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News : International Last Updated: Jun 16, 2009 - 8:47:01 AM


Global Economic Symposium: German Kiel Institute - - A 3-point program for combating the Financial Crisis and other remedies for global challenges
By Finfacts Team
Jun 15, 2009 - 12:35:30 PM

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The Global Economic Symposium will be held in Plön Castle, by Lake Plön, Schleswig-Holstein, Germany, from September 9-11, 2009. The castle is owned by the Fielmann eyewear company.

The Global Economic Symposium is organised annually by the German Kiel Institute for the World Economy and the Schleswig-Holstein Ministry of Science, Economics, and Transport. The debate on strategies to counter the world economic crisis will be continued during the Global Economic Symposium 2009, which will take place from September 9th to the 11th in the Fielmann Academy Castle Plön. The GES 2009 will focus on finding an end to the global economic crisis and how the world should look once the crisis has been weathered.

A 3-Point Program for Combating the Financial Crisis

The GES says the global financial crisis can be sustainably solved using a 3-point program that targets the root of the crisis.

Such a program should: 1) improve the transparency of financial products and financial institutions, 2) improve the regulation and sur­veillance of the financial sector, and 3) rectify the bankruptcy danger of banks by exchanging debt for equity.

This is the core of the approach to solving the global financial crisis that an international group of experts developed during and after the Global Economic Symposium (GES) 2008. Members of that group are:

Domingo F. Cavallo (Chairman and CEO of DFC Associates),
Joachim Fels (Managing Director and Chief Global Fixed Income Economist and Strategist, Morgan Stanley),
Richard Holmes (CEO Europe and Co-Chairman, Private Banking, Standard Chartered Bank),
Richard Portes (Professor of Economics, London Business School).

The expert group is convinced that the implementation of a three-point program is the only way to sustainably resolve the financial crisis and prevent the numerous and generous stimulus packages being offered worldwide from going to waste. The transparency of the financial sector should be heightened by:

– The standardization of complex financial contracts
– Shifting derivative trade to regulated markets
– Establishing an international credit registry
– Removing credit-rating agencies of their pseudo-government regulatory role.

The oversight and regulation of the financial sector should be improved by:

– Establishing and regulating the observance of equity quotes in an anti-cyclical fashion in order to avoid a credit-market collapse in a recession
– Subjecting all relevant financial institutions—be they in the banking or shadow-banking sector—to the same regulatory oversight
– Tying government help to the acceptance of these regulations.

Bankruptcy issues should be solved by:
– Government-guaranteed bankruptcy protection for all system-relevant financial institutions
– Shareholder and creditor participation in debt-for-equity swaps to avoid that tax payers carry the whole costs of bankruptcy protection.

An International Fee for CO2 Emissions as a Response to Climate Change

An international, standard emissions fee should be established in the medium-term for every unit of carbon dioxide emitted, proportional to the level of environmental costs accrued. This can be achieved in a number of ways including an international emissions tax, or the sale of a limited number of emissions rights. The proceeds would then be used to fund climate protection measures.

This is the main focus of the solution to current global environmental issues proposed by a team of international experts that convened during and after the Global Economic Symposium (GES) 2008. Members of this group are:

Richard Evans (CEO, Rio Tinto Alcan),
John Feldmann (Member of the Executive Board, BASF),
Frank E. Loy (Member of the Boards of Directors, The Nature Conservancy, The Pew Center for Global Climate Change, Environmental Defense Fund, and Ressources for the Future),
Thomas Sterner (Professor of Environmental Economics, Gothenburg University, President, EAERE).

The GES says a broad palette of instruments is currently being implemented to reduce harmful emissions, ranging from quotas, bio-energy quotas, and technological regulations (filament/incandescent light bulb restrictions), to voluntary emissions reduction. The GES expert team considers these initiatives to be inefficient as long as consumers, producers, and other decision-makers are not held financially accountable for harmful emission levels; sufficient incentives to behave in an environmentally responsible way can only be created by charging an emissions fee that corresponds to the level of environmental stress created by that emission.

Since an international standard emissions fee can, due to political reasons, only be established in the medium-term, the GES expert group recommends the ratification of an international agreement for the reduction of greenhouse gases in the short-run. Such an agreement should include all relevant harmful emissions producers, especially the European Union, the United States, Brazil, India, China, and Russia. It should eventually be expanded to include all other producers.

