Professor of TSU, the chief of management of economic and business quality Doctor of Economic Science – Emzari Jgerenaia

New World Economic Architecture

How many actual questions disturb Georgian society?
1. What will be the exchange course for Dollar and Lari?
2. Will bank credits become cheaper again or not?
3. What will happan to construction – will it become more expensive, cheaper… or???
4. The relationship between Russia-Georgia, will Russia be punished, will it return territories or not?
5. What is the index of unemployment and what prices will be especially on oil?
6. What is happening in the world economy and politics during this crisis and waht are the perspectives of Georgia?
The answer to all these questions basically depends on current processes in the west. But our experts and politicians don’t care about those new schemes, which are being tangled in the west. Let’s start from there, that in spite of the war between Russia-Georgia and annexation of territories, the dialogue is being carried out quite constructively with Russia not only by tandem of France-Italy-Germany, but also nearly all leading countries of the world. European house has become cold towards Georgia.
Current financial crisis of the world comes nearer to 1929 with its scale and perhaps will even exceed it with its volume. That’s why economists compare this existing situation to era of Keyns and the period of World War II, when the final conference of “Breton-Woods” registered a new Financial-Monetary order in the world and legalized USA’s supremacy on it.
When it was decided to gather the leaders of 20 biggest countries of leading economy in USA (this collection or unification was created in 1999 and the members of Great 7 were combined there: USA, Canada, Japan, England, France, Italy, Germany, and it was added by EU as a whole unit, and then Argentina, Brazil, India, China, Saudi Arabia, Russia, Australia, South Korea, South African Republic, Mexico and Turkey. Their sum total Gross Domestic Product compiles 90% of the whole world economy, but 80% of foreign trade and 70% of population. Everyone marked togather that this meeting would be the second “Bretton-Woods” and we’d become the witnesses of new world economic order and naturally, formation of political scheme.
But just at the end of this meeting disappointmant was followed and opinions appeared, that the meeting passed vainly – the expectation didn’t come true. I’d like to underline and remind that Bretton-Woods was the end of the process and not beginning. It was followed by the great war and argument. In spite of the fact, that in London on April of next year the details connected to financial control of the meeting was displayed, similar to 1944, the issue of free market and stabilization and regulation of Monetary-Financial market became again the order of the day. New Monetary Fund was not created yet, but in an old fund the talk was as about distribution of shares and functions, also about conferment of International controlling function.
I’d like to pass remote way towards “Bretton Woods” once more with you:
· The first main idea – open economy and free International trade are the most profitable conditions in the development of the world leader economies.
· Keyns’s decision about the depression of 30s: the growth of unemployment and poverty caused the demobilization of democratic countries and created the condition for nationalism and militarism on International scale.
· The growth of Transport and communication, propitious factors of fast development of International trade and overcoming poverty;
· Unprofitable – inflexibility of International Monetary calculation because of absence of standards of gold and common system of courses;
These remarks of Keyns were introduced by George Soros at USA’s congress hearing in November and by leaders of developing countries on 20 countries’ meeting.
Naturally, as Keyns has declared, in the long-term perspective we will all die, but many decisions, which were made in historical years, are also very actual today and perhaps it will last so in the nearest perspective.
“Bretton Woods” itself was being prepared for sevelar years. The first stage was the preparation of pattern principles, in 1943 two plans were worked out:
1. Lord Keyns’s banking principle of Britain – an ambitious plan about bank criation of world banks and helping developing countries, without any intervention in Monetary policy.
2. Henry White’s cloak room principle of USA – a pragmatical plan about creation of stabilization fund with the help of member countries deposit of common cashbox and giving to its members with limited conditions of currency.
– And after prolonged discussion and compromises:
– In June, 1944, USA’s State, New-Hemsher, Bretton Woods – 44 countries signed an agreement.
