A major initiative to secure global cooperation on important economic issues was launched just two months after the New York terror attacks on 9/11. This was the launch of the Doha Development Round of trade negotiations, seeking lower trade barriers among the 150 members of the World Trade Organization. Those unfinished negotiations are now in their ninth year, with no end in sight. This despite the carrot dangled by the Americans in 2006, that their President had a time-bound “fast track” authority to sign a trade deal that couldn’t basically be overturned by Congress.
Since this authority was about to expire in June 2007, trade delegations were warned of dire consequences if this golden opportunity was lost. Moods were periodically upbeat and downbeat, depending on whether prospects for trade-offs between reduction in agricultural subsidies and industrial tariffs brightened or not. India was increasingly sought to be isolated as the obstructionist villain, as it insisted that there would be no deal if farm subsidies were not cut. India’s foreign minister said, he was not driven by the US President’s “fast track” which, of course, subsequently expired. As of now, the Doha Round talks have stalled, failed, collapsed or dead, depending on your choice of diplomatic spin.
The same US President, no longer empowered with a fast-track authority, now with a lame-duck tag, and the lowest post-war approval rating, has convened a meeting of 20 big powers this weekend to evolve a cooperative approach to tackle the global financial crisis. The G-20 meet will also feature a prominent absentee: the US President-in-waiting. This Washington summit has been preceded by multiple, mostly uncooperative, summits in Europe. For instance, the bankruptcy of Iceland remains unresolved. Hungary and Ukraine desperately raise rates, while the rest cut interest rates sharply. With this track record in cooperation, the expectations for Washington remain modest, despite talks about a second Bretton Woods. Undoubtedly the crisis is far more severe than any of the Doha Round issues (and the Doha impasse has been successfully circumvented by a surfeit of regional trade deals), but the gravity of the crisis will be unmatched by the actual scope of cooperation.
The developing world sees itself as an unwitting victim of a global financial tsunami, whose earthquake epicentre was on Wall Street. So, the dominant sentiment from the developing country crowd such as India, Brazil and Mexico is to seek compensation. Their financial markets have suffered simply because of a rational flight to safety, and far more disproportionately than their fundamentals. South Korea finds itself in an awkward situation: That in order to bail out its banking sector, it will have to rescue three large banks which are actually Western subsidiaries. In India, despite the absence of subprime loans, excessive leveraging or indiscriminate securitization, the real economy will take a beating mainly because credit and confidence has dried up in the wake of the financial crisis. Developing countries are dismayed, but helpless, as they witness that all the standard International Monetary Fund-type prescriptions have been violated. Thus sick institutions are not allowed to fail, bad assets are brought on to government books, taxpayer-paid equity is put into failing banks and blanket government guarantees are dished out. There is already talk of bailouts beyond banks for real sectors such as auto and aviation.
The G-20 meeting is thus already burdened with diminished expectations. Given the track record of Doha, the prospects for establishing global rules for financial flows, or a global regulator are slim at best. Who would want to give up sovereign rights over legal and currency systems for some vague benefits of financial stability and soundness? (The European Union (EU) did adopt a common currency, but that took a quarter century. And some of the EU solidarity is under strain already). Only a desperate country such as Iceland might contemplate becoming dollarized. And even that didn’t help Argentina.
The biggest significance of the G-20 meeting is that it is not the Group of Eight. During earlier financial crises, the Brazil, Russia, India, China nations were not invited to any such coordination meetings, and their absence was hardly noticed. But today much of the world’s “foreign” exchange stock is with China, India and Russia. For quite some time, capital has been flowing “uphill” from these countries into the US, financing its consumption boom.
A large chunk of US debt is held by these countries, and a minor sell-off can induce recessionary winds (due to interest rate effects). This vulnerability is enhanced by the huge fiscal expansion caused by the bailouts. Before this financial tsunami struck, the world was becoming complacent that major imbalances of labour and capital, growth and stagnation, savings and investment, ageing and youthful societies had reached a sort of equilibrium. That complacency may be unwarranted. But unwinding those imbalances will need multilateral hands to clap. This G-20 meet is an acknowledgment that we need to be in this Noah’s Ark together.
Else we may perish in the flood.
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