Crisis heightens danger of global social unrest


Emma Thomasson and Stella Dawson
Times of Malta
February 3, 2009

World leaders in Davos, well aware of recent riots and spreading political discontent, vowed to do more to prevent the financial crisis causing deeper economic damage and making global poverty worse.

French Economy Minister Christine Lagarde warned the World Economic Forum of a vicious cycle where the very remedies to the financial turmoil – bank bailouts and stimulus plans – can unleash a backlash that worsens the crisis.

"We’re facing two major risks: One is social unrest and second is protectionism," Mr Lagarde said. The catalysts for these risks are using taxpayer money in rescue plans, and slowing growth, she said.

Economic hardship and rising unemployment have already sparked riots in Greece, Bulgaria, Latvia, Lithuania and Madagascar, and weeks of demonstrations helped bring down the government in Iceland.

Last week, more than a million people took to the streets of French cities to protest, and thousands marched in Russia on Saturday. "Buy Local" campaigns have sprouted in the US, and thousands of British employees have staged walkouts against the use of foreign contract workers.

At Davos on Saturday, hundreds of protesters accused bankers, business leaders and politicians of creating the crisis and sending them the bill.

"It’s people like you and me who have to pay for it with their tax money," said Alex Heideger of the Davos Green Party.

A constant refrain from political leaders at their five-day gathering with business chiefs that wound up on Sunday was that protectionism could worsen and stoke instability.

The mechanism is two-fold. Any withdrawal from global trade ricochets quickly through developing countries whose growth has come from exports. Recent trade data from China, the US and the EU have already shown sharp declines.

This problem is compounded by international banks pulling back from foreign lending to fix problems at home. Taxpayer demands in the US and Britain that banks lend at home, as a price for government rescues, further heighten the risk of capital being withdrawn from emerging economies.

British Prime Minister Gordon Brown said this could lead to deepening protectionism, a reversal of decades of globalisation, and rising poverty.

New data from the Institute of International Finance, which represents major international banks, show global lending is already shrinking. It estimates that private capital flows to emerging markets will plunge to €130 billion this year from almost €785 billion two years ago. Indonesian Trade Minister Mari Elka Pangestu on Saturday said the trend was deeply troubling. "These are real threats that will reverse development," she said.

Indonesia illustrates the problem emerging markets face. The growth of southeast Asia’s largest and most populous economy reduced its poverty level from 40 per cent in 1976 to about 18 per cent today, according to a World Bank Study. But during the economic 1997-98 crisis, poverty rose by 13 percentage points.

In an integrated global economy, shrinking demand in the developed world – most major economies are now in recession – feeds quickly through the supply chain, leading to job losses.

In India for example, Wipro Chairman Azim Premji said in Davos that if growth stalls in the information technology industry, "suddenly some two-and-a-half million in job creation disappears from the market." In China, he said the equivalent is about four million jobs.

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The drop in trade and investment could have profound consequences for the global economy where a vicious cycle of credit contraction, bank failure, falling exports, investment drying up, further economic decline and job losses can have violent spill-over effects.

Bank lending to emerging economies may well fall further. The International Monetary Fund estimated that banks will need to raise at least another €393 billion in capital before the financial system is stabilised, on top of the massive recapitalisation already injected.

This in turn may mean more countries face payment crises. Already Hungary, Ukraine, Iceland and Pakistan have tapped the IMF for help, and more IMF lending to stressed economies is expected. Turkey was working vigorously this week at Davos to strike a new IMF standby agreement to stabilise its economy.

Bankers, leaders and policymakers at Davos saw no let-up. "The economic news is going to be bad news for a while," said IMF first deputy managing director John Lipsky. The IMF said it has enough money to cope with expected requests for help but as a safety measure, it is trying to double its war chest to €393 billion within the next six months.

Factbox

France

Hundreds of thousands of strikers marched in French cities on Thursday to demand pay rises and job protection. Some protesters clashed with police, but no major violence was reported.

The one-day strike failed to paralyse the country and support from private sector workers appeared limited. Labour leaders hailed the action, which marked the first time France’s eight union federations had joined forces against the government since President Nicolas Sarkozy took office in 2007.

Russia

Thousands of opposition supporters rallied in Moscow and the far east port of Vladivostok on Saturday in a national day of protests over hardships caused by the financial crisis.

Street rallies were held in almost every major city. The pro-Kremlin United Russia party also drew thousands to rallies in support of government anti-crisis measures.

About 100 protesters were arrested in Vladivostok last month during protests against hikes in second hand car import duties aimed at protecting jobs in the domestic car industry.

Madagascar

More than 100 people were killed in civil unrest in Madagascar last week, according to the US ambassador. Police previously confirmed 44 deaths, with most of those in a store burned during looting when an anti-government protest degenerated into violence.

The mayor of Antananarivo, Andry Rajoelina, galvanised popular frustrations to spearhead demonstrations and strikes against President Marc Ravalomanana’s government. The violence came amid an oil and minerals exploration boom in Madagascar.

Iceland

Parties forming a new coalition for the crisis-hit island decided on Sunday its new prime minister will be former Social Affairs Minister Johanna Sigurdardottir.

Prime Minister Geir Haarde resigned last week after a series of protests, some of which had turned violent. He was the first leader to fall as a direct result of the credit crunch.

The collapse of the country’s fast-expanding banks under a weight of debt forced the country to take a €7.8 billion IMF-led rescue package and sparked widespread anger.

Davos

Hundreds of people rallied in Geneva and Davos on Saturday to protest against the World Economic Forum, saying the elite gathered for its annual meeting are not qualified to fix the world’s problems.

In Geneva, where the WEF has its headquarters, police in riot gear fired teargas and water canon to disperse a crowd.

Britain

Thousands of energy workers staged walkouts on Friday in protest over the use of foreign labour, fearing for their jobs in what is set to be the worst recession in the world’s major economies.

Contractors at a refinery owned by France’s Total began protests on Wednesday after Italian firm IREM won a contract to build a new unit. Unions say it has brought in workers from Italy and Portugal and deprived Britons of work.

Greece

Greek farmers removed roadblocks last week which caused 11 days of travel chaos across the country as they protested against low prices. They kept their blockade on Bulgaria’s border and central Greece.

High youth unemployment was a main driver for rioting in Greece in December, initially sparked by the police shooting of a youth in an Athens neighbourhood. The protests forced a government reshuffle.

Guadeloupe

France sent a minister to the Caribbean island on Sunday for talks aimed at ending a 13-day general strike over pay and prices that has paralysed the French territory.

An alliance of 47 unions and local bodies launched their protest on January 20 over the cost of living. They have drawn up a list of 146 demands including a €200 euro increase in the minimum salary, a freeze on rents and a cut in taxes and food prices. Island authorities have rejected the demands.

Bulgaria

Hundreds of Bulgarians demanded economic and social reforms in the face of a global slowdown in anti-government rallies last month, calling on the Socialist-led government to act or step down.

Earlier last month, hundreds of protesters clashed with police, smashed windows and damaged cars in Sofia when a rally against corruption and slow reforms in the face of the economic crisis turned into a riot.

Latvia

A 10,000-strong protest in Latvia on January 16 descended into a riot, with protesters trying to storm parliament before going on the rampage. Government steps to cut wages, as part of an austerity plan to win international aid, have angered people.

Lithuania

Also on January 16, police fired teargas to disperse demonstrators who pelted parliament with stones in protest at government cuts in social spending to offset an economic slowdown. Police said 80 people were detained and 20 injured.

Prime Minister Andrius Kubilius said the violence would not stop an austerity plan launched after a slide in output and revenues.


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