CHANGING WORLD ECONOMIC ORDER
The expansion of G8 to G20 represents in a significant way the change in the world economic structure. The gradual emergence of the so called BRIC nations (Brazil, Russia, India, and China) as important source of world aggregate demand and destination for investment flows from developed countries highlights both opportunities and challenges for world economic development. The developed world led by the US is now in trouble and there are worries that the projected economic recovery may in fact turn into a double dip recession. To avoid this possibility, the tools of monetary policy have already been used with almost zero rate of interest and yet consumption and investment demand remains anemic. Unemployment continues to be close to double digit and faith in the financial system remains shaky. The financial system still remains pro-cyclical in nature, thus reducing some potential of fiscal policy to work effectively. So far, good sense has prevailed and protectionist tendencies that were rampant in the Great Depression of the 1930´s have been checked.
However, if international policy coordination that cushions fall in the aggregate demand in the developed countries is not properly handled, the political pressures for restrictions may raise its ugly head to the detriment of all. It is possible to argue that rational policymakers will not indulge in these kinds of games but it is also a fact that human beings have the unique privilege of acting in a stupid manner. This brings into focus a couple of major issues that must be handled by the G20 meeting.
First, the international financial system has to be reformed so that it tends to be anti-cyclical with stronger regulatory mechanism that can detect potential crisis before it actually materializes. This will also mean designing a new system of international safety nets for countries that get into trouble. Perhaps, some of these issues could have been addressed after the 1997 financial crisis in Asia but they remained ignored. It was then considered that "crony capitalism" in Asia´s fast growing economies distorted the financial structure of companies and financial institutions leading to a mismatch between short-term foreign exchange borrowings and long-term investments.
There was the implicit assumption that such immature policy decisions could not take place in mature economies, especially the US. The US has not only the most sophisticated financial system in the world but also the largest number of outstanding scholars who have won Nobel Prize in economics. And, yet, instead of crony capitalism of the Asian variety, "greedy capitalism” scaled new heights in the Western world. It is interesting to note the similarity between "crony capitalism" in Asia (1997) and "greedy capitalism" in the West (2008).
In both cases, the mismatch between short-term liabilities and long-term illiquid assets remained a defining feature. In the US, it took the shape of financial innovation based on complex models that very few understood or cared to understand. Thus, investment bankers regularly underestimated systemic risks and provided leadership to an asset bubble where the tune "happy days are here again" seemed destined to last forever. As long as it lasted, the returns were fabulous and Wall Street became the new Mecca of financial glamor that ordinary individuals could only watch with awe and admiration.
In all multilateral trade negotiations, except the Doha round, development issues have not received attention. This has to change if international economic forums like the G20 are to have a meaningful impact on the lives of the people living in different parts of the world.
However, it did not last long for more that a few years and now everyone from professors to ordinary people have come to understand that the relation between the real and the financial part of the economy should not be stretched beyond a certain level. Understanding the dynamics of the "stretch zone" and designing policies that keep it within certain specified parameters are going to be important in the future. Perhaps, in line with this thinking, when the financial crisis started in 2008, there was also talk of establishing a supra national financial institution in the model of World Trade Organization. However, in the last two years, this radical proposal has lost support in favor of a strengthened International Monetary Fund with more resources and perhaps more teeth to warn of any impending crisis and also tools to impose certain supervisory standards that all nations have to follow.
HUMAN-CENTRIC APPROACH
The second most important issue in the G20 meeting has to focus on the role of the evolving international economic and financial order responsive to the development aspirations of the poorer countries of the world. In all multilateral trade negotiations, except the Doha round, development issues have not received attention. This has to change if international economic forums like the G20 are to have a meaningful impact on the lives of the people living in different parts of the world. This realization seems to have gained ground since the G20 declaration in Toronto. What this means is that dialogue, coordination and cooperation among nations in international economic policymaking must help create a conducive environment for inclusive economic development of poorer nations so that G20 retains the legitimacy to speak for all. The new forum must be seen as a vehicle for not just solving the problems of the rich countries but also for promoting a structure of world economic growth that should lead to gradual convergence in income among nations. This is consistent with the goals of the rich nations since the growth in demand and the flow of funds to the poorer countries on a global scale helps cushion the problems of demand deficiency in mature economies. The rapid growth of BRIC nations and the consequent rise in world aggregate demand has shown that this perspective is going to be increasingly significant in the future. In this process, exchange rate alignment will emerge as an important issue of concern so as to avoid the possibility of "currency wars" where all currencies will race down to the bottom with no winners and all losers. Similarly, role of the emerging nations in the functioning of international financial institutions will have to reflect the changing structure of world production. All these are important issues before the meeting.
There are reasons to be hopeful about the meeting since it is taking place in Korea that has literally transformed itself from one of the poorest country to an industrialized developed economy in the span of just half a century. In this sense, it is a reasonable expectation that Korean economic policymakers and technocrats who have led this impressive and inspiring transformation have a real feel of the dynamics of the development process and are therefore in a position to suggest policies that allows the G20 to be something more that an arena for solving only the problems of the rich nations.
Angus Maddison, a noted British economist, in his path breaking and sometimes controversial estimates of GDP (PPP) in the past has calculated that around 50 percent of world GDP (1990 dollars) originated in just two countries, India and China in 1700 AD, about 300 years ago. By 1950, it had decreased to around 8 percent primarily because of what economist and thinker Andre Frank has labeled as the "development of underdevelopment" under rising Eurocentric capitalism based on the logic of colonialism and highly unequal terms of exchange. The world is now firmly on the path of change in this economic structure. In the next 30 years, the relative economic strength of large nations like India and China is likely to move up significantly as it has already increased from around 8 percent of world GDP in 1950 to 20 percent in 2003 (estimates by Maddison). This trend will have to continue in the future. To assure a smooth transition in this direction for all the developing countries while simultaneously benefiting the developed world is truly a Herculean challenge worthy of great human wisdom and imagination sustained by a moral commitment to eradicate poverty from the world. In this new century, the future we build should not be Eurocentric, US centric or Sinocentric, it will have to be, above all, human centric in all its essential focus. One hopes that the G20 meeting in Seoul will take the first resolute steps in this direction.
Writer is a former finance & foreign minister of Nepal
prakash_dr@hotmail.com
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