Amer­i­can lead­er­ship in a mul­ti­po­lar world

Financial Mirror (Cyprus) - - FRONT PAGE -

Giv­ing up the spot­light is never easy. The United States, like many aging celebri­ties, is strug­gling to share the stage with new faces, es­pe­cially China. The up­com­ing meet­ings of the In­ter­na­tional Mon­e­tary Fund and the World Bank – two in­sti­tu­tions dom­i­nated by the US and its West­ern al­lies – pro­vide an ideal op­por­tu­nity to change that.

The US must come to terms with the re­al­ity that the world has changed. The longer the US re­mains in a state of de­nial, the more dam­age it will do to its in­ter­ests and its global in­flu­ence, which re­mains sub­stan­tial, if more con­strained than be­fore.

The world no longer ad­heres to the static Cold War or­der, with two blocs locked in open but guarded con­fronta­tion. Nor does it work ac­cord­ing to the Pax Amer­i­cana that dom­i­nated in the decade af­ter the Soviet Union’s col­lapse, when the US briefly emerged as the sole su­per­power.

To­day’s world is un­der­pinned by a mul­ti­po­lar or­der, which emerged from the rise of de­vel­op­ing economies – most no­tably China – as ma­jor ac­tors in trade and fi­nance. The US – not to men­tion the other G-7 coun­tries – now must com­pete and co­op­er­ate not only with China, but also with In­dia, Brazil, and oth­ers through ex­panded fo­rums like the G20.

To this end, the US must show lead­er­ship and adapt­abil­ity. It can­not refuse to sup­port China’s ef­forts to ex­pand its role in global gov­er­nance. Nor should it is­sue harsh re­bukes to its al­lies when they do not fol­low suit, as it did when the United King­dom an­nounced its in­ten­tion to join the new China-led Asian In­fra­struc­ture In­vest­ment Bank.

The US seems to be stuck in the Bret­ton Woods sys­tem, the rules-based or­der – un­der­pinned by the IMF and the World Bank, with the US dollar at its heart – that emerged af­ter World War II. The Bret­ton Woods sys­tem in­sti­tu­tion­al­ized Amer­ica’s geopo­lit­i­cal supremacy, leav­ing the old im­pe­rial power, the UK, to step aside – a step that it took gra­ciously, if a lit­tle des­per­ately, given its grave post­war eco­nomic sit­u­a­tion.

Over the years, how­ever, the Bret­ton Woods sys­tem, with its mix of lib­eral mul­ti­lat­er­al­ism and mar­ket-ori­ented eco­nomic poli­cies, has come to sym­bol­ise the An­gloAmer­i­can dom­i­nance of the global econ­omy that much of the world now crit­i­cises, es­pe­cially since the global fi­nan­cial cri­sis. In par­tic­u­lar, the Wash­ing­ton Con­sen­sus – the set of free-mar­ket prin­ci­ples that in­flu­ences the poli­cies of the IMF, the World Bank, the US, and the UK – has gen­er­ated con­sid­er­able re­sent­ment, es­pe­cially af­ter the Asian fi­nan­cial cri­sis of the 1990s.

Against this back­drop, it is hardly sur­pris­ing that China has been us­ing its grow­ing global in­flu­ence to help en­gi­neer a new eco­nomic or­der – one in which the US dollar does not reign supreme.

Zhou Xiaochuan, the gover­nor of the Peo­ple’s Bank of China, China’s cen­tral bank, has re­peat­edly called for a shift to­ward an in­ter­na­tional mon­e­tary sys­tem that al­lows for the use of mul­ti­ple cur­ren­cies for pay­ments and in­vest­ment. Such an ap­proach would re­duce the risk and im­pact of liq­uid­ity crises, while de­cou­pling the in­ter­na­tional mon­e­tary sys­tem from the “eco­nomic con­di­tions and sovereign in­ter­ests of any sin­gle coun­try.”

Of course, China be­lieves that its own cur­rency, the ren­minbi, should even­tu­ally play a cen­tral role in this new mon­e­tary sys­tem, so that it re­flects China’s role not only as a lead­ing en­gine of global eco­nomic growth, but also as the world’s largest cred­i­tor. In­deed, to­gether with the other sys­tem­i­cally im­por­tant economies (the US, the UK, Ja­pan, and the eu­ro­zone) China drives trends that, for bet­ter or worse, ex­tend far be­yond its bor­ders.

Since 2009, China’s lead­er­ship has been pur­su­ing a set of poli­cies that en­cour­age the use of the ren­minbi in re­gional trade and re­duce its de­pen­dence on the dollar in in­ter­na­tional pay­ments. But ex­pand­ing the ren­minbi’s role in the in­ter­na­tional mon­e­tary sys­tem is just the first step to­ward in­sti­tu­tion­al­iz­ing a mul­ti­po­lar world or­der. China has also spear­headed the estab­lish­ment of new mul­ti­lat­eral in­sti­tu­tions, with AIIB fol­low­ing on the heels of the New Devel­op­ment Bank, cre­ated with other ma­jor emerg­ing economies (Brazil, Rus­sia, In­dia, and South Africa).

By tak­ing th­ese steps, China’s lead­ers have called at­ten­tion to the in­ad­e­quacy of the ex­ist­ing in­ter­na­tional mon­e­tary sys­tem, and its in­sti­tu­tional frame­work, in to­day’s com­plex, mul­ti­po­lar world econ­omy. In par­tic­u­lar, China’s agenda high­lights ques­tions about Amer­ica’s ca­pac­ity to pro­vide the needed liq­uid­ity to sup­port in­ter­na­tional trade and fi­nance.

To be sure, the US is right to won­der whether the new or­der that China hopes to build will be as open and rules­based as the Amer­i­can-led or­der – the one that gave China the mar­ket ac­cess it needed to achieve its spec­tac­u­lar eco­nomic rise. But the an­swer to that ques­tion can be found only by en­gag­ing China on the is­sue of re­form of global gov­er­nance – not by deny­ing that change is needed at all.

As the US stub­bornly pur­sues a pol­icy of con­tain­ment to­ward China – ex­em­pli­fied in its fight against the AIIB’s estab­lish­ment, its re­lent­less ac­cu­sa­tions of cur­rency ma­nip­u­la­tion, and its re­fusal to rat­ify IMF re­forms that would in­crease China’s in­flu­ence – it risks los­ing its abil­ity to shape what comes next.

The re­sult could be a world of frag­mented blocs – an out­come that would un­der­mine not only global pros­per­ity, but also co­op­er­a­tion on shared chal­lenges.

The Spring Meet­ings of the IMF and the World Bank of­fer an im­por­tant op­por­tu­nity to sig­nal a new ap­proach to­ward China.

And there could be no more cred­i­ble sig­nal than US sup­port for the ren­minbi’s ad­di­tion to the bas­ket of cur­ren­cies that the IMF uses to value its in­ter­na­tional re­serve as­set, the Spe­cial Drawing Right. Amer­ica will be in the spot­light once again. But how will it per­form?

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