February 2, 2009 / 11:25 AM / 11 years ago

Crisis heightens danger of global social unrest

DAVOS, Switzerland (Reuters) - 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,” Lagarde said on Saturday. 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 United States, 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 United States and the European Union 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 United States and Britain that banks lend at home, as a price for government rescues, further heighten the risk of capital being withdrawn from emerging economies.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 $165 billion (116 billion pounds) this year from almost $1 trillion 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 percent in 1976 to about 18 percent 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 (WIPR.BO) Chairman Azim Premji told Reuters in Davos that if growth stalls in the information technology industry, “suddenly some 2-1/2 million in job creation disappears from the market.” In China, he said the equivalent is about 4 million jobs.


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 spillover effects.

Bank lending to emerging economies may well fall further. The International Monetary Fund estimated that banks will need to raise at least another $500 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 $500 billion within the next six months.

The Asia Development Bank is looking to triple its capital base to $165 billion to tide it over the global crisis.

Donald Kaberuka, president of the African Development Bank, also foresees risks of rising poverty if aid to his continent dries up. “It’s not just a narrow financial crisis. It’s a big development crisis,” he told Reuters.

“With all the bailout problems, there will be a big decline in aid to developing countries.”

TAKE A LOOK-World Economic Forum in Davos

For full coverage, including blogs, TV, pictures, please see www.reuters.com/davos

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