Since then International Monetary-Financial relationship moved to regulative system and gold standard became a matter of history, dollar became reserve currency, but USA – unconditional financial leader. The agreement entered into force on December 27, 1945. This tendency continued until 70s; however correction was entered in the agreement:
1. The first change was on May 31, 1968 – the creation of SDR, it entered into force on July 28, 1969;
2. The second change was on April 30, 1976 – the agreement of Jamaica, the failure of Breton Woods’ system and transition to free rate, it has been in force since 1978.
3. Until 1992 there were 3 leaders in martyrdom:
§ To favour for creation of many-sided system of calculation and to fight against monetary limitation;
§ To favour for remaining the stability of taxation balance;
§ The consultation of developing countries governments in order to carry out and manage reforms in Monetary-Financial field.
§ To favour the development of International cooperation in Monetary-Financial field;
§ To favour the employment and high level of income with the way of broadening Internetiional trade and balanced growth.
§ To favour the currency stability, regulate monetary regimes and control of devaluation for getting competitive adventage among participating countries.
The world bank,which was created in Bretton Woods in 1944, is also the first-born of new monetary system, which unites 184 countries. The main goal of its establishment, with Marshal Plan, was restoration of destroyed Europe after the war. But today its goal is the social-economic assistance for developing countries.
Why did we remind this history? The process was also going on for years at that time. Everything began since the big depression of 1929, maybe even earlier and it stretched in time. The negotiations with leading countries of that time (except Germany) were going on for several years. This was the era, when USA was preparing dollar as a dominant currency in the world, but the gold as a reserve precious metal. In spite of the resistance between USA and Europe, the American version won from represented two plans about the issues of new financial scheme. International Monetary Fund is an incarnate American project. The main sponsor of this organization has been USA till today and naturally, this organization fulfils the demands of USA’s political course. The first result, which was agreed on 20 countries meeting, is the change of structure of International Monetary Fund and management. So the talk is about the growth of its controlling functions and responsibility connected to monetary exchange rate. Of course, the sponsor is being changed – the leading positions will be shared by China and Saudi Arabia.
The project was worked out by Gordon Brown and for the first time he divulged it on summer meeting in England and later in Japan on the meeting of Great 8. This means the beginning of serious processes, which will not be decided simply – for the next 20 years the world leader country will be still USA, but leader currency – dollar. The rules of game will change usefully for new players – China, Saudi Arabia and India. It’s less presumable, that pooling will be put on Russia, or old Europe will return its fame. In 1944 Stalin’s Russia tried a lot, but it couldn’t take a leading place in the institutions of Breton Woods’s system and it was offended. Financial processes were held without Soviet Union. In the world market dialectics tendency about the denial of dollar absolute dominance appeared and the new rules of monetary control – free creeping monetary rate – was born by the crisis of 1970s. The financial centers of London and New York appeared.
The next process is the creation of Euro. Europe is furiously trying to come out of dollar’s captivity, just as a result of these processes from the beginning of XXI century we got serious currency and euro zone on the continent. I represented the whole history for creation of euro and euro zone, but in spite of this, its dynamics is determined by Japanese Yen, Chinese Yuan and USD, but position of euro was conditioned by their weakness. The reality is as follows – China is the third biggest economy in the world, but India came nearer to Japan and with the volume of economy it is the fourth country in the world. Brazil, Mexico and South Korea have economy of the only trillion dollar cost. These are not simple figures, because the main originality of XXI century’s world economy, that consumption market is definitive of everything, acknowledged consideration, that producers and holders of technological New-House determine everything have changed diametrically today in those conditions, when for different reasons western businessmen transferred their business to China, Indonesia, Korea and India. Today these countries are the main providers of conditions of life and other electric techniques on the market. Asian countries are the leaders in light industry and production of cars on International market and make serious steps for supplying computer technology. These processes have been going on for the last 40 years, which changes the variety of business. Previous developing countries, for example, the United Arab Emirates created in 1969 today became the capital exporters with other Arabic countries.
As George Soros says, the west was basically busy with financial-banking business for the last 25 years, which was absolutely clear, because they reached unprecedented profitability just in financial-banking sphere. Since 1960 only 10% of received profitability of leading countries came to profitability of banking-financial sphere. In 2005 this figure composed 35% in USA and Britain. In November during his statement in front of the special commission of USA’s senate George Soros, who is himself the holder of financial-speculative capital and gathered his property by this way, represented his own point of view about overcoming the crisis and declared, that the measures of financial sector and rate of growth was not proportional to the growth of economy.