Developing countries should be encouraged to reduce their emissions by receiving technology transfers from industrialized nations. In order to achieve this, the expert group recognizes the fact that intellectual property rights must be introduced in developing countries; at present, the high risk of intellectual property theft is pre-venting the export of environmental technology to developing countries.

Diffusing Trade Disputes Effectively

The GES says current global crisis bears the threat of governments undertaking protectionist measures, much like what happened in the Great Depression of the 1930s. First steps have already been taken in this direction by many governments. The World Trade Organization (WTO) is going to be faced with many conflicts in which it must mediate. As one of the few international trade organizations, the WTO is equipped with a well-established mediation method: the Dispute Settlement Mechanism (DSM). However, in a time of crisis this mechanism must be made even more effective in order to reduce welfare losses for all involved in such trade disputes stemming from protectionist measures.

Concrete suggestions for the reform of the DSM have been made by an international group of experts during and after the GES 2008 consisting of: Professor Anne O. Krueger, John Hopkins University Baltimore (USA); Professor Patrick A. Messerlin, Institut d´ Etudes Politiques de Paris; UNCTAD General Secretary Supachai Panitchpakdi; Werner Marnette, former Science and Economics Minister of Schleswig-Holstein; and Dieter Pommerening, Consultant of the GES Executive Committee.

Their two main solutions are: 1) countries suffering from unwarranted trade restrictions by other countries should be financially compen­sated, and 2) the WTO should develop a set of rules to include class-action lawsuits so that groups of countries can invoke the DSM in order to increase the pressure on countries setting unfair trade restrictions.

The motivations behind the recommendations of the expert group is the increasing number of countries turning to the WTO and, through the DSM, are justified in their complaints but rarely able to generate any use from the verdict. The reason is that parties who are entitled to retaliate often suffer from deliberate delay strategies of the parties who were found violating rules.

The experts further emphasise that the entire world trade system needs to be streamlined because of the challenges it faces: for one, the increasing heterogeneity among the 150 WTO member-states, and also the increasing number of goal conflicts between the classical anti-discrimination goals on one side and fairness and re-distribution goals on the other, and the inability to conclude agreements which is exemplified by the collapse of the Doha Round. To make progress in these aspects, the experts recommend reducing the number of demands placed on such discussions. Simplifying the negotiating agenda by including only issues directly related to trade in goods and services—possibly focusing only on market access issues to start with—might be one way to facilitate negotiations. This approach would create less resistance than a comprehensive negotiation agenda would.

Escaping the Labour Market Downturn with Individual Incentives, Demand Side Policies, and Employment Subsidies

The global financial crisis is hitting the labour market increasingly hard; industrialized countries such as Germany are seeing a dramatic rise in unemployment numbers. Adding to the current crisis is the fact that the structural labour market problems that arose during the last business-cycle upswing have gone unresolved. Many workers are still suffering from the effects of the increased globalization and remain either unemployed or earn so little that they can not provide for their families. To combat both problems, individual incentives to search for and take up employment should be improved. Qualification and employment subsidies must be provided and the state must take an active role in increasing the demand for domestic labour.

These are the central points of the solution to the current labour market problem that an international group of experts agreed upon during and after the Global Economic Symposium 2008. Members of that group are:

George A. Akerlof (Nobel Laureate; Professor of Economics, University of California, Berkeley),
Jørgen Elmeskov (Director of the Policy Studies Branch of the OECD Economics Department),
Assar Lindbeck (Professor of International Economics, University of Stockholm),
René Obermann (CEO, Deutsche Telekom AG).

The GES says empirical studies show that unemployment levels are highest in countries with com­prehensive social security systems; a relatively low difference between employment wages and social security benefits is prevalent in these countries, resulting in very low motivation for the unemployed to search for work. To raise work incentives, countries like Germany should abstain from raising the amount and time-frame for which unemployment benefits are made available. Instead, employment and wage subsidies, along with a lowering of income taxes should be used to create incentives to join the work force.

Workers with low or outdated qualifications should be granted continuing education or re-schooling subsidies. These measures, geared towards increasing the labour supply, should be accompanied by demand increases, according to the experts, in order to avoid the danger of higher labour supply leading to higher unemployment levels. Short-term employment subsidies could expand consumer demand and thus lead to a reduction in unemployment. Additional steps including other Keynesian demand instruments such as a general tax rate reduction and an increase in government consumption and investments should be considered.

