International negotiations on greenhouse gases and alternative energy sources face challenges

ASTANA. March 19. KAZINFORM /Rizvana Sadykova/ As part of series of publications in connection with the Second Astana Economic Forum on ?Economic Security in Eurasia in the System of Global Risks?held in Astana, 11-12 March, 2009 we introduce our guest Joseph A. McKinney, Ph. D. Professor of International Economics, Baylor University, Waco, Texas, USA to our readers.

What is your opinion about proposal of President Nursultan Nazarbayev on the creation of the singleworld currency? Along with this Economic Forum these days Kazakhstan also marks the 15th anniversary of the idea on establishment of Euroasian Union, which was announced by our President in 1994. First I would like to answer to the latter question. Obviously, any regional integration, especially in economic sphere has many benefits, therefore, I do believe that the idea of President Nazarbayev is viable and realistic. The cooperation in the field of trade for example, will be very helpful for all the countries as a whole. As far as the single world currency concerned, I am not so optimistic. I think that perhaps after many years that might be possible that I think it will take many years for the world economy to evolve to the point. The same time, I believe that an immediate step to that direction might be an introduction of regional currencies. Certainly the higher degree of regional integration the more realistic the idea of creation of the regional currency. There a lot of discussion on the main cause of current economic crisis and ways to get out.. What is your opinion about the nationalization of the banks, which was done by some governments? What are main steps to overcome this crisis in general? The economic crisis originated in the United States, but resulted from a confluence of several factors. Partly as a reaction to the Asian financial crisis of the late 1990s, several Asian countries began to run large current account surpluses and to accumulate massive foreign exchange reserves. At the same time, an escalation of oil prices allowed major oil producing countries to accumulate large amounts of foreign exchange. As these funds were recycled, a large proportion of them found their way into the well-developed capital markets and perceived safe haven of the United States. Funds flowed into real estate, stimulated in part by policymakers who on social grounds were encouraging homeownership even by very low-income individuals. Restoring health to the financial sector will require the removal of toxic assets from the balance sheets of financial institutions by governmental entities that can eventually sell the assets when their value can be more accurately determined. Only after these toxic assets have been removed from balance sheets will credit flows, which are the lifeblood of a market economy, be restored to normal levels. Turning to your question on nationalization of banks, while this may be necessary step in the short run I do not believe that is a good idea for the long term. And this crisis situation of purchasing the stock of a bank is one way that capital can be injected into the bank and keeps it solvent. I think perhaps you know that when Sweden had financial crisis they did nationalize the banks. And before many years they were private types of the banks. And that I think will be the paradigm to the extent appearance of the nationalization of banks in the UK and in the United States. That will be temporary solution and later on those banks again will be privatized. In order to attenuate the length of the recession, coordinated monetary and fiscal responses are needed. The major countries of the world have seemingly realized the seriousness of the crisis, and are responding with both monetary expansions and fiscal stimulus packages. The Obama administration in the United States has proposed a stimulus package that amounts to almost 6% of Gross Domestic Product (GDP) on top of a federal budget deficit that already stands at around 8% of GDP. China has announced a very significant fiscal stimulus, and Japan has agreed to make funds available to supplement the resources of the International Monetary Fund and the World Bank as they assist emerging economies. Then what do you think on the role international financial institurions during current financial crisis? A reformed International Monetary Fund (or some alternative institutional arrangement) will need to have oversight and review functions over financial institutions operating on a global scale. Hedge funds will need to be regulated, credit rating agencies monitored, and internationally agreed capital adequacy standards established. Further international convergence of accounting standards would also be desirable. The challenge will be to implement measures that provide greater financial stability without inhibiting the financial innovation that is needed in market economies. The combined efforts of the International Monetary Fund, the Bank of International Settlements and the Financial Stability Forum will be required to construct a new international financial architecture. An improved international institutional structure is needed not only in the financial realm, but also with regard to environmental and energy issues. Just as market failures in financial markets have adverse consequences throughout the world economy, market failures or distortions in environmental and energy matters also have global consequences. For a variety of reasons, a cooperative equilibrium is unlikely without the assistance of international institutions. Cooperation can, however, potentially yield large benefits to all concerned. Your presentation at the forum was devoted to world economic crisis in relation to energy and environmental issues. Could you give us a brief summary on these matters? In fact, effective international cooperation concerning climate change and alternative energy sources will be very difficult for a number of reasons. There is also a lack of trust among the countries involved, with less developed countries such as China and India suspecting that efforts to get them to reduce their greenhouse emissions have the ulterior motive of slowing down their economic growth. Less developed countries point out that countries such as the United States and Western European countries freely emitted greenhouse gases during their economic development, and that it is unfair to ask less developed countries now to take the same measures expected of the more developed countries that would hinder their economic growth. International negotiations to find agreement on reduction of greenhouse gases and the development of alternative energy sources will face many challenges. Less developed countries will resist imposing burdens on their economies that might reduce the rate of economic growth. During recent years, the United States has not taken a strong leadership role with regard to international environmental issues and energy matters. That is likely to change, however, under the new administration. President Obama has expressed concerns about the huge imbalances that have developed in international trade and payments because of exchange rate policies. He also has promised to cap carbon emissions and set up a system of tradable emissions permits, and to provide financial support for alternative energy sources. His recently proposed fiscal stimulus package includes expenditures of almost $50 billion for energy projects, much of it targeted toward the development and implementation of alternative energy sources. Joseph A. McKinney is Ben H. Williams Professor of International Economics at Baylor University. He has taught at University of Virginia and Seinan Gakuin University in Japan, and has been Fulbright Senior Scholar in the United Kingdom and in Canada. He has published articles on international economics and trade policy, and has been consultant to administrative agencies and legislative committees in the United States on international trade issues. On March 13, 2009 Joseph A. McKinney has become an Honorable professor of the Kazakh University on Economics, Finance and International Trade.