SUPARNA KARMAKAR (The author is a trade economist, specialising in international trade policy. )
The last couple of years seem to have ushered a seismic change in the global outlook on economic policy. More than the popular disenchantment with globalisation in the western world, what is telling is the change of heart among the key proponents of free market economics.
The IMF's open support of capital controls as a stabilising policy tool in February this year and the recent endorsement from an important member of the US President's economic advisory council on the need for the world to move away from market fundamentalism can be deemed as tectonic shifts in international economic thinking that until recently was underpinned by the Washington Consensus.
Limitation of markets
The economic uncertainty in the aftermath of the 2007-08 financial crisis has led to a renewed appreciation today that authoritarian capitalism is as liable to abuse its power as authoritarian governments. The limitations of markets to deliver social objectives and development are also being acknowledged.
As noted by Kevin Gallagher in his most recent Financial Times article, “The pendulum has now swung in the other direction. A parade of studies (from multilateral institutions and renowned economists worldwide) have showed that capital account liberalisation was not associated with growth in emerging markets, and that capital controls have been fairly effective.”
Even in the sphere of trade policy, analysts are cautious in linking development with trade, unlike in the pre-crisis times when greater trade openness was thought to be synonymous with trickle-down welfare enhancement. It is now more rationally acknowledged that trade and market openness do lead to higher growth, though not necessarily to equitable growth; and that countries need to institute appropriate redistribution systems and implement complementary domestic policy reforms for the benefits of trade-led growth to reach a larger section of the population.
Continued disconnect
The problem, however, lies in the continued disconnect between economic rationale and politics. And it is most starkly apparent in the much-talked of financial reforms and restraint that the G-20 leaders are expected to deliver in Seoul at the November 11-12 meeting. While, on the one hand, the US negotiators continue to focus on the exchange rate adjustment as the main tool for global rebalancing, the prospect of continued super-loose monetary policy in the G-3 has led to a surge of investment capital into emerging market economies, thereby exacerbating the competitiveness challenges that have long been posed by Beijing's exchange rate policy.
The recently aired warnings from the UK and India about the G-20's future merely put into words what has already become apparent from the actions of several governments — that several leaders doubt a multilateral solution to global imbalances and currency frictions is within reach.
As a result, many have opted for unilateral actions on capital control to avoid being squeezed between the US and China. The success of the G-20, or for that matter any multilateral negotiating forum, will necessarily have to depend on the proactiveness of the world's reigning superpower, the US. However, continuing preoccupation in the US with fixing its domestic economy has translated into a lack of meaningful engagement with the rest of the world on most multilateral issues.
The US posture on both trade and climate negotiations continue to reflect not only a lack of leadership and political will, but a hubris that is counterproductive to accomplishing anything.
Not-so-bleak
Nevertheless, the global economic situation is not as bleak as the above discussion may imply. A redeeming feature of recent times has been that the North-South business initiatives and private sector economic cooperation have sustained, albeit at a low level in view of the weak global growth scenario.
But the cooperation evident in the real world is not evident at the diplomatic level. It is no wonder then that disenchantment with the G-20 process has been accelerating in recent months and that the prospects of G-20 appear rather dim, as is the case for both the Doha Round of trade negotiations and the climate change talks.
If multilateral institutions and policy groups wish to remain relevant, it is imperative that policymakers begin to lead and not lag the private sector initiatives. Injection of some much-needed economic pragmatism and a more co-operative outlook among the negotiators is necessary if the world is to shrug off the pervading sense of missed opportunities at successive G-20 meetings.
Strategic approach needed
Many articles in this column have argued for a more strategic approach to national policymaking and for shunning short-termism while devising strategies for issues with multilateral/cross-border implications. Giving in to political expediency often forces countries to opt for policies that become inimical to reforms and structural change.
But even more damaging are the consequences of complacency, inaction and delayed action. And this holds as true for developed countries as it does for the developing ones. It is important that the issues between the US and the emerging economies, including China, are resolved politically, though losing sight of the business imperatives in the thrust and parry of political fencing would be akin to committing economic hara-kiri.
It is hoped that the forthcoming G-20 meet will be able to distinguish and draw the fine line between the politics and economics of global cooperation. Indeed, it is here that the winds of change in strategic thinking are needed the most.
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