In the run-up to the New Year, the outlook for the global economy remained clouded in pessimism. The most recent being the United Nations’ World Economic Situation and Prospects (WESP) reports, the findings of which were unveiled towards the end of last year. WESP said growth in the world economy was expected to remain subdued this year and the next as well. These findings were in line with the constant warnings issued by the International Monetary Fund (IMF) that risks in a global economic recovery remained considerably high. The US “fiscal cliff” and the lingering euro zone crisis have only strengthened the pessimistic outlook.
The first two weeks of 2013 have, however, brought in news that can help change sentiment in the coming months. The fact that lawmakers in the US were able to avert the “fiscal cliff” and stave off the risk of economic paralysis will raise expectations that bipartisanship is taking hold of policymaking. Should this happen, one of the major fall-outs could be a more constructive engagement by the world’s largest economic power to usher in a more democratic governance structure at the global level. The second positive feature for the US is its improving job market. The past few months have seen stabilization of the job market and as a result, 2012 witnessed a reduction in its unemployment rate by 0.7%. More recent figures indicate that employers have continued to offer new jobs despite the uncertainties caused by the fiscal cliff.
China, the second largest economy, also seems to have overcome the dip in economic growth seen in 2012. The country’s manufacturing sector grew at its fastest pace in December in more than a year-and-a-half, according to the HSBC Purchasing Managers’ Index. At the same time, China’s exports recorded a steep increase of over 14%, helping the trade surplus for the month to increase to over $31 billion. Backed by such an impressive performance, analysts in China are already predicting the economy will grow by 8.5% in 2013.
Can these bits of positive news from the two major economies, coupled with a somewhat reduced anxiety over the meltdown of the euro zone lead to a more constructive engagement between countries in multilateral fora dealing with governance issues in several critical areas? This is an important issue; only if countries work collectively to put in place systems for preventing the downturn of 2008 can the gains that are beginning to be seen be protected from severe headwinds.
The economic downturn of the recent past has reinforced the importance of credible and enforceable global rules in finance and trade not only for the orderly functioning of these two areas but also for bringing predictability and transparency in the economic system. However, rule-making and the implementation of the rules at the global level have seen plenty of problems in the past. This has only worsened since 2008.
The major economies had responded with alacrity after the September 2008 collapse of Lehman Brothers Holdings Inc. and agreed to introduce stricter rules through Basel III norms to prevent the recurrence of the turmoil witnessed in global financial markets. In the period since then, major economic powers seem to have lost the sense of urgency. While the US has decided to set a timeline for implementation of Basel III only after it has fully implemented its domestic legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the European Union (EU) is not likely to implement the new regulations before 2015.
The process of strengthening of global trade rules, which have been in the works for more than a decade through the negotiations in the Doha Round, was severely affected by the economic downturn. These negotiations have gone nowhere since 2008, with no meaningful engagement between members on any of the substantive issues.
However, it seems that the US and EU are setting their sights back on the trade negotiations and are engaging in informal discussions aimed at redefining the contours of the Doha Round. In what is being termed as “early harvest”, they are pushing for an early conclusion of negotiations in areas that will give their interest groups additional markets, especially in the emerging economies, while they would themselves not make any substantial concessions to their trading partners. This strategy was first unveiled by the International Chamber of Commerce (ICC) last fall. Terming it as the World Trade Agenda, ICC suggested that the negotiations be conducted based on a harvest of “doable” elements to achieve a “Doha victory”.
Opinion on the future course of negotiations in the Doha Round has been divided and will remain so. But this should not be allowed to undermine the making of comprehensive global trade rules, which are essential for cross-border trade between countries to take place in an orderly manner. Absence of such rules would inevitably trigger discriminatory trade policies, and this would leave the economically weaker countries at the mercy of their larger trading partners. Multilaterally agreed trade rules are, therefore, one of the most significant global public goods waiting to be realized.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.