"My" Economic Cold War: not so bad, anyway...

Now, an Economic Cold War: Old Realities, New Prospects
Paulo Roberto de Almeida *

Old Realities
The geopolitical Cold War is definitely closed, it seems. Besides “normal” political tensions and trade frictions between major powers, there are no more totally opposed conceptions about how to organize the world economically or politically. No one is saying something like “we’ll bury you”, as done in the past by a Soviet leader.
We are having now an economic Cold War, or sort of. Indeed, there is nothing capable of starting a full-scale confrontation among major powers. What we do have now are trade frictions and currency misalignments, over a post-crisis adjustment process. There is a dispute over how national economic policies should take into account their impacts over other countries’ economic situation. But, as Mark Twain could have argued, rumors about a global currency war are greatly exaggerated. We have not yet outlived the current financial crisis; this is just one among many others that affect dynamic markets since the beginnings of capitalism.
It is not entirely true that this crisis was created by the deregulation of the financial markets, although low regulation can indeed have facilitated the expansion of existing bubbles in some markets. The main culprit for the bubble, though, is the low level of interest rates established by central banks during too long a period. In the same manner, albeit in very different ways, that the old Lords of Finance of the Twenties created the crisis of the 1930s, by their action or inaction, the present crisis is the result of misguided policies by the new Lords of Finance.
It is also not true that this crisis is severe enough to justify a new Bretton Woods-like redrafting of the world economic order. Talks about a new financial architecture, or even about a redistribution of world economic and political power, are totally in contradiction with the more prosaic realities of our days. We are not at all in a post-major crisis arrangement, a sort of diplomatic complete reordering of the world after a cataclysmic seism, touching all and every major actor of the international scene. We are very far from that. Let’s look the precedents.
We are not in Wesphalia-1648. We are not in Vienna-1815. We are not in Paris or Versailles-1919. And we are not in Bretton-Woods-1944, or San Francisco-1945. We are not in any major re-founding of the international political and economic order. We simply are, nowadays, in the middle of our 1930s, trying to manage a big crisis by national responses, each one fitted to the specific circumstances of each country, and delinked from a major disaster affecting everyone and all countries.
To be more precise, we are somewhere between 1931 and 1933, still in the middle of a recession, but not in a depression. The level of unemployment is not as high as in 1933, and is probably in line with patterns of our days. World trade and financial flows are not as disrupted as in the 1930s, although economic liberalization regressed: we reverted to a light version of trade protectionism, without quotas.
This new economic Cold War arises from structural changes in the world economy, already on the move since the Eighties, when China started to flex its muscles again. At the same time, developing countries ceased to rely on national, inward-looking, projects for national development and opened themselves to foreign investment. Since then, the world economy has been transformed irrevocably.
But not everything, of course, has changed. The major decision-making institutions are still the same, with the same distribution of voting rights. IMF and World Bank are in the middle of their travails to find a new distribution of quotas. The collective voting power of China, India and Brazil is 20% less than that of Belgium, Netherlands and Italy, despite the fact that the joint GDP of the former countries is four times greater the size of their European counterparts; they have a population 29 times greater. Those are the reasons for this new economic Cold War.
How to manage those new realities in the economic realm, having as political leverages the same old structures of the decision-making process? That’s a tricky question, with no clear answer to the dilemma. To manage the world economy is a pretension that even the old G7 never reached to attain in its glorious days. Developed countries controlled then a big proportion of the world’s GDP, trade and financial flows. But they were never capable of coordinating their macroeconomic policies among themselves; never mind establishing rules and goals for the rest of the world.
Nowadays, with a painful free-fall in advanced economies, it is difficult to see what could be done to restore growth rates from their stagnating levels. Besides the cyclical problems affecting major economies, with the possible exception of China, India and a few other countries, we still have global challenges ahead, like poverty in less developed countries, decisions to be made regarding environmental matters, human rights violations in non-democratic countries, and many other relevant issues.
One single strategy would be the establishing of just one big goal for the world community: that has to be the promotion of global development, not exactly through assistance (the traditional Official Development Assistance), but primarily through real trade liberalization, especially in the farm sector, the only real possibility for the less-developed countries to become integrated into the world economy. The United States and European Union have a main responsibility in this domain.
It is highly unlikely that consensual proposals concerning global development could be arising from such a large body as the financial G20, too heterogeneous to be able to reach common positions. Perhaps, the best hope would be to have an evolution from the current G8 to a new G13. That means joining the leaders of the G8 together with five other big countries, namely Brazil, China, India, South Africa, and, either Indonesia or Mexico. Experience shows that small, informal bodies are more likely to deliver something meaningful than large institutionalized groups that get involved in bureaucratic foot-dragging and political entanglements.

New Prospects
What is to be done? The biggest problem in this approach of a G20-minus is acquiring the legitimacy that is involved in the act of speaking for the whole world community from the starting point of only 13 countries. To solve this quandary implies that the political leaders of these 13 countries would have to find a terrain of reciprocal confidence between them that has to be compatible with the representation at large they would be pretending to have from the whole community of nations.
Finding common grounds is a hard task to achieve. It will quite difficult to attain a perfect coordination of agendas between the big advanced and emerging countries and, together, among them and the international institutions. The world is simply not as globalized as required to attain this kind of interaction. Disparities of interests, differences of levels of development, imbalances between countries, many factors collude to render almost impossible this exercise of coordination.
A modest approach could be a more frequent interaction – once a year – between the leaders of the new G13. Sherpas of a special quality, meeting twice a year, could then be mobilized to discuss trade matters, environmental affairs, human rights protection, UN peace-keeping missions and the like, with specific mandates from their political leaders. But, don’t look at the UN for the organization of their agenda. It is difficult to implement anything through the UN, a too large and chaotic a body. Better to rely of the coordination of agendas of the three more important agencies for globalization: IMF, World Bank and WTO.
The main task of the “new sherpas” is to look for international economic coordination around relevant issues for the global community. A possible suggestion would be to try to establish a “global new deal”, exchanging extensive protection to investments and to proprietary riches (patents and the like), as well as other good microeconomic conditions for productive activity, from the side of developing countries (the recipients of FDI), against extensive licensing and effective investments and trade liberalization by rich countries and investors alike. This kind of deal, by extending property rights for the rich, could entail the strengthening of trade, financial and investment flows to the poor, giving a pretty little boost to globalization.
Traditional assistance for development, because it is ineffective, should be replaced, essentially, by a focus on educational improvements, that is, an extensive program for human resources qualification. Assistance as such should be limited to the implementation of a consistent program for eradicating most of infectious diseases in African countries and in some other developing countries. The main reason for the persistence of poverty in those countries is not the lack of resources, but the absence of governance and their non-integration into the world economy through trade links.
Assuming that the questions of democratic governance and human rights protection can be a conundrum for countries like China, or perhaps even Russia, the main target for the agenda of the new G13 could be the adoption of high standards for public governance in the technical meaning of this expression. It is a little too early to make democratic governance and respect for the human rights the decisive criteria for bilateral and-or multilateral cooperation. But these should be the ultimate goals of any kind of new global governance.

* Paulo Roberto de Almeida
Brazilian Diplomat, International Political Economy; Professor at University Center of Brasilia (Uniceub); (www.pralmeida.org)

[Shanghai, October 12, 2010]