November 5, 2008 11:28:54 pm
The summit being hosted in Washington to deal with the financial crisis will not yield magical solutions. It will be hosted by a lame-duck president, and in all likelihood does not have adequate preparation behind it. But it will be an indication of the nature of changes being contemplated in the global system and who is setting the agenda. For countries like India, this will be as good a test as any of their capacity to exercise a modicum of leadership in a rapidly changing context. This, more than anything else, may be Manmohan Singh’s real foreign policy moment. There will be plenty of professional advice about short-term measures. But it is important to keep an eye on long-term global governance issues.
The format of this meeting itself is something of an innovation and needs to be institutionalised. For years there has been resistance to expanding the G-8, to a more representative and effective, but still manageable, number. For all their limitations, summit processes do matter. More than formal institutions, it is summit processes that are going to be mechanisms of coordination and governance in the near future. It is time that the debilitating illusion of the G-8 having some exalted guardianship over the rest of world was jettisoned for good. The first reform countries like India should insist on is that they now be equal partners in the process of setting the agenda, not outsiders reacting to a fossilised G-8. This expanded format should be institutionalised.
There should be clarity over what we want in institutions of global governance. Forms of international coordination have distributional consequences between and within countries. Most discussions of regulation have self-defeatingly ignored these issues. The character of interdependence in the global economy is such that we need new global coordination mechanisms to cope with this new reality. One bank in crisis somewhere, one regulatory lapse in a national economy can set countries reeling. Therefore there is a clamour to set up a global regulatory mechanism, or strengthen supra-national institutions to coordinate global policy. But as Winston Churchill famously said, when people are clamouring that something be done it is very likely that something bad will be done. There is a need for mechanisms for greater coordination, and in the short run institutions like the IMF will have to play an important part in both pumping liquidity and mitigating exchange rate volatility. But India should be wary about blindly following calls for more supra-national regulation or unduly empowering bodies like the IMF.
The real issue is not voting shares in these institutions but the intellectual assumptions on which they operate. These institutions acquire a life of their own just by their presence. They are powerful mechanisms by which socialisation into ideas takes place. For instance, the IMF’s role in pushing for capital account liberalisation, far beyond its own constitutional mandate, was a prime example of an institution constantly overstepping its bounds.
The main lesson from the current crisis is not necessarily that we need the creation of more concentrated power in some global institution. Rather we need the opposite: more checks and balances, more dispersal of power that prevents the dissemination of ideas without serious contestation. It’s therefore important that India follows up on the proactive coordination with China that Manmohan Singh and Wen Jiabao have promised. It should also not shy away from thinking of regional institutions of all kinds as a counterbalance to the epistemic monopoly exercised by a whole range of institutions, from rating agencies, universities, to international institutions.
The Fed’s offering credit lines to a select group of countries is being seen as a paradoxical reassertion of American power in Asia. Whether it will prove to be so in the long run is an open question. But China’s very restrained international response to the crisis is not without interest. It has a lot at stake in ensuring the crisis in the US gets resolved. It could be that it is more worried about domestic issues to be proactive internationally. But it also could be that, for all the rising power of Asia, it is still not geared up for responding intellectually or taking responsibility for global issues. Can India, with its fewer resources, step up to the plate?
But we have to be clear about the source of this crisis. The simple fact is that dozens of national central banks and regulators including the Fed were either asleep, or more likely blindsided, by their own extravagant intellectual assumptions. It is not clear that concentrating more power in supra-national institutions will solve this particular problem. Think of all the euphoria around the Basel norms. They were supposed to make the banking system globally more transparent, and yet the results were quite the opposite for two reasons. First, formal transparency in accounting standards was confused as being a substitute for substantive and prudential regulation. And second, this supra-national norm itself embodied the same mistakes about capital adequacy that national regulators were succumbing to. The issue is not what norms or institutions you create; the issue is what forms of knowledge and learning get embedded in them.
The question for India is whether it has something to intellectually contribute to this space. But its ability to do so will in turn depend on whether it can mobilise innovative economic thinking, not just be a recipient of G-8 wisdom. And this thinking will have to cover three dimensions simultaneously: our own specific experience, ideas about global economic architecture that go beyond the formulaic, but also the ability to deeply understand the dynamics of Western economies. It may turn out that tackling this crisis requires not just short-term measures like pumping liquidity and stabilising exchange rates. It will, at least in the US, require a radical rethink of its credit culture, its assumptions about the relation between finance and the real economy, its assumptions about the sustainability of global imbalances, and its social security architecture (better social security can help restore confidence).
Bretton Woods I was a confluence of two forces: the balance of power in international politics after WWII. But it was also premised on a set of intellectual assumptions shaped significantly by one of the unreservedly great men of the 20th century (the phrase is Hayek’s): John Maynard Keynes. Now, both the character of the shift in global power and our intellectual understandings of sustainable economies are in question. The true test of rising power is the ability to command intellectual influence in times of uncertainty. Will Manmohan Singh seize this moment with originality?
The writer is president, Centre for Policy Research, Delhi
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