by Arvind Subramanian, Peterson Institute for International Economics
Op-ed in Forbes
November 3, 2008
Writing in the Financial Times last week, Kishore Mahbubani rightly drew attention to the contrast between the handling by the United States and European countries of their own financial crises and their stance as advisers, lenders, and conditionality-setters when emerging markets faced their crises back in the late 1990s.
Then, it was: "Do not rescue failing banks, raise interest rates, balance your budget." Today, each precept has been honored more in the flagrant flouting than in the observance. In some ways, he was even a tad charitable in omitting perhaps the most important critique against the industrial countries back then: They insisted on too much austerity and made too little available money. Had more money been made available by foreign lenders—the money that the creditors (including China) and their own citizens, not to mention future taxpayers, are making available now—the severest impact of the crisis could have been limited.
Even more important than admonition about the past, Asia and emerging markets have reason to feel nervous about the future. The intellectual climate on globalization, especially in the United States, is slowly shifting. It is not inconceivable that the recession and economic downturn, interacting with pre-existing anxieties about globalization, could lead to a retreat from open markets. It would be a cruel irony indeed if the headmasters of the universe, having guided and goaded emerging markets into globalization, validated this retreat in the very hour of need.
But this "rest" versus "West" scorecard needs to move beyond schadenfreude and finger wagging. There is no escaping the interdependence. Asia may have wanted to insulate itself and strike out on its own in the aftermath of the 1990s crisis. But, in fact, over the last 10 years, Asia has become more integrated, more enmeshed with the West and the world in terms of trade and capital flows. Even India, one of the most closed economies, saw capital flows explode.
That is the simple reason why the crisis has been surprisingly severe in Asia and why there has been not "calm and confidence" but a sense of deep anxiety, even panic, among Asian policymakers. Further, while Asia did a lot to protect itself against economic shocks, its prospects for quick recovery look weak because its major export markets—still the United States and Europe—are in recession. If their economies do badly, Asia will find it more difficult to make a swift and early economic recovery. Forget about a decoupled Asia.
So, the rest and West are, in Bob Dylan's words, "so entwined" that their conversation has to move beyond past resentments and focus on managing their vulnerable interdependence with a sense that all flows—not just money and goods but ideas and learning—are not unidirectional but mutual. Consider the encouraging signs.
It was ironic indeed that Mahbubani's article came out on the very day that the US Fed extended swap lines, providing dollar liquidity, to four emerging markets, including Korea and, yes, Singapore. Not only did this measure have very favorable economic effects in reducing market uncertainty and volatility in the emerging world, it was a shrewdly successful foreign policy demarche on the part of Fed Chairman Ben Bernanke. These swap lines were sizable—$30 billion for each country—and extended unconditionally, without strings. It was as if the two big "mistakes" committed by the West during the 1990s financial crisis were being corrected 10 years on. This was corrective action as atonement.
The Fed's actions also facilitated an International Monetary Fund (IMF) response that announced its own facility to provide large sums of quick disbursing, conditionality-lite liquidity to countries in crisis. Before this crisis ends, the IMF will probably dish out more money in a few weeks with far fewer strings than it did over several months in the 1990s crisis.Asia was surprisingly complicit in both IMF and Fed initiatives. China, which could easily have supported Pakistan's request for financial help, actually prodded it to turn to the IMF instead. Korea and Singapore chose to accept help from the US Fed instead of tapping into Asian financial arrangements.
Second, in another acknowledgment that the rest-West dialog needs to be updated, the United States and Europe have called for the Bretton Woods II summit with the stated aim of rethinking the global financial architecture. The motives may be partly cynical. The outcomes may well be modest. But the West has taken the risk that if it does not follow through with commitments to change, it will have exposed itself to the charge of hypocrisy.
It is noteworthy that it is not the G-7 group of industrial powers that has been convened but the G-20, comprising a number of emerging-market countries. It is both an acknowledgment and a signal that the monopoly on decision-making, hitherto held by the West, will need to be broken. The opportunity has been created for the "rest" to seize the moment and aim to re-equilibrate the rest-West relationship.
To be sure, Asia's rapid growth and dynamism, almost certain to survive the ongoing crisis, signals the end of the unequal relationship between the rest and the West. But a past of unequal dependence should lead not to a future of sullen or schadenfreude-soaked isolation. Asia will have arrived not when it has asserted its independence from the West, but when it can engage comfortably, confidently, and on equal terms with it. That is what its leaders should do on November 15 when they stride into the White House for the Bretton Woods II summit.
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