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The New International Economic Disorder
NEWPORT BEACH "“ A new economic order is taking shape before our eyes, and it is one that includes accelerated convergence between the old Western powers and the emerging world's major new players. But the forces driving this convergence have little to do with what generations of economists envisaged when they pointed out the inadequacy of the old order; and these forces' implications may be equally unsettling.
For decades, many people lamented the extent to which the West dominated the global economic system. From the governance of multilateral organizations to the design of financial services, the global infrastructure was seen as favoring Western interests. While there was much talk of reform, Western countries repeatedly countered serious efforts that would result in meaningful erosion of their entitlements.
On the few occasions that such resistance was seemingly overcome, the outcome was gradual and timid change. Consequently, many emerging-market economies lost confidence in the "pooled insurance" that the global system supposedly put at their disposal, especially at times of great need.
This change in sentiment was catalyzed by the financial crises in Asia, Eastern Europe, and Latin America in the late 1990's and early 2000's, and by what many in these regions regarded as the West's inadequate and poorly designed responses. With their trust in bilateral assistance and multilateral institutions such as the International Monetary Fund shaken, emerging-market economies "“ led by those in Asia "“ embarked on a sustained drive toward greater financial self-reliance.
Once they succeeded in overcoming a painful crisis-management phase, many of these countries accumulated previously unthinkable levels of international reserves as precautionary cushions. They extinguished billions in external indebtedness by generating and sustaining large current-account surpluses. And they increased the scale and scope of domestic financial intermediation in order to reduce their vulnerability to external storms.
These developments stood in stark contrast to what was happening in the West. There, unprecedented leverage, massive debt creation, and a seemingly infinite sense of credit entitlement prevailed. Financial excesses become the rule rather than the exception, facilitated by financial innovation and the erosion of lending standards and prudential regulation.
Suddenly, the world turned upside down: "rich" countries were running large deficits and, in some cases, tipping from net creditor status to net indebtedness, while "poor" countries were running surpluses and accumulating large stocks of external assets, including financial claims on Western economies.
Little did these countries know that their divergent paths would end up fueling large global imbalances, and eventually trigger a financial crisis that has shaken the prevailing international economic order to its foundations.
There is no restoring fully that order. Rather than recovering strongly, sluggish Western growth is periodically flirting with recession at a time of high unemployment and multiplying debt concerns, particularly in Europe. In an amazing turn of events, virtually every Western country must now worry about its credit ratings, while quite a few emerging economies continue to climb the ratings ladder. We can now consider the image of Western delegations heading to emerging countries to plead, cap in hand, for financial support, both direct and through the IMF.
At first blush, this unusual convergence between Western and emerging countries seems to reflect what advocates of a new international economic order had in mind. But appearances can be misleading, and, in this case, they are misleading in a significant way.
Advocates envisaged an orderly process in which economic convergence accompanied and facilitated global economic growth. They foresaw a collaborative process guided by enlightened policymaking. But what is occurring is far different and more unpredictable.
Rather than exhibiting enlightened leadership, Western policymakers have consistently lagged realities on the ground, with a bewildering mixture of denial, misdiagnosis, and bickering undermining their responses. Rather than proceeding in an orderly manner, today's global changes are being driven by the disorderly forces of de-leveraging emanating from a Europe in deep financial crisis and an America seemingly unable to restore sustained high rates of GDP growth and job creation.
Multilateral institutions, particularly the IMF, have responded by pumping an unfathomable amount of financing into Europe. But, instead of reversing the disorderly deleveraging and encouraging new private investments, this official financing has merely shifted liabilities from the private sector to the public sector. Moreover, many emerging-market countries have noted that the policy conditionality attached to the tens of billions of dollars that have been shipped to Europe pales in comparison with what was imposed on them in the 1990's and early 2000's.
Fortunately, despite having lagged rather than led this process of consequential (and increasingly disorderly) global change, it is not too late for policymakers to catch up. But doing so requires more than just better national policymaking in Europe and America; it is also time for urgent and deep reform of the multilateral system and its main institutions. That process requires joint leadership by the emerging world as a true equal and partner of Western powers.
Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of When Markets Collide.
Copyright: Project Syndicate, 2011. www.project-syndicate.org
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Username Password New registration Forgotten password myerscpa 07:34 21 Dec 11This is an excellent analysis. One hopes that the next paper from Mr El-Erian will cover what would constitute "deep reform" and what the agenda should be for "joint leadership" between the emerging world and the West.
