BOGOTA, LIMA, SANTIAGO – International economic coordination is as necessary as it is elusive. During the global financial crisis, the G-20 became the primary forum to agree on basic principles in areas such as the fiscal-policy response and the role of the International Monetary Fund. By underscoring the need to avoid trade protectionism and other beggar-thy-neighbor policies, it also put some pressure on governments concerning what not to do. In these respects, the G-20 was clearly a step forward.
Lately, however, as the G-20 has tried to reconcile divergent national economic interests and recovery strategies, it has been far less successful relative to its initial meetings in Washington and London in 2009. Indeed, the G-20’s Seoul summit in early November exposed a deep divide.
Global imbalances and currency misalignments could well wreck the global recovery and push the world into the protectionist mire. Most nations would suffer, but nations caught in the middle would suffer the most. Today, the emerging economies of Latin America could become some of the first casualties in the economic crossfire between the United States and China.
Consider Colombia, Chile, and Peru. These economies face two serious problems. The first is the flood of short-term capital heading their way. If there was ever any doubt, events of the last few years should have reinforced the lesson that too much capital chasing short-term yield can distort exchange rates and asset prices, potentially leading to financial catastrophe.