Sta. Ana coordinates Action for Economic Reforms. This article was published in the March 09, 2009 edition of the Business World at pages S1/4 and S1/5. It is an extension of the article on global collective action , which BusinessWorld published on 2 March 2009.
Leaders of developed and developing countries all recognize the need for collective action to tame the worldwide recession.
But collective action is easier said than done. Protectionism is tempting as jobs and incomes at home are vanishing.
Topnotch economists, including Federal Reserve chair Ben Bernanke and Barry Eichengreen (University of California, Berkeley), say that mercantilist policies during times of world recession did work. See for example Bernanke’s Essays on the Great Depression (2000) and Eichengreen’s Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (1992).
That is, mercantilism can work from a limited, purely one- country perspective. Mercantilism advances one country’s economic interest at the expense of other countries. Bernanke and Eichengreen found out that the countries that abandoned the gold standard, effectively devaluing their currencies, had a quicker recovery than those countries that stuck to the gold standard.
A corollary finding was that the countries with devalued currencies posted higher net exports, arising from a strong export boost even as imports did not significantly decline, in comparison to other countries. This suggested that the beggar-thy-neighbor practices increased incomes, enabling home consumers to buy imported goods.
That protectionism worked amidst the depression in the 1930s does not however mean that it should be applied nowadays. To repeat, mercantilism only benefits one country at the expense of other. In abnormal times like a global recession, the effects are catastrophic. In the 1930s, the protectionism of one country led other countries to follow suit, igniting a vicious cycle.
Just imagine a small community engulfed by a wild fire. Without collective action (the absence of a fire department), each homeowner insulates his own home. That is to say, everyone is minding his structure and no one is controlling the spread of the fire. In the end, the fire guts all houses in the community.
Now substitute that small community with a globally integrated economy. The message is this: A public bad (a fire or an economic crisis) requires collective or coordinated action. During bad times, internationally coordinated efforts are superior to country-first approaches.
This is admittedly difficult to do. A president of one country is elected to protect the citizens of his country, not to serve the whole of humanity. But as the example of the community fire illustrates, self-interest necessitates collective action.
Even Barack Obama, the calculating, clear-headed, strategic-thinking leader, faces the dilemma—save the US first or act as a global leader first and foremost. A friend who listened to Obama’s inaugural address quipped that the US president’s speech was inward-looking, best summarized by his speech’s ending: “God bless America.”
But joking aside, what constitutes global collective action?
The immediate priority measure is to put in place an internationally coordinated fiscal stimulus plan. Even a large economy like the US cannot solely depend on its own fiscal stimulus. The US fiscal stimulus will undeniably boost consumption. But given that the US has a relatively high marginal propensity to import, Americans will tend to use a significant share of new income to buy imported goods. The marginal propensity to import lowers the multiplier effect of the fiscal stimulus.
Thus, instead of resorting to protectionism, the US should take the lead to engineer a global fiscal stimulus. In this manner, US imports are offset by US exports as the global stimulus encourages citizens of other countries to buy goods from the US and the rest of the world. In a word, everyone gains.
Despite the G-20’s call for coordinated responses to the crisis, the global fiscal stimulus plan is far from sufficient. A survey on fiscal stimulus plans done by Kelvin Gallagher and his students at Boston University reveals these facts:
Less than 30 countries are engaged in fiscal stimulus. The majority of these countries are advanced economies. The big emerging market economies like China, India, Brazil, Mexico, Argentina, Chile, Egypt, and several Southeast Asian countries also have stimulus programs. By the way, the Philippines does not appear on Gallagher’s list. My naughty mind leads me to ask if Gallagher is not convinced about the authenticity of Gloria Arroyo’s “resiliency plan.”
The total amount involved in the fiscal stimulus of the countries covered by the Gallagher survey has reached US$3.067.8 trillion, equivalent to 4.86 percent of the world’s gross domestic product (GDP). As a percentage of GDP, the fiscal stimulus package of China (16.23 percent), Brazil (14 percent) Japan (11.7 percent), Hungary (11 percent), or Singapore (8.4 percent) dwarfs the US plan (5.69 percent).
It appears that many developing countries, especially the poorer ones, do not have the liquidity or the fiscal ammunition to undertake stimulus plans. Thus, a critical element of internationally coordinated action is for the advanced economies and the multilateral institutions, especially the International Monetary Fund (IMF), to support the poor countries.
The IMF has come to the rescue of several countries. But the problem with the IMF funding is that some of its loan packages especially to high-risk developing countries contain the usual conditionalities that constrict growth. But what countries need now are expansionary policies.
Hence, the IMF must not only be aggressive in providing loans or allocating special drawing rights to the developing countries. It must likewise eschew the stiff eligibility criteria and harsh policy conditionalities.
It is partly their wariness toward IMF packages—their negative experience during the 1997 financial crisis—that led the Southeast Asian countries (ASEAN) to establish the Chiang Mai Initiative (CMI). The CMI is a regional reserve fund that ASEAN countries can tap in times of economic turbulence. The funds for CMI mainly come from China, Japan, and Korea. (Thus, the facility is called the “ASEAN + 3” initiative.) As part of the regionally coordinated response to the global crisis, ASEAN +3 agreed to increase the facility from US$80 billion to US$120 billion.
However, in its transition period, the CMI requires a troubled member country that seeks to draw from the regional fund to have a program with the IMF. A rule states that 80 percent of the CMI financial assistance will still be linked to IMF conditions.
Developing countries will need additional sources of international financing, other than the conventional IMF and official development packages. Dani Rodrik sees the introduction of some sort of a Tobin tax as a novel way of generating funds at the same time regulating volatile capital flows. In times of crises, capital suddenly pulls out of higher-risk countries, thus worsening the distress of the aggrieved countries.
Economists across the ideological spectrum see the soundness of international rules on capital control. Kenneth Rogoff, former chief economist of the IMF and adviser to Republican John McCain, has called for such global rules. Joseph Stiglitz, the nemesis of neo-liberals and conservatives, has consistently advocated the reshaping of global institutions to fight poverty and economic crises. Stiglitz’s proposals have a wide scope, from introducing innovative regulation to restore the integrity of financial institutions to increasing and strengthening the voice of developing countries.
Stiglitz defines the current crisis as a “’Bretton Woods moment’ a moment where the international community may be able to come together, put aside parochial concerns and special interests and design a new global institutional structure for the twenty first century. It would be a shame if we let this moment pass.”