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| Shankar Acharya: Uncertain times | | The decline of western economic hegemony appears to have seriously complicated forward movement on key, current issues of global economic governance |
| Shankar Acharya / Jul 22, 2010, 00:20 IST |
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These are uncertain times for global economic governance. For over six decades after the Second World War, the West framed the rules of engagement for the global economy. In the initial years, the United States was the pre-eminent power, which oversaw the creation of the Bretton Woods system (IMF and World Bank) and the initial Rounds of trade liberalisation under the newly born GATT (which became the WTO at the end of the Uruguay Round in 1993). As Europe recovered from the ravages of war and Japan launched on its high growth phase, these new leviathans (especially Europe) increasingly asserted themselves and won greater voice and roles in world economic governance. But it was still an essentially western enterprise, with a demilitarised Japan content to go along in return for an American nuclear umbrella. The Soviet Union and its satellites were not an integral part of this economic system and the developing countries didn’t carry significant economic clout, not even the populous Asian giants of China and India.
Despite major debates on a variety of issues between the US and European nations, the broad thrust of multilateral trade liberalisation proceeded quite successfully through multiple trade Rounds and cross-border private capital flows revived over time as industrial countries gradually relaxed their capital controls. The 1973 Opec oil price hike was a significant shock to western dominance but was overcome in time through a combination of economic adjustment to higher prices and adroit cooption of the major Opec surpluses via recycling through the western financial systems. In response to the oil shock, the West created the G7 system in 1975 as a potent instrumentality to coordinate western control over the major international economic areas of trade, exchange rate systems and capital flows. Western dominance over global economic governance increased after the collapse of the Soviet Union in 1990 and the subsequent, willing cooption of the “second world” countries into the western system.
The big and sustained challenge to the West’s sway over world economic governance came with the rise of China (especially) and other developing countries after 1980. As everyone knows, China’s spectacular resurgence began around 1980. By the late 1990s, her economic scale was such that her continued spectacular growth of GDP, industry, trade and capital flows began to shift materially the balance of world economic activity away from the West after four centuries of hegemony. The effect was amplified by strong growth of India (about a third of China’s economic size), and moderate expansion of Russia, Brazil, Mexico, Indonesia and Turkey. In PPP (purchasing power parity) terms, Martin Wolf estimates (Financial Times, July 14, 2010) that the share of these countries in world GDP rose from just over 20 per cent in 2000 to nearly 30 per cent in 2010. During the same decade, the share of the G7 countries fell from almost half of global GDP to 40 per cent.
Of course, this shift in economic weight was accelerated by the North Atlantic financial crisis (2007 onwards) and the associated Great Recession of 2008-09. As major western economies foundered and flailed, Asia revived quickly, especially China and India. Virtually all future projections expect these trends in shifting global economic power to persist in the coming decades.
Perhaps predictably, the gradual decline of western economic hegemony has complicated the governance of global economic issues. Rising nations like China, India and Brazil are increasingly assertive of their economic rights and perspectives. Correspondingly, the waning (in relative terms) hegemons of the past are loathe to cede voice and control. Nowhere are the anomalies more obvious than in the voting shares of the IMF (especially) and World Bank, where small European nations still command disproportionate vote shares. Three big and current global economic issues illustrate the growing complexity of economic governance in our increasingly multi-polar world. They are: multilateral trade liberalisation, macroeconomic policy coordination and the response to global climate change.
Unlike its predecessor GATT/WTO Rounds of multilateral trade liberalisation, the Doha Round, launched nearly 10 years ago as the “Development Round”, has got bogged down and shows little prospect of an early and successful conclusion. Of course, there are many factors at work, including the reluctance of a recession-hit West to undertake further liberalisation and the intra-West, US-European dispute over agricultural subsidies. However, the loss of western hegemony (compared to earlier Rounds) is surely a significant complicating factor in hammering out an agreement. Some argue that with global trade (outside agriculture) quite free, there is no great urgency to concluding the Doha Round. But this may underestimate the potency of the “bicycle factor”: if one doesn’t keep moving forward, then trade liberalisation can fall into regressive protection. The danger is particularly acute when unemployment rates are ruling high.
A year ago, macroeconomic policy coordination seemed to have achieved new heights in response to the Great Recession and partly mediated through the freshly mandated G20 Summits. Governments of all major economies found it in their interest to ramp up expansionary fiscal and monetary policies. Since the early months of 2010, that consensus has frayed, especially after the sovereign debt pressures after the Greek fiscal crisis. Most governments are seeking early exits from large-scale fiscal and monetary stimuli, but at different times and with different phasing. As the recent G20 Summit in Canada showed, there is little effective policy coordination, both across western and non-western economies and between western ones. Equally worrying is the absence of effective coordination between the US and China on the key medium-term macro issues of exchange rate realignment and rebalancing of aggregate demand. Without these, there is significant risk of rising protectionism and re-emergence of global imbalances.
Finally, the absence of really meaningful progress at Copenhagen last December showed the clash of interests and expectations between the West and the major developing countries in coping with the clear and present dangers of ruinous climate change. A bare modicum of agreement was achieved between the “coalition of the unwilling”, notably the US, China, India and Brazil. The more progressive (on climate change mitigation) European nations were largely excluded form the final “deal”.
So, the decline of western economic hegemony appears to have seriously complicated forward movement on key, current issues of global economic governance. It seems a reasonable bet that as multi-polarity increases over time, effective convergence and agreement on major issues of world economic governance will become more difficult. No panacea seems to be in sight.
The author is honorary professor at ICRIER and former chief economic adviser to the Government of India. Views expressed are personal
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