 Index: Jan-Dec 2008

Fig. 3 Dax Index: Jan-Dec 2008

Fig. 4 Cac 40 Index: Jan-Dec 2008

20
Fig. 5 BBC Global 30 Index: Jan-Dec 2008

(Source for figures 1-5: Global stock markets in 2008

http://news.bbc.co.uk/2/hi/business/7716406.stm)

After reaching a record high in July 2008 of $147 a

barrel, the price of oil had fallen to $39.67 on 31st
December, 2008. This has serious implications for oil
exporting countries like Nigeria. The Nigerian economy,
unlike the American economy, which is a credit
economy, is a cash-and-carry economy: every
transaction is by cash. Despite this, the Nigerian capital
market is suffering the impact of the global credit
squeeze as foreign portfolio investors in the market had
fled even before the crisis became prominent. The mass
exodus of the investors is at the root of the persistent
share-price decline (Uwah , 2008).

Industrial output in Japan dropped by 8.1% in

November compared with the previous month, the
biggest fall since records of such output statistics
began. At the same time, unemployment rose to nearly
4% of the population as more than 2.5m people were
out of work in Japan in November, a rise of 100,000
compared with the year before. Factories were also
closed as demand for manufactured goods slumped
amid the global financial downturn
(http://news.bbc.co.uk/2/hi/asia-pacific/7799908.stm,
27 December 2008). These few examples indicate the
recession has already enveloped the entire world.

21
 Chapter Six

THE RESPONSE OF THE G-20 LEADERS TO THE

CURRENT GLOBAL RECESSION

The Leaders of the Group of Twenty (G-20) met in

London on 2 April 2009, with the belief that the world
economy was facing the greatest challenge in modern
times; a global crisis requires a global solution;
prosperity is indivisible; and that for growth to be
sustained it must be shared. They took a number of
decisions bordering on the following areas (see London
Summit – Leaders’ Statement):

a) On restoring growth and jobs, the leaders agreed

to undertake an unprecedented and concerted
fiscal expansion that will amount to $5 trillion and
raise output by 4 per cent by the end of 2010 and
also save or create millions of jobs.

b) As regards the strengthening of financial

supervision and regulation, the G-20 leaders
identified major failures in the financial sector and
in financial regulation and supervision as
fundamental causes of the crisis. Therefore, they
agreed to rebuild trust in their financial system,
take action to build a stronger supervisory and
regulatory framework for the future financial
sector, and ensure that their domestic regulatory
systems are strong.

c) On the issue of strengthening the global financial

institutions, the G-20 leaders believed that
emerging markets and developing countries have
been the engine of recent world growth and were
facing challenges that aggravated the current
downturn in the global economy. It is therefore
necessary that capital continues to flow to them
through strengthening of the international
financial institutions, particularly the International
Monetary Fund (IMF). An additional $850 billion is

22
 to be provided through the global financial
institutions to support growth in emerging
markets and developing countries. The G-20
leaders, among other measures taken, have
agreed to increase the resources available to the
IMF through immediate financing from members
of $250 billion. They also supported a substantial
increase in lending of at least $100 billion by the
Multilateral Development Banks (MDBs).

d) In the area of resisting protectionism and

promoting global trade and investment, the G-20
leaders observed that falling demand was
intensified by growing protectionist pressures and
a withdrawal of trade credit; they promised not
repeat the historic mistakes of protectionism of
the past. To this end, they decided to refrain from
raising new barriers to investment and trade in
goods and services, and to minimise any negative
impact on trade and investment of their domestic
policy actions.

e) Finally, as regards ensuring a fair and sustainable

recovery for all, the G-20 leaders expressed their
determination to restore growth and lay the
foundation for a fair and sustainable world
economy. They recognized their collective
responsibility to lessen the social impact of the
crisis, reaffirmed their commitment to meeting
the Millennium Development Goals and to
achieving their pledges including commitments on
Aid for Trade, debt relief, etc.

It is interesting to note that the above decisions taken

by the G20 leaders indicate their understanding of the
real causes of the global recession and the solutions to
it. The leaders have recognized that the crisis requires a
global solution and that prosperity is indivisible.
Moreover, inconsistent and insufficiently
coordinated macroeconomic policies had been
recognised as one of the major causes of the global

23
recession by the G-20 leaders at an initial meeting
in Washington on November 15, 2008, on the
current recession. These recognitions show the need
for the adoption a globoeconomic policy to replace the
moribund macroeconomic policy.

