The global economy is in crisis, but there may be more hope for the poor than you think.
In the shadow of a financial crisis that has sent the U.S. stock market tumbling nearly 25 percentage points in the last month, the world’s finance ministers and central bankers gathered in Washington recently for an urgent discussion of how the economic peril will spread—and how to stop it. Days later, leaders from London to Berlin promised hundreds of billions in bailouts to embattled banks and financial institutions.
Throughout this crisis, there’s been much talk of how it is affecting Wall Street and Main Street. But only a few public figures, such as World Bank President Robert Zoellick, have sounded the alarm about how the credit crunch will hurt the poorest of the poor—people who may not have a street at all. So, FP’s Elizabeth Dickinson caught up with Jeffrey Sachs, a renowned economist and World Bank and International Monetary Fund (IMF) advisor who has made his name with his passionate calls for an end to poverty. She asked him if he still thinks such an ambitious goal is possible and what world leaders can do to prevent the worst suffering.
Foreign Policy: Western finance ministers and central bankers were in Washington Oct. 11 to 12 for the IMF and World Bank annual meetings and to hash out a coordinated global strategy to deal with the financial crisis. How would you describe the mood?
Jeffrey Sachs: I think in general there’s fear, naturally. This is a very big financial upheaval and there are profound risks. We are far from out of the woods. Certainly, there will be a significant financial crisis as far as the real economy [is concerned]. Everyone is uncertain about what’s happening.
FP: U.S. Federal Reserve Chairman Ben Bernanke wrote in the Wall Street Journal Oct. 14 that, “the tools are in place to respond effectively and with force.” Is he right?
JS: I think that it all depends on the terms. I don’t think we’re going to have a Great Depression, and we’re not going to have an outright crash where there are mass bank failures and bankruptcies. But we are going to have a deep recession. We will feel it, and it will be very painful. Unemployment will go up several points; the drop in growth will be significant in absolute terms. It will be prolonged, and it will be a difficult recovery because of all of the imbalances in the economy and because households have high levels of debt. The scale is a major recession of an economy that has business cycles. We’re going to have a meaningful-sized business cycle.
Other areas of the world are experiencing the crisis for lots of reasons—because their own banks did what U.S. banks did; because our monetary policy led to bubbles that spread; because their economies are dependent on imports. I don’t think it will lead to a worldwide downturn everywhere. China, for example, will continue to experience good growth during this period.
FP: As the crisis spreads around the globe, can you give us a sense of how it is affecting people in developing countries?
JS: I think the effects probably are ironically felt more in middle-income countries, because one of the attributes of the poorest countries is that they are more disconnected to the world system. Their banks are not connected and are very small relative to the economy. People don’t own stock, so they don’t lose their pensions. In middle-income countries like Brazil and India, there could be more substantial risks.
FP: At last weekend’s meeting, Robert Zoellick noted that 100 million people have been driven into poverty so far this year. Do you think that number will go higher?
JS: That crisis is a result of commodity prices, especially rising energy prices and higher fertilizer prices. It is not the result of this crisis, and I don’t think that the direct effects of this crisis will be significant.
The question of course is whether the crisis distracts [countries] from all of these [antipoverty] policy agendas, which is relevant and often a life-or-death issue. That’s obviously a real concern. My general take is that in good times or bad, it’s hard to get people to focus on these issues. I’m not sure [this crisis is] going to diminish from the low levels of focus we usually have.
I expect the whole attitude toward governance to change, especially if [U.S. Senator Barack] Obama becomes president. The days of laissez faire recklessness and greed are over, and the idea that government has responsibilities in the financial markets and to the poor and even to the world’s poor will become more important.
FP: You wrote on your blog, “The basic message of this week is that the world must find a new model of collective leadership following the collapse of US authority.” You seem to think a multipolar world will be better suited to combating global challenges such as poverty and global warming. But isn’t it equally likely that we end up with a power vacuum—no leadership at all?
JS: Well, this is what we’ve had over the past several years: The United States has abandoned its old role as system stabilizer. Really already in the Clinton administration that was true, but it was bravely accelerated in the Bush era where policies were neglectful.
I do expect China, the European Union, and other actors can play a responsible role especially on these developmental, climate, and global investment issues. But no one should expect U.S. leadership, only U.S. cooperation.
FP: Even if the financial crisis doesn’t touch the poorest of the poor, what about emerging economies such as Nigeria, Angola, and Kenya where the banking system, for example, was just getting on its feet? How will the crisis affect these places?
JS: Of course Nigeria fluctuates with the oil prices, and that’s also the case for Angola. Kenya is a lot more complicated because you have a more diversified economy. Its banks are not strong to begin with, and now the easy go-go days are [over]. But I don’t see that as a major loss for the development of these countries. They will have their work cut out for them in attracting serious investment, but it can remain possible in this setting. Linkages that can be forged with the United States, China, India, will continue to go forward.
FP: As president of the Millennium Promise Alliance, which aims to help countries reach the U.N.’s Millennium Development Goals by 2015, you have spent a great deal of time advocating for increased foreign aid. With hard economic times hitting big donors such as the United States, Europe, and others, how much do your efforts need to change?
JS: The main point I have been trying to make is that promises are for less than 1 percent of income—which is true whether we are in a good year or a bad year. Less than 1 percent is manageable. These are commitments that we can afford. It’s important for the world, and I’ll continue to argue that case.
Second, the idea of $25 billion for Africa suddenly doesn’t sound like so much after a $700 billion bailout in the United States or $2 trillion in bank guarantees in Europe. We’ve just been making choices to ignore the poor rather than calculations based on real resources available. We made a choice to let millions of people die and not honor our commitments. The crisis doesn’t change our quantitative ability to follow through. And now, I think everyone is more of a macroeconomist than they were before. They can evaluate for themselves that it’s just not a lot of money compared to the amounts mobilized in recent weeks.
Third is that one of the core strategies is looking at multiple donors, not only traditional donors in the United States and Europe. The Middle East can and should put in more money; China can and should put in more money. We are going to see those connections grow, to the good of everyone.
Jeffrey Sachs is director of the Earth Institute at Columbia University and author of Common Wealth: Economics for a Crowded Planet (New York: Penguin Press, 2008).