Financial sector was growing faster for several times, which caused gigantic financial bubbles for the last 20 years. Today the sum total index of share trading reaches 40 trillion dollars a year, which favors financial sector to earn 500 million dollars a year only with trade administration. We are approaching the vertex; in my opinion the reason of crisis is the derivatives market and hedge funds! Here is who has exploded the world derivatives. According to the data of International bank calculation, the rotation of non-exchange derivatives composes 595 trillion dollars, 9 times more than the GDP of the whole world, but the rotation of exchange derivatives composes 2.3 quadrillion dollars!!!
None of the long-term investments gives so much profit as derivatives. Finally sub-prime and also other mortgage were absorbed by derivatives market and hedge funds. This happens because hedge funds and derivatives market were not under the strict regulation. At the above mentioned conference George Soros represented the program, project about making the regulation of financial market more severe and also about the regulation of hedge funds on International scale. Just such decision was made by the members of 20 countries with their communiqué: the world crisis has begun because of derivatives and hedge funds, their speculative and frequent criminal activity, especially neglect of demand-supply law and carrying out wrong operations.
According to George Soros, the era of financial capitalism is over and the real economy will move forward. Also the dictate of London and New York is over in financial sphere. A little reorganization will happen in several regional financial centers, but this reorganization takes a while and during this period dollar will remain on its pedestal. Moreover, the trade deficiency is decreasing, Itself monetary reserves in dollars of 20 countries are very big.
That’s why the discussion about the forum of financial stability is going on at the moment (the organization, which was created in 1999 after the crisis of 1997-98 by the Great 7 with FFS and IMF, as a control of financial and capital market). If till now the control of financial market was carried out on national level, afterwards it will be carried out on International level by the modified Institutes.
Now it’s time to answer our question.
1. In 2009 USD will keep its positions more or less, in 2010 USA’s economy will begin important raising. Nobody wants fallen dollar during the raised real economy, which will be a decisive factor for the improvement of USA’s economy and dollar solidity. In 2009 the exchange rate of Lari towards dollar will be solid, because we are waiting for serious assistance from the west – more than 4 billion dollars. This will compensate stopped investments.
2. 2009 is the year of crisis and monetary fund supposes to fall the growth speed of world economy by 2,2%, even International trade which was increased annually by 5-10%, will decrease by 2%. Only the index of unemployment will increase. If today there are 190 million unemployed people in the world, according to Labour International Organization there will be 210 million at the end of 2009, herewith there is not defined exactly the data of China and India, also some of the republics of former Soviet Union. Unemployment will increase by 15-18% in Georgia. This will touch as construction, also financial-trade and industrial spheres.
3. The prices on commodity market will fall. Because of dollar rate solidity import will become more expensive in Georgia, but not very significantly, which is a very hopeful factor for the customers of commodity market, which’s activity will decrease because of little financial income.
4. Europe blames USA for provoking crisis and makes everything to return its old fame. Russia is its ally and it’s difficult to believe that the west will punish Russia for its annexation in Georgia. Russia’s punishment is reduced prices on oil because of the world crisis, but this has happened only according to the world crisis. The west is not interested in having war with Russia because of Georgia, because it is connected to Russia with economy. But in 2009 Russia will discover itself in front of a very serious economic problem, which will not be able to change its imperial intentions yet, maybe on the contrary, Russia needs this war.
5. In 2009 the crisis of construction will enter the decisive phase in Georgia and new concentrations will appear on banking market, getting credits from banks will become more difficult and persentage rate will not reduce, so some of the strong players will have problems on banking market. However, it must be said, that the business will not come to bankrupt.
The world crisis is bearing new economy and structures in the world. In long-term perspective the fate of Georgia will be depended on it. In April, in London, where 20 countries will gather again, perhaps the contours will appear what the world agree about.