In spite of the embryonic signs of recovery, there are still many challenges facing world leaders. The first is to ensure that they are not too optimistic. The IMF and World Bank are still predicting declining growth and contracting output around the world, and the outlook according other indicators such as unemployment will remain gloomy. Although the steps taken so far may be beginning to yield results, much more work is still needed to ensure the recovery.
Any optimism may actually go further than stopping the recovery in its tracks - it could reignite the financial crisis. Leaders and economic policy makers will need to ensure that they balance their approach: large government deficits could generate inflation and make it more expensive to borrow on international markets. But implementing a shift towards policy restraint too early will impact with considerable force on the fragile recovery.
A further challenge facing world leaders is the waning momentum for change. As some indicators begin to pick up, public and political pressure to push through reforms is decreasing and there is a danger now that the impetus for radical and necessary change will be lost. The result of this would be - except for a few cosmetic changes - the global economy will emerge from this recession looking much as it did before, only smaller and with more people unemployed and angry.
Reform, for example, of the Bretton Woods institutions is something that is not only important - it is something that has to be implemented more quickly. The Western powers need to face up to political reality and offer a reform of governance that properly reflects the distribution of power in the new global economy. Without these reforms, developing economies, particularly countries such as China and Brazil, may begin to reject the institutions on the basis that they are not representative enough to efficiently pursue their primary objectives, ie. stability of the international financial system and the fight against poverty.
The scale of the current crisis has been associated with inadequate regulation and supervision of banks and financial markets. But rushing through new financial regulation in a purely reactive response to the financial crisis would be a mistake. The priority should be to ensure that existing regulation is enforced thoroughly.
There have also been many political criticisms relating to fair value accounting rules, alleging that they caused some of the market volatility and may have been a factor in the financial crisis. Fair value did not cause the financial crisis, and world leaders should use this crisis to show commitment to the principle of an accountable, transparent and sound system of international regulatory cooperation, maintaining full support for the move towards a single set of high quality international accounting standards. The globalisation of business means that one set of reporting standards, the principles-based IFRS, is essential.
In addition to bigger businesses, SMEs are vital to driving economic recovery through the role they play in creating jobs, innovation, and macroeconomic growth. It is crucial that leaders recognise the importance of SMEs and find more ways to collaborate and partner with business, civil society and governments in encouraging institutional changes to help improve the operating environment for SMEs.
Finally, while politicians struggle to retain votes and work economies out of recession, it is crucial that they acknowledge the climate crisis as well. Acting early, as key policy documents, economic forecasts and project proposals are urging, will raise our chances of diverting catastrophe at a reduced financial and environmental cost, while building a strong green economy.
Courtesy By ACCA
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