No One Model for New Global Economy

TOKYO: As the global economic crisis tightens the future of the world, the capitalist system looks grim: Major countries find their interest rates approaching zero, leaving little room for maneuvering. Massive fiscal stimulus programs threaten to ignite inflation, higher interest rates and free fall of the US dollar. On top of these gaping policy pitfalls, anti-globalization sentiments will likely gain momentum, inevitably spilling over into the political realm. The world thus faces the combined dangers of over-regulation of the market, stifled innovation, rampant protectionism and, ultimately, the erosion of the liberal international order.

Against this dire backdrop, capitalism is likely to take divergent courses in different countries. The solution to the current crisis may no longer be the earlier call for a “new Bretton Woods” but closer coordination among the major economies.

As the world capitalist system seems headed for a period during which major national economic models diversify, the time and mood are not right for a “new Bretton Woods.” Instead, recognizing that weight has shifted to the financial poles of China and Japan, the United States must adjust its global financial strategy. The current crisis demands not a brand new structure, but rather a new vision, with careful cultivation of US-China-Japan trilateralism a critical vehicle to this end.

New global governance cannot be effectively established without taking into account the change in the world’s political economy, namely the ongoing power shift from West to East. A central focus point of this gravitational shift is China. As events unfold, Beijing’s role, as well as the development of the US-China bilateral relationship in the wake of the crisis, will be critical fronts to watch. From a macroeconomic perspective, China’s position remains strong. The country possesses nearly $2 trillion in foreign currency in reserves, up to 70 percent of which analysts assume to be in US dollar-denominated assets including treasury securities.

For its part, Japan is poised to play a role in efforts to treat the global malaise. Before attending the G-20 summit in Washington last November, Prime Minister Taro Aso pledged a bridge loan of up to $100 billion to the International Monetary Fund to aid economies hit by the financial crisis. Japan remains a formidable manufacturing engine, the world’s second-largest holder of foreign reserves after China, with more than $1 trillion worth. By nominal GDP measures, Japan is the world’s second-largest economy. China and Japan are the largest net savers in the world – potential sources of credit for the US and the rest of the world.

Decades ago, Charles Kindleberger, in his analysis of the Great Depression, announced that the smooth operation of a liberal international economic order requires the existence of a hegemon or, at the very least, a multilateral institution capable of functioning in such a capacity. By Kindleberger’s so-called Hegemonic Stability Theory, a sustainable international economy requires an international leader that can and will enforce the rules of the game. The Great Depression, therefore, sprung from an ability-motivation gap in which the United States could, but was not willing, to provide the necessary common goods to maintain economic order, while the United Kingdom was willing, but could not fill this role.

Applied to today’s dynamic, Asia may be able to build new global governance, but is perhaps not fully willing to assume the mantle of responsibility at this stage. The United States, on the other hand, is willing to gallop to the rescue, but given the current crisis, is no longer able.

Yet several hurdles bar the smooth path to a new global governance with Asia at the helm. Asia is far from being one unified entity. In particular, China and Japan hold significantly divergent views on matters of global governance. There is also a danger that the strains of the crisis are unleashing protectionist forces. Ultimately, the prospect of Asia’s contribution to establishing new global governance depends on its ability to grow and develop quickly. In particular, it depends on the resiliency of the Chinese and Japanese economies.

Asia-Pacific countries must ponder agendas along with a global governance framework for tackling the deepening economic challenges in the months ahead. First, Asia aspires to have more of its own voices incorporated into global governance. With the rise of Asian economic might over the last decade, Asian countries are increasingly dissatisfied with their representation in such governance structures as Bretton Woods, the IMF and the World Bank, which do not reflect shifting global power balances.

There's no need to build a new Bretton Woods from scratch. Rather, the existing one must be rebooted. The G-20 platform can be gradually developed, while at the same time strengthening the G-7 as a sort of caucus to G-20 at the financial minister level for the purpose of macroeconomic policy coordination.

Second, there is the matter of the saving-investment balance. Asia, particularly China and Japan, are best advised to boost slumping domestic demand. China and Japan, along with the United States, should likewise strive to stem the rising tide of protectionist pressures within each country.

Third, China, Japan and the United States should take incremental steps toward the ultimate object of a form of trilateral consultation on macroeconomic policy. The best strategy is to ease into coordination through discrete bilateral platforms to be merged once conditions have seasoned sufficiently. Ultimately, trilateral cooperation will be most desirable, as Japan can ease and soften the US-China mutually-assured-destruction brand of a “balance of terror” in financial geopolitics. Even beyond the coordination of capital flow management, Japan has a leadership role in the environmental realm.

Fourth, there is a pressing need for currency realignment. The renminbi must appreciate vis-à-vis the dollar significantly in order to correct global imbalances in the coming years. Though discreet negotiations may still be coordinated between the two countries to realign the dollar against the renminbi in an orderly manner, US-China policy consultations should be confined for the time being to behind-the-scenes maneuvering or risk instigating a dollar freefall, something that is not in anyone’s best interest.

Fifth, the coming years will likely witness an emerging diversification of global capitalist systems among the major global players, and China and the US should be open to new ideas for innovation from all corners. Perhaps the greatest trial is preventing the eruption of a similar crisis down the line. In the spirit of a shift from “curative to preventive medicine,” the preventive role of the central bank should be further expanded.

Finally, as Asian regionalism continues to deepen, the US must remain part of the process. To this end, the Asia-Pacific Economic Cooperation should be restored to its original format: a forum designed simply to promote trade and investment, while facilitating development and cooperation.

No longer can the international community point to one clear-cut model to guide the world markets, and the task of establishing a set of common rules is crucial. As the eastward shift of power accelerates, a robust Asia-Pacific strategy, with new US-Japan-China cooperation as its primary foundation, is critical for global economic stability.