By World Economic Forum, 2009
As the effects of the financial crisis continue to unfold, the world faces serious challenges to the functioning of both capital markets and the global economy. With aggregate demand falling, there is a significant risk of a severe global recession that will affect many sectors, asset classes and regions in tandem.
Financial regionalism
This is a world in which post-crisis blame-shifting and the threat of further economic contagion have created three major blocs on trade and financial policy, forcing global companies to construct tripartite strategies to operate globally. As the crisis deepens in the US and Europe through 2010, the emerging markets walk away from a series of global talks, reject Western models and ideals, and form their own bloc of domestically focused economies. The US is isolated. With the exception of tourism and energy materials, most trade flows among the blocs decline sharply. Energy security becomes a key issue.The financial world is split among the three regional blocs—the US-led Democratic Trade Alliance, the expanded EU area and the Eastern International Economic Community led by China. The global landscape is therefore characterised by old and new champions seeking to operate on a regional basis, with Asian financial institutions dominating the global landscape in terms of size.
Re-engineered Western centrism
This is a highly coordinated and financially homogenous world that may yet have to face up to the realities of power shifting to the East and the dangers of regulating for the last crisis rather than the next. With emerging economies severely affected by the global recession, the West maintains economic and moral primacy by playing a leading role in corporate restructuring, driving productivity increases and maintaining free trade globally. Its crowning achievement is the reform of existing international financial institutions—dubbed “Bretton Woods II”—and the creation of a supranational regulatory authority. Unfortunately, Bretton Woods II falls short of the needs of emerging economies and the new regulatory regime fails to consider structural flaws in risk management, leading to renewed fears of an even bigger crisis.After being dominated for a short time by politicians and regulators, the financial world is once again a major engine of profitability and growth managed by insiders. With emerging market exchanges marginalized and those in the developed world greatly restructured, the advanced economies drive a new phase of growth.
Fragmented protectionism
This is a world characterized by division, conflict, currency controls and race-to-the bottom dynamics that only serve to deepen the long-term effects of the financial crisis. As the global recession bites, a range of other events, including inter-state conflict, domestic unrest and natural disasters, combine to make things worse. Countries try to look after their own economic interests, blaming each other and turning to populist, protectionist policies. Resource conflicts emerge, and security threats and terrorism keep nationalism and protectionism alive despite the high economic costs.The financial world is extremely localized and highly volatile, with major arbitrage opportunities for those with the ability to execute trades across borders. Unfortunately, capital controls in most jurisdictions make this very difficult, and political risk is high.
Rebalanced multilateralism
In this world, initial barriers to coordination and disagreement over effective risk management approaches are overcome in the context of rapid shifts in geo-economic power. The global community learns from its mistakes through sharing: As the US goes through successive crises and the emerging economies battle their own problems, the world eventually realizes that meaningful collaboration is the only way forward. Major shifts in international institutions and a new recognition of the meaning of global governance imply that the financial system is better suited to the challenges of a complex, interdependent world in 2020, if not at all perfect.Emerging markets set the pace for economic growth, cooperation on financial policy and new approaches to systemic financial risk. The financial system is globally integrated but, given the rapid growth in the emerging markets, in many cases dominated by BRIC-focused players.