The G-20 leaders also rejected protectionism and

supported increase in government spending, regulation
and close supervision of the financial sector. They also
realized the need for continued support to emerging
markets and developing countries because they are the
engine of recent world growth.

What now remains is their wholehearted commitment

to the implementation of these decisions. Leaders of
other nations need to understand how these decisions
will affect the economies of their respective nations and
the kind of effort they also need to make as their
contributions to the global effort.

24
 Chapter Seven

ADDRESSING THE GLOBAL ECONOMIC RECESSION

WITH A GLOBO-ECONOMIC POLICY: AN
ILLUSTRATION

The diagram below depicts the relationship between the

economies of five nations. It is used to illustrate the
need for a globo-economic policy in addressing the
current global economic recession. For simplicity it is
assumed that there five nations in the world and each
has one major economic activity as the chief source of
its income. Thus agriculture, mining of petroleum,
production of automobiles, manufacture of
consumables, and tourism are considered to be the
mainstays of the economies of United States of America
(USA), Nigeria, Japan, United Kingdom and Thailand
respectively. Each country pursues its economic activity
on the basis of its natural endowments, technological
development and the comparative advantage it has in
relation to its economic activity.

USA JAPAN

UK

NIGERIA
THAILAND

Fig. 6 Economic interdependence among the members

of a five-nation world

25
United Kingdom is put in the middle of the other
countries to show how its economy relates with the
economies of the other countries. The arrows
originating from United Kingdom indicate what goes out
from it to other nations, while those originating from
USA, Nigeria, Japan, and Thailand indicate what it gets
from these countries. Each country can therefore,
assume the position of the United Kingdom in the
diagram to indicate how its economy helps and depends
on the economies of other nations.

In the example, United Kingdom manufactures

consumables such as chemicals, lubricants, processed
foods; stationery and drugs. It imports petroleum from
Nigeria, and farm produce from USA. It also imports
vehicles from Japan for distributing its finished goods.
With an increase in economic activities and prosperity in
this country, its demand for these imports will be on the
increase and the number of tourist wishing to visit
Thailand from the United Kingdom will also increase.
Thus when the economy of the United Kingdom
prospers, it will boost economic activities in the other
countries.

Since recession is about low demand for goods and

services, low domestic and foreign demand for
manufactures from the United Kingdom will lead to low
demand for farm produce from USA, automobiles from
Japan and petroleum from Nigeria. Moreover, a
downturn in the economic activities in the United
Kingdom will reduce the number of tourists willing and
capable of visiting Thailand. Low demand for petroleum
from Nigeria can be aggravated by low demand for
automobiles and by the use of alternative fuel for
running them, this will result in less income among
Nigerians and subsequently a fall in their demand for
other goods and services produced by the other four
nations.

From this simple illustration it could be seen that with

the ever increasing forces of globalization,

26
macroeconomic policy in a single nation with a view to
increasing output and employment or reduce inflation
rate is becoming increasingly ineffective. So nations
have to sit together to fashion out a mutually beneficial
goboeconomic policy. With the simplified example of a
five-nation world, the affected nations can meet to
agree on the following policies:

1) Stimulating domestic demand for goods and

services in each country though the means of
government spending in form increase in public
works (roads, dams, schools, electricity, etc)
upward review of workers’ salaries and
allowances for students, etc. A deficit budget is
needed in a period of recession so the increase in
government expenditure can come through
borrowing from local and foreign sources
depending on what will be done with the money.
Projects that require foreign exchange can require
external loans while projects that can be executed
with local resources do not require external loans.
The disadvantage of borrowing by government is
that the prevailing interest rate may go up, thus
increasing the cost of capital for investors.
Increase in money supply by printing additional
money and using it to increase government
spending is another alternative for a deficit
budget. Its disadvantage is that it will lead to
inflation if the amount of money supplied exceeds
the level of output in an economy. In developing
and underdeveloped nations, reliable
measurement of their levels of output does not
exist as most informal economic activities are left
out in determining their GDPs.1 It could be

1
Gross Domestic Product (GDP) is the total value of goods and
services produced in a country over a period of time, it may be
calculated by adding up the value of all goods and services produced;
27
 argued that the use of money in providing basic
infrastructure could lead to rise in GDP as well as
lower the cost of production facing industries thus
reducing the level of inflation.

