The recent economic crisis was Western in origin but had global consequences. As trade finance dried up, global trade fell and demand collapsed. It revealed a divided and disconnected world.

But can we respond to this crisis in a sustainable way? Is it possible to achieve solid, environmentally friendly economic growth that raises living standards as equitably as possible and is consistent with the Millennium Development Goals? I believe so.

Growth can be green. High food and energy prices may pose economic and social problems but these can be addressed through environmentally friendly policies, increased investment in commodity-producing regions, and by green technology.

First we need to rebalance our global economy and introduce better regulation for the financial sector. Policymakers have been implementing an austerity agenda and ignoring growth, yet the euro crisis continues. Even when paying down debt there is much that we can do to boost demand and generate jobs. Debtor countries need to save more, while saver countries need to spend more. If only the debtor nations adjust, then a deflationary bias is built into the global economy.

Emerging economies need to switch from export-led to domestically driven growth. So we need to boost social safety nets to deter excess savings; support small and medium-sized firms that are the key to job creation; and develop deeper and broader capital markets to help underpin domestic-driven growth.

The financial crisis revealed the sheer scale of the shadow banking industry and the extent of inter-financial activity that had little economic benefit. But while regulators need to discourage such activities they also have to ensure that excessive regulation does not limit the banks’ ability to lend. Without trade finance, global trade suffers. The wrong type of regulation could encourage more businesses to shift into the shadow, unregulated industry, sowing the seeds of the next crisis.

So we need a common global financial agenda, led by the Bank for International Settlements and the Financial Stability Board. We need to focus on three types of infrastructure: hard infrastructure – roads, transport links and so on; soft infrastructure – skills and education; and institutional infrastructure – the bodies the West takes for granted but which are still lacking across the emerging world.

We need institutions that are accountable and share common goals. This is no time for purely national political agendas; our response must be global to be truly sustainable.

Author: Dr Gerard Lyons, Chief Economist and Group Head, Global Research, Standard Chartered Bank; Member of the World Economic Forum Global Agenda Council on Banking & Capital Markets.

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