A new economic order
is taking shape before our eyes, and it is one that includes accelerated
convergence between the old Western powers and the emerging world’s major new
players. But the forces driving this convergence have little to do with what
generations of economists envisaged when they pointed out the inadequacy of the
old order; and these forces’ implications may be equally unsettling.
For decades, many people lamented the
extent to which the West dominated the global economic system. From the governance
of multilateral organizations to the design of financial services, the global
infrastructure was seen as favoring Western interests. While there was much
talk of reform, Western countries repeatedly countered serious efforts that
would result in meaningful erosion of their entitlements.
On the few occasions that such resistance
was seemingly overcome, the outcome was gradual and timid change. Consequently,
many emerging-market economies lost confidence in the “pooled insurance” that
the global system supposedly put at their disposal, especially at times of
great need.
This change in sentiment was catalyzed by
the financial crises in Asia, Eastern Europe, and Latin America in the late
1990’s and early 2000’s, and by what many in these regions regarded as the
West’s inadequate and poorly designed responses. With their trust in bilateral
assistance and multilateral institutions such as the International Monetary
Fund shaken, emerging-market economies – led by those in Asia – embarked on a
sustained drive toward greater financial self-reliance.
Once they succeeded in overcoming a
painful crisis-management phase, many of these countries accumulated previously
unthinkable levels of international reserves as precautionary cushions. They
extinguished billions in external indebtedness by generating and sustaining
large current-account surpluses. And they increased the scale and scope of
domestic financial intermediation in order to reduce their vulnerability to
external storms.
These developments stood in stark contrast
to what was happening in the West. There, unprecedented leverage, massive debt
creation, and a seemingly infinite sense of credit entitlement prevailed.
Financial excesses become the rule rather than the exception, facilitated by
financial innovation and the erosion of lending standards and prudential
regulation.
Suddenly, the world turned upside down:
“rich” countries were running large deficits and, in some cases, tipping from
net creditor status to net indebtedness, while “poor” countries were running
surpluses and accumulating large stocks of external assets, including financial
claims on Western economies.
Little did these countries know that their
divergent paths would end up fueling large global imbalances, and eventually
trigger a financial crisis that has shaken the prevailing international
economic order to its foundations.
There is no restoring fully that order.
Rather than recovering strongly, sluggish Western growth is periodically
flirting with recession at a time of high unemployment and multiplying debt
concerns, particularly in Europe. In an amazing turn of events, virtually every
Western country must now worry about its credit ratings, while quite a few
emerging economies continue to climb the ratings ladder. We can now consider
the image of Western delegations heading to emerging countries to plead, cap in
hand, for financial support, both direct and through the IMF.
At first blush, this unusual convergence
between Western and emerging countries seems to reflect what advocates of a new
international economic order had in mind. But appearances can be misleading,
and, in this case, they are misleading in a significant way.
Advocates envisaged an orderly process in
which economic convergence accompanied and facilitated global economic growth.
They foresaw a collaborative process guided by enlightened policymaking. But
what is occurring is far different and more unpredictable.
Rather than exhibiting enlightened
leadership, Western policymakers have consistently lagged realities on the
ground, with a bewildering mixture of denial, misdiagnosis, and bickering
undermining their responses. Rather than proceeding in an orderly manner,
today's global changes are being driven by the disorderly forces of
de-leveraging emanating from a Europe in deep financial crisis and an America
seemingly unable to restore sustained high rates of GDP growth and job
creation.
Multilateral institutions, particularly
the IMF, have responded by pumping an unfathomable amount of financing into
Europe. But, instead of reversing the disorderly deleveraging and encouraging
new private investments, this official financing has merely shifted liabilities
from the private sector to the public sector. Moreover, many emerging-market
countries have noted that the policy conditionality attached to the tens of
billions of dollars that have been shipped to Europe pales in comparison with
what was imposed on them in the 1990’s and early 2000’s.
Fortunately, despite having lagged rather
than led this process of consequential (and increasingly disorderly) global
change, it is not too late for policymakers to catch up. But doing so requires
more than just better national policymaking in Europe and America; it is also
time for urgent and deep reform of the multilateral system and its main institutions.
That process requires joint leadership by the emerging world as a true equal
and partner of Western powers
No comments:
Post a Comment