SEOUL – Hubris usually gives birth to disaster. The root cause of the current global crisis was intellectual hubris in the form of the blind belief that markets would always resolve their own problems and contradictions. Thirty years after the Reagan-Thatcher revolution, the ideological pendulum has begun to swing in the opposite direction.
Each time in the last hundred years that a shift of this magnitude has occurred in beliefs about state-market relations, a major political-economic upheaval has ensued. For example, World War I marked the end of the nineteenth-century’s laissez-faire liberalism and ushered in a period of state-centered economic systems. The Great Depression and World War II opened the new era of the Bretton Woods system of a more balanced state-market relationship.
Similarly, the 2008 global financial crisis ended three decades of neo-liberalism, characterized by free trade and financial globalization. We still do not know the nature of the era ahead of us; we can only be certain that the global economy is in the middle of a major transition, and that the old ways will not work anymore.
The main concern in this period of great uncertainty is whether the transition to a new paradigm can be managed without further destabilizing the international political-economic order. There are already some serious signs of distress – the currency war between the United States and China, and its spread to other countries, being a case in point.
Indeed, current global conditions have more worrying similarities to the early 1930’s than they have differences. Then, every state looked inward, squandering valuable opportunities to achieve common prosperity through international policy coordination. The leadership vacuum caused by America’s unwillingness to cooperate and Britain’s sudden inability to lead resulted in the failure of the London Conference of 1933, which is often seen as opening the way to the Great Depression and the catastrophe of World War II.
Having learned the lessons of the 1930’s, the post-war global economic order was built on a network of international institutions, such as the International Monetary Fund, the World Bank, and what ultimately became the World Trade Organization. But the lessons of the past seem to be too distant in policymakers’ minds these days, whereas domestic political pressure to put national economies first appears overwhelming.
In addition, the institutions created in the days following WWII no longer seem effective enough to meet the new challenges of the global economy, and thus have lost some of their legitimacy. For example, the IMF’s authority has suffered in the recent decade – especially in Asia – from the fund’s deep commitment to neo-liberal orthodoxy and the so-called “Washington Consensus.”
Reinvigorating these institutions is the first step toward solving the global economy’s current problems. We need their help to implement norms, principles, rules, and decision-making procedures, thereby mitigating the endemic free-rider problems in quasi-anarchical international society.
Thus, the first task for the G-20 meeting on November 11-12 in Seoul must be to revitalize and strengthen the IMF and global financial regulation. If the G-20 leaders can also make meaningful progress towards resolving the Doha Round of trade negotiations, they will add momentum for global economic stabilization.
There are signs that the Seoul meeting may be successful. The meeting of G-20 finance ministers and central bankers in the South Korean city of Kyeongju on October 22 produced some noteworthy achievements, such as shifting 6% of the IMF’s voting quota from overrepresented Europe to underrepresented emerging countries, doubling members’ quotas, and reducing Europe’s representation on the Fund’s executive board by two seats.
IMF Managing Director Dominique Strauss-Kahn declared the move “historic” and the most important decision on the Fund’s governance since its establishment in 1944.
The IMF also was empowered to conduct the Mutual Assessment Process of each country’s macroeconomic policies under the Framework for Strong, Sustainable, and Balanced Growth. That authority should allow the Fund to inspect even the world’s mightiest economies, the US and China. The recent agreement by the Basel Committee on Banking Supervision on a new capital-adequacy framework is another positive step.
But the key issues lingering in the minds of the G-20 leaders will be exchange rates and global imbalances. The Kyeongju meeting decided that the G-20 countries would move toward market-determined exchange rates and pursue “politics conducive to reducing excessive imbalances and maintaining current-account imbalances at sustainable levels.”
These two issues may or may not be on the table for further discussion in Seoul. If G-20 leaders can reach specific and effective agreements on exchange rates and global imbalances without overshadowing other issues, the prospects for a soft-landing for the global economy will improve greatly. If not, protectionism and trade wars will intensify, and we will come one step closer to reliving the nightmare of the 1930’s.
Either way, the Seoul G-20 summit will likely mark a watershed in the history of the post-war global political economy.