Tuesday, September 2, 2014
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Walking with Giants

PARISIn the aftermath of the G20 Pittsburgh Summit last year, European and American officials insisted that G20 membership was imposing “new responsibilities.” They invited policymakers from the emerging giants to become more involved in designing a new global economic framework – implicitly suggesting that this has not been the case so far.

Yet the evidence does not support this view. Brazil, China, India, Korea, and Mexico had already been playing a decisive role in two major areas – the global trade regime and the management of the worldwide economic crisis; the jury is still out on a third – climate change.

Few people appear to realize the fundamental contribution of the emerging economies to the success of the current global trade regime. During the last three decades, the amazing success of China’s trade liberalization has done much more to convince other developing countries of the gains from trade than all the OECD countries’ exhortations.

Similarly, among World Trade Organization members, China has made the deepest commitment to liberalization of services, India has raised the issue of wider services liberalization, and Brazil has been decisive in cracking American and European agricultural protection. During key WTO ministerial negotiations in July 2008, Brazil was the most pro-active negotiator. Those negotiations failure are generally attributed to India and the United States, but most observers seem to agree that America’s responsibility was greater.

On crisis management in the wake of the financial meltdown in 2008, the emerging economies have been as diligent and active as the US and the European Union. The deterioration of the overall fiscal balances of South Korea, China, and India has been just as severe as in the larger EU member states. Crisis-related discriminatory macroeconomic measures taken in 2009 by all the main emerging economies other than India and Brazil are comparable to those in the US and throughout the EU.

Last but not least, the core emerging economies have abstained from increasing tariffs, and their stimulus packages grant much more limited subsidies to the banking and automobile sectors than do comparable packages in OECD countries. The exception has been China’s dramatic stimulus measures, which, being industrial policies, will be a source of severe trouble in the future.

As for climate change, the positions of the emerging economies were until mid-2009 negative or defensive. But India did much to change the mood when it became pro-active in the climate-change debate in the run-up to last December’s Copenhagen summit. Just before the meeting, China announced a substantial cut in the increase, although not the level, of its emissions.

The leadership credentials of other G20 countries, such as Argentina, Indonesia, South Africa, Russia, Saudi Arabia, South Africa, and Turkey, have been less convincing. These countries have been more hesitant in trade matters, more ambiguous in the instruments they have chosen for managing the crisis, and remain reluctant to deal with environmental issues. These attitudes also largely echo their less convincing economic performance.

The fact that the core emerging economies have contributed substantially to shaping the new global economic framework does not mean that they do not still face serious challenges. In particular, the huge income discrepancies between them and the rich countries endanger their own long-term growth and political stability, and could yet impair their future involvement in the G20 process.

It is fashionable nowadays to look to stricter international rules as “the solution” to most global problems, But such a strategy is not well-suited to an ongoing shift in international economic relations. The emergence of new world powers, combined with the diminishing influence of current powers, is not propitious for stricter disciplines. The world’s rising powers are likely to be increasingly disinclined to accept constraints that they see as American or European tutelage. At the same time, they are still far from being able either to exert leadership or introduce more discipline themselves.

This means that the OECD countries will have to lead by example. What, in concrete terms, would such an approach mean? First, when reforming their own domestic regulatory frameworks, they should avoid dramatic swings away from allegedly rational markets to allegedly rational governments. Rather, they should improve the quality of regulation, along with enforcement and monitoring. As regulation is a form of competition between governments, focusing on improved regulation increasingly looks like the best channel of influence available to OECD countries.

Second, OECD countries should keep their markets open, and open those that are closed – in agriculture (crucial to the sustained growth of emerging economies like Argentina, Brazil, and Indonesia) or in services (crucial for countries like India or Korea). Above all, these areas hold the key to generating more domestically-based growth in all the emerging economies. All of this implies much stronger support from OECD countries, especially the US, for a successful conclusion of the Doha WTO trade round.

This year, South Korea – one of the best performers during the global crisis – will hold the G20 chair. Giving strong support to South Korea’s initiatives offers a splendid opportunity for the OECD countries to show that, though they remain proud of the disappearing post-WWII world, they do not fear the new world that is emerging.

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