Growing Economies, Rising Problems – Part I

JAKARTA: The world is witnessing a chaotic transition to uncertainty. While there is a profound transformation in global economic power balance, the lack of leadership has created a serious vacuum.

Not much more than a decade ago the emerging economies – China, India, Indonesia, Turkey, Brazil, Mexico, South Africa, Vietnam and others – were still little more than global economic minnows. In the course of the last decade, the share of world GDP of the three main emerging economies, Brazil, China and India, has doubled. Not only have the emerging economies surged, they have also become increasingly interconnected. South-South trade, aid and investments are booming.

The surge of the emerging economies has been all the more marked since the 2008-09 Western financial crisis. The woes of the erstwhile established economic powers – the EU, Japan and the US – stand in stark contrast with the high growth rates and levels of confidence of the emerging economic powers. From São Paulo to Istanbul to Jakarta there is a buzz that reflects recent achievements and envisages far more.

China has already surpassed Japan as the world’s second biggest economy in nominal GDP. Brazil has overtaken G7 members Italy and Canada to hold 7^th position. India, now in 10^th place, is looking for bronze by 2030. Turkey, 17^th, wants to be in 10^th position by 2023 to celebrate the Republic’s centenary. Indonesia, 18^th, aims to get there faster. As the emerging powers climb, the expectations are for the Western economies to be dislodged, including Germany, France and the UK. The US, according to the International Monetary Fund, will be overtaken by China in 2016!

Whatever the exact figures and dates may be, the profound transformation is on and will continue. A G7-dominated world will soon be a thing of the past

Ironically the life of the dying order is being prolonged by the political failure of the emerging countries. If proof were needed, the recent pathetic response of the emerging economic powers to the succession of managing director of the IMF provides a vivid example. While the G7 is on the way out, it is premature to suggest that the E7 – combined GDPs of seven emerging countries, China, India, Brazil, Mexico, Russia, Indonesia and Turkey – could overtake the combined G7 soon.

As impressive as has been the positive contribution of the emerging economies to global economic growth, quite unimpressive has been their generally negative contribution to global governance.

The current deplorable state of global governance, of course, is not the fault of the emerging powers. The resistance and myopia of the established powers loom large – whether in international finance, trade, climate change, security, development or poverty alleviation. American obstreperousness is the biggest obstacle to the conclusion of the World Trade Organization Doha Round, which would have unleashed new growth. The floundering economies of the Eurozone are causing havoc with the international monetary system. Unfulfilled promises made at the G8 summits in Gleneagles and L’Aquila help account for failures in meeting some of the Millennium Development Goals. The Copenhagen Climate Change Conference in December 2009 ended in tragicomedy.

The rising powers, however, do not rise to the occasion – neither by displaying leadership nor by getting their act together. A few examples:

This century’s trade policy battles are primarily between the developed and the developing economies, with the latter demanding a more level playing field, and the former refusing to abandon their discriminatory practices. The attempt to launch a new World Trade Organization round at Seattle in 1999 foundered due to the chasm between the two. The round was launched two years later in Doha, Qatar – though this is attributed to the fact that just after “9/11” the US was eager to take steps to help the developing countries. At the Cancún WTO ministerial meeting in 2003, the US and the EU had worked out a deal on agriculture that they had expected to push through. The emerging economies formed the G22 under the combined leadership of Brazil, China, India and South Africa, which effectively, to the great consternation of Washington and Brussels, destroyed Western trade policy hegemonism. After this “victory”, however, the G22 morphed and while US/EU leadership has indeed been wanting, the major emerging trading powers have provided none. They are better, it would seem, at saying “no you can’t,” not “yes we can”!

A similar narrative arises from climate change. The established powers display a great deal of hypocrisy after enriching themselves and causing global warming through CO₂ emissions for well over a century. The emerging powers are now told they must play by different rules. This may be logical, but the perception is that the onus is placed on the newcomers in contrast to the unwillingness of the established industrial powers to assume responsibility and share the burden. A new acronym was born in Copenhagen: the “BASIC” countries, Brazil, South Africa, India and China, banned together to avoid commitments on climate change they deemed unacceptable in light of both their growth requirements and the EU’s browbeating intransigence .

Now the globe watches the IMF saga. The emerging economies had, quite rightly, long complained that power in the international financial institutions was too concentrated among the G7 countries, expressing special rancour that the heads of the World Bank and the IMF are reserved, respectively, for an American and a European. Dominique Strauss-Kahn’s departure was expected, as he planned to resign to run for the French presidential election. Thus, while the manner and speed with which he left may have been a surprise, his imminent resignation was not. There was plenty of time to reflect and plan.

Here was a real opportunity for the emerging powers to exercise collective clout and assume the leadership of the IMF. They have no lack of eminently suitable candidates. The EU managed to get its act together rapidly, displaying how effective it can be when it comes to defending its perceived prerogatives. The emerging powers stood dazed on the platform watching the global governance train leave with another European driver.

Two candidates remain in the race. Agustín Carstens of Mexico is highly qualified; he did not, however, obtain the endorsement of the emerging powers, after some, like Indonesia, had already announced their support for the EU candidate Christine Lagarde, who now looks like a shoo-in. Suspicion and differences among the emerging countries seems a more potent force than resistance to the bullying established powers.

We live in turbulent times with heightened risks on all fronts – geopolitical, economic, environmental, demographic, social – with a dangerous global leadership vacuum The leadership qualifications and qualities of the G7 are tattered, and there is no leadership from the emerging powers, apart from a collective capacity to say no.     

Until and unless the G7 countries are prepared to share global leadership and the emerging economies are prepared to assume global responsibility, the chaotic transition to uncertainty will remain the poignant feature of our times. The multipolar world can either gain centripetal momentum or fragment into centrifugal forces of de-globalisation. The emerging powers must quickly learn the lessons from the “Lagarde saga” and get their collective leadership act together.