Maybe glob­al­i­sa­tion isn't the an­swer

The Pak Banker - - OPINION - Ngaire Woods

LAST week, Chris­tine La­garde, the In­ter­na­tional Mon­e­tary Fund's man­ag­ing di­rec­tor, warned that if coun­tries do not act to­gether, the global econ­omy could be de­railed. Like­wise, the OECD has warned that coun­tries must move "ur­gently" and "col­lec­tively" to boost global growth prospects. Yet the G20 fi­nance min­is­ters and cen­tral-bank gov­er­nors to whom th­ese en­treaties were di­rected failed to agree any such ac­tion at their re­cent meet­ing in Shang­hai.

To be sure, the com­mu­niqué re­leased af­ter the meet­ing in­cludes a pledge to use "all pol­icy tools - mon­e­tary, fis­cal, and struc­tural - in­di­vid­u­ally and col­lec­tively" to "foster con­fi­dence and pre­serve and strengthen the re­cov­ery." But the com­mu­niqué also re­flects dis­tinct divi­sions - par­tic­u­larly with re­gard to the role of mon­e­tary and fis­cal pol­icy in stim­u­lat­ing growth - among the fi­nance min­is­ters and cen­tral bankers who agreed on its text.

On mon­e­tary pol­icy, the com­mu­niqué of­fers the empty state­ment that the G20 would "con­tinue to sup­port eco­nomic ac­tiv­ity and en­sure price sta­bil­ity, con­sis­tent with cen­tral banks' man­dates." That avoided the cen­tral ques­tion: Should cen­tral banks be at­tempt­ing to stim­u­late growth through "un­con­ven­tional" mon­e­tary poli­cies?

The Bank for In­ter­na­tional Set­tle­ments thinks not, ar­gu­ing in its 2015 an­nual re­port that "mon­e­tary pol­icy has been over­bur­dened" in an at­tempt to rein­vig­o­rate growth, a re­al­ity that is re­flected in "the per­sis­tence of ul­tralow in­ter­est rates."

The re­sult is a vi­cious cy­cle of too much debt, too lit­tle growth, and too-low in­ter­est rates that, to quote the BIS's Clau­dio Bo­rio, "beget lower rates."

This sober­ing anal­y­sis has not stopped the Bank of Ja­pan or the Euro­pean Cen­tral Bank from fur­ther mon­e­tary eas­ing. Nor did it de­ter Peo­ple's Bank of China Gov­er­nor Zhou Xiaochuan from ex­press­ing a will­ing­ness to shoul­der more of the growth-stim­u­lat­ing bur­den in Shang­hai.

But not ev­ery­one is ig­nor­ing the writ­ing on the wall. Re­serve Bank of In­dia Gov­er­nor Raghu­ram Ra­jan has called on the IMF to ex­am­ine the ef­fects of un­con­ven­tional mon­e­tary pol­icy not just on the coun­tries that im­ple­ment them, but also on the rest of the world. Like­wise, Bank of Eng­land Gov­er­nor Mark Car­ney has pointed out that coun­tries us­ing neg­a­tive in­ter­est rates (in­clud­ing, most re­cently, Ja­pan) are, by forc­ing cur­rency de­val­u­a­tion, ex­port­ing weak de­mand - ul­ti­mately a zero-sum game.

When it comes to fis­cal pol­icy, agree­ment is sim­i­larly lack­ing. The IMF is urg­ing sur­plus coun­tries like Ger­many to pur­sue more stim­u­lus. The OECD, too, has called upon its wealth­ier mem­bers to take ad­van­tage of their cur­rent abil­ity to bor­row for long pe­ri­ods at very low in­ter­est rates to in­crease growthen­hanc­ing in­vest­ment in in­fra­struc­ture.

Th­ese calls pro­voked a sharp re­but­tal from Ger­man Fi­nance Min­is­ter Wolf­gang Schäu­ble, who con­demned the "debt-fi­nanced growth model." The re­sult of this con­flict was a vague dec­la­ra­tion by the G20 that it would use "fis­cal-pol­icy flex­i­bly to strengthen growth, job cre­ation, and con­fi­dence, while en­hanc­ing re­silience and en­sur­ing debt as a share of GDP is on a sus­tain­able path."

In light of the state­ments by the IMF and the OECD, this dis­tinct fail­ure to agree on mon­e­tary and fis­cal pol­icy seems highly dan­ger­ous. But both in­sti­tu­tions may be over­stat­ing the prob­lem.

In fact, de­spite wide­spread un­cer­tainty - volatile cap­i­tal flows, plum­met­ing com­mod­ity prices, es­ca­lat­ing geopo­lit­i­cal ten­sions, the shock of a po­ten­tial Bri­tish exit from the Euro­pean Union, and a mas­sive refugee cri­sis - the stalling of global co­op­er­a­tion may be less risky to­day than it was even a decade ago.

The key fac­tor in this con­text has been wide­spread recog­ni­tion of the risks inherent in eco­nomic glob­al­i­sa­tion, and con­certed ef­forts to build up the needed re­silience on a na­tional, bi­lat­eral, or re­gional ba­sis.

Con­sider fi­nance. Twenty years ago, a cat­a­strophic fi­nan­cial cri­sis be­gan in Thai­land and quickly spread across East Asia. Since then, those economies, and oth­ers in the emerg­ing world, have self-in­sured against cri­sis by build­ing up huge stock­piles of for­eignex­change re­serves.

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