The developed countries
have to look beyond to the health of the developing world
leaders talk a lot about the benefits of globalization but much of
the time they seem to have hazy notions of the issues facing the
developing parts of that globe. So it is hard to be confident that
the November 15 meeting in Washington of the G-20 group of major
developed and developing countries (including Indonesia) will do much
to halt the global slide into recession.
As of now, the focus
looks likely to be mainly on the issues most directing affecting the
developed countries – cross-border financial market regulation,
the role of the IMF and the overall global financial architecture in
the post-Bretton Woods world. These are of course very
important issues. However they are also very complex, very technical
and are really more about the prevention of future crises than
escaping from the consequences of the present one.
The real issue now is
not how much more money must be thrown at failing financial
institutions in the west. Most likely the threat of systemic collapse
has been averted by the takeovers and guarantees that major developed
countries have offered to stave off the contagion. The issue is to
reverse the threat of collapse of real demand spreading from the west
to the whole world. For that the sustenance of the developing world,
or at least the better run parts of it, is absolutely vital. More
than ever these countries have a key role to play in rescuing global
demand, in the process helping the developed world by offering
opportunities for trade, increased markets for their capital goods.
Yet their collective voice, their ability to make the rich nations
understand how they can help, not be a burden, remains weak.
Firstly the developed
world must come to realize that their group of countries alone cannot
resolve global demand issues. Several of their economies –
notably the United States, the United Kingdom and Australia –
actually needed a recession to get back to sustainable growth after
years of excessive consumption and property speculation financed by
borrowing from the developing world and by the creation of the exotic
financial instruments which have now proved to be fool’s gold.
They did not need the dramatic change in fortunes we have seen, but
they did need to spend less and save more.
The major developed
economies which did not fall into this consumer and debt trap, Japan
and Germany, are in only slightly better condition to help their
fellow rich nations. They have static and fast-aging populations with
little inclination either to consume or to invest in new capacity.
On the other hand
populous and tolerably well-run developing countries such as
Indonesia, India, Brazil, South Africa, Thailand, etc have growing
workforces and inbuilt ability to rapidly increase productivity
through investments in skills and machines – the latter being
mainly imported from the developed world.
Yet the developing
countries are constrained from helping the world as a whole by a
financial system which is not merely monstrously unfair but has
become an impediment to growth. The rich nations are responding to
the current crisis by issuing massive amounts of government debt.
They are able to do this even though some of them (again the US, UK,
Spain) had already been running huge current account deficits for
years because their currencies (dollar, euro, yen, pound and Swiss
franc) are regarded as currencies which can act as reserves.
As a result they do not
need to worry unduly about the impact of fiscal policies on their
currencies. Nor are they subject to the IMF-imposed policies which
exacerbated the crisis in Indonesia and elsewhere in Asia a decade
Meanwhile look at the
problems being faced by Asian countries which have for years been
accumulating large foreign exchange reserves, following tough fiscal
and monetary policies and generally conducting very conservative
economic policies. Now, just when they should be able to use fiscal
expansion to offset declining exports and private investment, just
when their reserves ought to enable them to face a few years of
current account deficits they are constrained by fears of currency
collapse whether driven by general global instability or by the
ill-informed comments of the US ratings agencies – Standard &
Poor’s, Fitch etc – the agencies whose mixture of
greed and incompetence contributed so much to the financial collapses
in the west.
Thus Indonesia can at
one moment be praised for its years of good economic management,
success in reducing government debt, building reserves, bravely
cutting fuel subsidies. Then, just when it needs to think of
expansionary policies it finds the rupiah in danger of falling off a
cliff. Countries from Brazil to Malaysia, South Africa to Thailand
face similar dilemmas.
At times the system
seems racially biased as well as favoring the old rich. Thus
Australia can, almost without comment from the rating agencies, run
up net external debt of $500 billion and run current account deficits
of 6 percent of gross domestic product even when commodity prices are
high. But developed Korea finds itself in deep trouble despite a
current account deficit which is both recent and half the Australian
level and which has reserves six times larger.
In the longer run these
issues can only be resolved by a reshaping of the global
architecture. More immediately however they need to be addressed by:
funding for the IMF and the World Bank. The IMF needs money to help
stabilize middle income countries hit, through no fault of their
own, by capital outflows or sudden fall in export prices. An
increase in IMF quotas is more than warranted for practical reasons
and to offset the bias that reserve currency status gives to the old
rich. The World Bank needs money to stimulate infrastructure
investment, particularly in those countries like Indonesia with good
records of fiscal management. China is the only developing country
now in a strong position not merely to expand domestic demand to but
also use its reserves to push the west to make better use of the IMF
and World Bank.
Extension of swap
arrangements. The US Federal Reserve has helped some countries –
Mexico, Brazil, Korea – with swap arrangements which have
helped stabilize their currencies. The European Central Bank and the
Bank of Japan should be encouraged to do more of the same for
deserving developing countries.
In Asia specifically,
the nations with huge reserves, notably Japan and China, should
massively step up their medium to long term lending to developing
countries to ensure that investment does not now fall off a cliff. In
addition to direct project lending they need to start buying domestic
government debt. In the longer run this will likely prove a better
investment than in low yielding US and European debt. At the same
time, ability to borrow overseas in their own currencies rather than
dollars will make Asian governments less worried about foreign
In short the government
interventions at national level must be extended to the international
arena. That does not mean US-EU-Japan. It means all those countries
significantly involved in international trade and investment and
particularly those, mostly in Asia, with the greatest collective
potential to pull the world out of recession.