Furthermore, the experts strongly warn against the increased use of contingent protectionist measures—such as anti-dumping measures—and rally for their restriction. The WTO should raise the threshold limits above which countries can claim victimization by foreign exporters and claim compensation for unfair import competition. It would also be helpful to increase transparency in this context: if anti-dumping measures are first considered when cost-benefit analyses for consumers have also been conducted, protectionist measures borne of anti-dumping measures can often be avoided.

Helping Losers of Globalization with Training Vouchers

The GES says the risk with which the globalization of economic relationships comes and its threats to many jobs which have been affected by the off-shoring of production sites has become even more evident with the global economic crisis. How can those who have been affected by such changes be assisted? A group of international experts devised a set of concrete solutions during and after the GES 2008.

The two main components of their solutions are: Losers of globalization should receive hiring and training vouchers instead of the government protecting specific jobs or industries, and these vouchers should be financed through taxes independent of the work effort—such as emissions tax revenue—and not through income tax changes which might exert disincentives to work.

The group of experts is composed of: Joaquín Almunia, Commissioner for Economic and Monetary Affairs of the European Commission; Belmiro De Azevedo, Chair­man of the Sonae Group; Peter S. Heller, Professor of Economics at the Johns Hopkins University; Assar Lindbeck, Professor of International Economics, Uni­versity of Stockholm; Adam Posen, Deputy Director of the Peterson Institute; and moderator Evan Davis from the BBC.

They emphasise that protectionist measures for threatened jobs and businesses is not a long-term answer, whereas hiring and training vouchers can provide financial incentives to employers to hire or keep employees and provide internal training programs. The vouchers would provide partial compensation for employer costs involved with such measures, and would be financed by the government. Those businesses that help combat unemployment and are dedicated to developing human capital in the country would be subsidized. Theses vouchers would provide employees with the possibility to avoid unemploy­ment and receive continued education to develop new skills.

The experts further emphasize that it would be a strategic mistake for the govern­ment to finance these measures through changes in income tax laws: raising income taxes would create disincentives to work thus forcing mobile highly skilled workers to go abroad, creating a domestic “brain drain” - - the exact opposite of the intended effect of strengthening human capital formation. In contrast, tax revenue gained, for example, through a carbon emissions tax would create a double gain for the state: improve human capital and simultaneously promoting environmentally conscious behaviour among businesses.

Educational Systems in Industrialized Countries Require Massive Reform

The GES says the global economic crisis is shedding light on the shortcomings of educational systems in developed countries. Current education systems typically fail to promote lifelong learning or the development of skills that will allow workers continued education to consistently fulfill the changing demands of an intertwined world.

The pressure exerted by the global economic crisis should be used to reform education systems, especially in Germany. Instead of focusing on the teaching of specialized knowledge in a rather narrow field of vocational expertise, higher importance should be given to the development of skills that will allow workers to constantly develop their capacities. This especially includes creativity, social compe­tence, and communication skills. The principles of “lifelong learning” or “learning how to learn” and employment flexibility should gain importance in all fields of education. Workers of all ages should have access to skill-development programs.

This is the central recommendation to dealing with educational shortcomings that an international group of experts during and after the Global Economic Symposium 2008 developed. Members of this expert group are: H.E. Sheikha Lubna Al Qasimi, Minister of Foreign Trade of the United Arab Emirates; Professor Richard E. Baldwin of the Graduate Institute of International and Development Studies in Geneva; Professor Alan S. Blinder of Princeton University (USA); Dr. Hans-Paul Buerkner, President and CEO of the Boston Consulting Group; and moderator Roland Tichy, Editor-in-Chief of the WirtschaftsWoche.

The experts stress that both vocational and academic systems must be reformed: Vocational systems—especially Germany’s two-tier system—focus too much on teaching one group of skills for a specific job and ignore the importance of job flexibility demanded by labour markets. This should change by giving workers the possibility to gain multiple qualifications during their employment life to improve their chances of employment in a number of fields. Similar deficiencies are found in aca­demic educational systems as well. Talent, learning ability and individual skills of students are so diverse that educational systems must be developed to better utilize students’ potential and prepare them for the demands of the labour market. Schools and universities must teach not only knowledge and technology, but also skills which will allow the development of further qualifications later in life.

The GES says a very important role is also played by early childhood education, where the basis for logic and memorization skills is laid. Self-motivation, self-control, and social inte­gra­tion are also skills acquired in early childhood. No comprehensive education reform can ignore the importance of early childhood education.

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