My sense is that the "unfathomable amount of financing" being pumped into both the US and the European economies masks what is fundamentally a productivity crisis between the West and the emerging economies. The new technologies accentuate the labor cost differential and overcome many of the advantages of long-standing infrastructure and social practice in the West. Both Europe and the US have avoided the labor market and other reforms necessary to improve productivity while failing to make the big infrastructure investments in public works that have long been the policy response to recessions in the West, particularly the United States.
I would think that a good strategy for emerging markets would be to invest in bonds in development and infrastructure banks located in Europe and the United States to improve overall demand in these flaccid economies. These investments would be better than buying sovereign debt and just fueling ongoing consumption deficits in the West. Such a strategy would also "show the way" and establish a new standard of leadership, one reminescent of the Marshall Plan.
Always nice to exhibit some moral leadership while economic strength is on the ascendency!
utilitus 07:47 21 Dec 11While the west suffers from the cross-eyed headache caused by trying to reconcile capitalism with democracy, where neither of these ideals were anywhere near realized, let alone their combination, the Chinese especially seem just rough enough around the edges as capitalists to be concentrating on securing hard assets worldwide. Perhaps such keen pragmatism will trump the dizzy myopia of "high" finanace. Politically, east and west seem about equally corrupt, just at different stages of development, and beware of any economic analysis with an implicitly capitalist bias. The Chinese cat, whatever its' color, is bred to catch mice, especially if the hapless rodents are blind.
AUTHOR INFO Mohamed A. El-Erian Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of When Markets Collide. MOST READ MOST RECOMMENDED MOST COMMENTED Is Modern Capitalism Sustainable? Kenneth Rogoff The Neuroeconomics Revolution Robert J. Shiller What Can Save the Euro? Joseph E. Stiglitz A Summit to the Death Kevin O'Rourke Fragile and Unbalanced in 2012 Nouriel Roubini A New World Architecture George Soros America's Political Class Struggle Jeffrey D. Sachs Did the Poor Cause the Crisis? Simon Johnson The Risky Rich Nouriel Roubini To Cure the Economy Joseph E. Stiglitz Is Modern Capitalism Sustainable? Kenneth Rogoff Occupy the Classroom? Dani Rodrik The Exchange-Rate Delusion Michael Spence A Summit to the Death Kevin O'Rourke What Can Save the Euro? Joseph E. Stiglitz ADVERTISEMENT PROJECT SYNDICATEProject Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
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This is an excellent analysis. One hopes that the next paper from Mr El-Erian will cover what would constitute "deep reform" and what the agenda should be for "joint leadership" between the emerging world and the West.
My sense is that the "unfathomable amount of financing" being pumped into both the US and the European economies masks what is fundamentally a productivity crisis between the West and the emerging economies. The new technologies accentuate the labor cost differential and overcome many of the advantages of long-standing infrastructure and social practice in the West. Both Europe and the US have avoided the labor market and other reforms necessary to improve productivity while failing to make the big infrastructure investments in public works that have long been the policy response to recessions in the West, particularly the United States.
I would think that a good strategy for emerging markets would be to invest in bonds in development and infrastructure banks located in Europe and the United States to improve overall demand in these flaccid economies. These investments would be better than buying sovereign debt and just fueling ongoing consumption deficits in the West. Such a strategy would also "show the way" and establish a new standard of leadership, one reminescent of the Marshall Plan.
Always nice to exhibit some moral leadership while economic strength is on the ascendency!
While the west suffers from the cross-eyed headache caused by trying to reconcile capitalism with democracy, where neither of these ideals were anywhere near realized, let alone their combination, the Chinese especially seem just rough enough around the edges as capitalists to be concentrating on securing hard assets worldwide. Perhaps such keen pragmatism will trump the dizzy myopia of "high" finanace. Politically, east and west seem about equally corrupt, just at different stages of development, and beware of any economic analysis with an implicitly capitalist bias. The Chinese cat, whatever its' color, is bred to catch mice, especially if the hapless rodents are blind.
Project Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
Project Syndicate provides the world's foremost newspapers with exclusive commentaries by prominent leaders and opinion makers. It currently offers 54 monthly series and one weekly series of columns on topics ranging from economics to international affairs to science and philosophy.
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