Some leaders and economists tend to emphasize

a control of inflation rate even if such control will
bring hardship to people. Achieving a low inflation
rate is simply a means to an end, not an end in
itself. The end is to increase the standard of living
of people though good nutrition and health care,
education, etc. That is why development is now
measured in terms of the Human Development
Index2, not low inflation rate or the GDP only.

2) Curtailing protectionism -. There are two types of

protectionism. Use of tariffs and taxes to
discourage imports from other countries as well
as outright banning of importation of certain
goods can be referred to as primary
protectionism. Secondary protectionism can be
seen as any attempt to achieve complete self-

the expenditure on goods and services at the time of sale; or

producers’ incomes from the sale of goods or services (Gross
Domestic Product. Microsoft® Encarta® 2006 [DVD]. Redmond,
WA: Microsoft Corporation, 2005.)

People can made to suffer unnecessarily when governments rely on

reducing money supply to control inflation, which is just one of its
many causes. In addition to this calculation of GDPs , especially in the
less developed nations, do not fully reflect activities in the formal
economy talk less of the black economy, so using them as basis for
determining the appropriate money supply for an economy can cause
hardships to people unnecessarily or suffocate economic growth.
2
Human Development Index (HDI) is an estimate of living standards
published for the first time in 1990 by the United Nations
Development Program. It uses a scale of 1 to 100 and takes into
account GDP per head, adult literacy, and life expectancy (ibid).

28
 reliance on home made goods coupled with
conduct of researches on the production of
alternatives to goods being imported from other
stifle nations even if the nation doing so lacks a
comparative advantage in producing them.
Therefore nations wishing to formulate an
effective globo-economic policy have to agree on
the level of protectionisms they can tolerate in
view of their peculiarities and needs as individual
nations, and on the basis of their collective goal of
attacking global recession.

3) Setting goals and targets as well as identifying

means for achieving desired level of global
output, employment, economic growth, etc, and
specifying the contribution of each country in
relation to these goals and targets.

29
 Chapter Eight

CONCLUSION AND RECOMMENDATIONS

Conclusion

Depression is not synonymous with dearth of wealth or

resources, it implies low demand (purchasing power)
leading to low utilization of available resources including
labour, so it requires reflationary measures. Protective
macroeconomic economic policies such as tariffs are
ineffective in overcoming global recession; they retard
international trade and promote misunderstanding
among nations. Globoeconomic policies, on the other
hand, have the potentials of moving economic activities
of different nations towards achieving common goals
such as price stability, economic growth and
development, curtailing unemployment, etc., and of
promoting interdependence, peaceful co-existence and
mutual benefits among them. These goals cannot be
achieved if there is no fair play in the global economic
game and competition, and if weak nations are not
assisted to utilize resources at their disposals and in line
with their socio-cultural peculiarities and economic
needs. Conflicts arise more often than not among
nations due pursuance of economic goals by a nation or
a group of nations without regard for global peace and
development.

Recommendations

Lessons from the Great Depression of the 1930s would

be useful in overcoming the current recession but the
forces and requirements of globalization need to be
taken into consideration when conceiving and
formulating policies aimed at ending it. So
globoeconomic policies need to designed and
implemented by individual nations, sub-regional,
regional and world bodies with due consideration of
forces and requirements of globalization and with a
view to setting goals on desired employment and

30
productivity levels, growth rates, etc, which should be
in line with the existing endowments and capacities of
each nation, sub-region or region.

Reflationary measures should be employed by nations

to increase aggregate demand in their economies with a
view to reducing unemployment. It can be executed
through printing of money or through public sector
borrowing (government borrowing from the private
sector).

Leaders of individual nations should know the difference

between what can be done with foreign earnings and
what can be done with their local currencies and how
the two are related. It is improper to tie, for instance,
provision of adequate money for a project that can be
executed with local resources, to foreign earnings.
Where dams for irrigation, roads for transportation and
buildings for schools and hospitals are mainly made
with local resources (rocks, sand, cement, etc) found in
a given nation, local currencies can be printed to buy
these resources. This policy would increase economic
activities and reduce poverty among people through the
multiplier effect. It will also provide the infrastructure
required for boosting productivity. Foreign earnings
should be used for foreign goods and services and in
line with the priorities of the moment.

Financial aids and assistance given to the poor and less

developed nations by the developed ones should not be
curtailed as doing this will further reduce global demand
for goods in services and subsequently exacerbate
global recession.

Additional sources of revenue other than taxes should

be identified and used to supplement government
revenue. Asking people to pay more taxes or pay new
ones reduces their disposable incomes and leads to a
further fall in demand.

31
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