00 7/7/2009 5:35 AM

The global economic, social and financial
context for the Pope's third encyclical

Translated from
the Italian service of

July 6, 2009

The eve of the release of Pope Benedict XVI's third encyclical, Caritas in veritate, finds the leaders of the industrialized world converging in the Abruzzo for the start of this week's G8 summit under the presidency of Italy.

It is a timely coincidence that further emphasizes the societal issues confronted by the Holy Father in the encyclical. Luis Badilla looks at the global background that forms the context for the encyclical.

On the eve of the December 2008 Doha Conference [in the United Arab Emirates] on development funding promoted by the General Assembly of the United Nations, the Pontifical Council on Justice and Peace published, with the approval of the Vatican Secretary of State, a Note intended as 'a contribution to the dialog".

The note highlighted the principal characteristics of the economic, social and financial moment in history against which Benedict XVI's new encyclical must be read.

The global crisis today

The global financial crisis originated from the collapse of the sub-prime credit market in the United States. This followed a rise in agricultural and energy prices in the first months of 2008. The collapse of credit thus became dramatic on many levels, with negative consequences: it meant, above all, that funding for development was relegated to the background.

National sovereignty
Are we facing the necessity for a simple change - or of a true and proper re-establishment of the system of economic and financial international institutions?

Many quarters, public and private, national and international, have called for a new Bretton Woods-style conference. [This was the 1944 United Nations conference held in Bretton Woods, New Hampshire, to set up mechanisms that would regulate the international financial and monetary system following World War II. It led to the creation of the International Bank for Reconstruction and Development (IBRD) [coommonly known as the World Bank], the General Agreement on Tariffs and Trade (GATT), and the International Monetary Fund (IMF).]

The crisis has undoubtedly highlighted the urgency for identifying new forms of international coordination on monetary, financial and commercial affairs.

It is evident today that national sovereignty alone is inadequate. Even the richest nations acknowledge that it is no longer possible to achieve national objectives relying solely on internal politics: that international agreements and rules, set and overseen by international institutions, are absolutely necessary.

In this, nations must guard against a chain reaction of reciprocal protectionism - rather, they should reinforce cooperative actions promoting transparency and vigilance in the financial system.

Nations must consider solutions involving 'shared sovereignty' as the history of European integration has shown, starting from concrete problems [such as the 'common market' in Europe), within a vision of peace and prosperity that is rooted in shared values.

Rich nations and poor nations

The financial nexi that connect the developed countries with the poorest countries present at least two paradoxical elements. The first is that in the global system, it is the 'poor' nations who finance the 'rich' nations - the latter are the beneficiaries of resources, both from the flight of private capital from the poorer nations, or from government decisions by the poorer nations to place their official reserves into 'safe' financial instruments in the highly evolved economies or in offshore banks.

The second paradox is that the resettlement of migrants - the least 'liberalized' component of the processes of globalization - requires an investment of resources that, at the macro level, already far surpasses the level of available aid for development.

In simple terms, it is as if the poor from the undeveloped 'South' of the globe are actually helping to finance the rich 'North', even as workers from the 'South' must emigrate to work in the North in order to be able to send back money to support their families left in the South.

Regulating the financial market

The present crisis ripened in a context when the temporal horizon for financial operators to make decisions had become extremely brief, and in which trust - the essential ingredient for 'credit - rested more on the mechanisms of the market rather than on fiduciary relationships among business partners.

It was not by chance that this trust fell through in the very compartment that was considered 'safe' by definition - interbank relationships.

But without this trust, everything is blocked, including the possibility of normal functioning by private enterprise, who suddenyl found that sources of credit had dried up or become very stringent.

The financial crisis indeed has among its consequences the prospect of an even worsening financial climate. All of which leads all the players involved to take 'protective' measures that can only make this worsening more likely, and with predictable cumulative effect.

The crisis suddenly meant a loss of that faith that had always been placed in the market, and the incapacity of the market to respond with amechanism that was supposed to be self-regulatory and therefore, ultimately still able to generate development for all.

Trust, transparency and rules

But financial markets cannot operate without trust. And without transparency or rules, there can be no trust. The proper functioning of the market requires the State to play an important role, and wherever necessary, the international community as well, in establishing and enforcing rules of transparency and prudence.

But it must be remembered that no regulatory intervention can 'guarantee' it can be effective, without a well-formed moral conscience and day-to-day awareness of responsibility by the very operators of the market, especially the entrepreneurs and the major financial players.

Today's rules, having been designed from yesterday's experience, will not necessarily protect the system from the risks of tomorrow. Thus, even if there exist good structures and good regulations, these alone do not suffice because man can never be changed or 'redeemed' simply from the outside.

One has to to reach man's most profound moral being. There must be real education in the exercise of responsibilities for the good of all, by all subjects, at all levels: financial operators, families, enterprises, financial institutions, public authorities, civilian society.

The role of civilian society in financing development

Financing development involves both public aid to development as well as the role of all the persons, enterprises and organizations affected. Civilian society does not only carry out an important active role in development work itself, but in the financing of such development.

It does so, first of all, by voluntary contributions, person to person, as in the resettlement of emigrants, or relatively simple organizational forms (e.g., adoption from afar).

Then there are the resources mobilized by business enterprises in the exercise of their social responsibility. And finally, often very prominent, the contributions of major foundations.

The very adoption of responsible behavior in matters of consumption and investment constitutes an important resource for development. Disseminating such responsible behavior, from the viewpoint of its material effects, can make the difference in the functioning of particular markets.

But their importance resides above all in the fact that they express a concrete participation by individuals - as consumers, as investors of family savings, or as decision-makers in industry - in the opportunity to rescue the poor from their poverty.

Means and ends

A last, important warning: One must be careful not to confuse the means (financial resources) with the end, namely development. It is not enough to make available a prescribed amount of development funding to automatically achieve development.

Development is not so much the 'result' that one finds at the end, but the path that is traced day by day through the concrete choices made by the multiple actors involved - donor and recipient governments, non-governmental organizations, local communities.