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 manoeuvring. 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-globalisation 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 co-ordination 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, recognising 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 US$2 trillion in foreign currency in reserves, up to 70 per cent 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 G20 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 US$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 G20 platform can be gradually developed, while at the same time strengthening the G7 as a sort of caucus to G20 at the financial minister level for the purpose of macroeconomic policy co-ordination.