There is only one message that comes out of Toronto, where the G20 summit has come to an end. The formation, ostensibly created to reflect changing power equations in the world economy, serves no purpose. It has turned out to be one more talking shop in which agreement to disagree is presented as a consensus.
The disagreement that matters today concerns the near-global rush to reduce public debt by curtailing government expenditures. Occurring so soon after the Great Recession this policy stance is threatening a second recessionary dip.
On Tuesday, June 29 the World Trade Organization’s Committee on Financial Services will hold its much anticipated session on the WTO and the financial crisis. Developing countries should follow this session with great scrutiny. The WTO has claimed that it played no negative role in the financial crisis. However, research by the IMF and the UN suggest otherwise.
Work by independent economists, the IMF, and the World Bank has shown that those nations that capital account liberalization is not associated with economic growth in developing countries. Indeed, developing nations need to cross a minimum threshold of institutional development before such liberalization can help spur growth.
Almost two decades ago, Francis Fukuyama, at the peak of the hubris and arrogance of neoliberal thinking, famously suggested that history had ended. The unfolding of the European crisis may finally prove him wrong. It is true that the failures of the Washington Consensus during the 1990s led to a revival of the left in Latin America, starting with the election of Chávez in 1998. However, I would venture, risking being a bit Eurocentric, that political changes in the periphery are seldom capable of having global effects in the same way as changes in the center of the capitalist system.
On the other hand, the crisis of the euro, and the adjustment measures taken by the European countries may prove more significant as a way of bringing back the old coalitions that were instrumental in building the Welfare State. There are at least two elements in the rescue packages implemented in Greece and Spain that are particularly wrongheaded and will have a terrible social impact.
Trade officials in the Obama Administration have made it abundantly clear that they will move forward in the WTO’s Doha Round of negotiations only if the larger developing countries agree to open their economies more to U.S. exports. As Kevin Gallagher pointed out on the Triple Crisis Blog (“Obama’s New Trade Agenda”), the administration’s trade policies, and its announced goal of doubling U.S. exports, backtrack from those of the Bush Administration, renege on the basic principles of the Doha Development Round, and undermine precisely the kind of multilateralism President Obama claims to stand for.
Such intransigence does not bode well for the WTO, nor does it give much hope that the Obama Administration will use the current TransPacific Partnership negotiations to forge what it promises will be a “21st century trade agreement.”
Clearly, a creative new approach is needed to break the trade deadlocks. I offer a modest proposal here: Instead of negotiating reductions in tariffs and farm subsidies, it’s time to negotiate reductions in hypocrisy. I call it the Hypocrisy Clause, which mandates phased reductions in “trade-distorting hypocrisy,” with the greatest reductions coming from the most developed hypocrites.
Under the radar screen at the US-China Strategic and Economic Dialogue (SE&D) last month, the US and China continued to discuss a bi-lateral investment treaty (BIT). If the final negotiated text looks like the majority of US BITs it could threaten financial stability and economic growth in China.
The US and China began negotiations toward a BIT in 2008 under the Bush Administration. After taking office, US President Barack Obama gave his seal of approval to the negotiations at the November 2009 SE&D when the two nations agreed to “expedite” them.
China’s development over the past thirty years has been unprecedented. Not only has per capita growth been faster than 8 percent per annum throughout the period, but according to the World Bank China has brought 300 million people—a number roughly the size of the entire population in the US—out of poverty.
The global economic crisis is a wake-up call for developing countries, particularly low-income ones, to reconsider their long-term industrial and development strategies as the short-term counter-cyclical macroeconomic policy tools available to them are very limited. It is not going to be easy, but it is necessary. Some selective import restrictions under the “balance of payments clause” of the World Trade Organization (WTO) and capital controls would be helpful, but not sufficient. A debt moratorium, debt forgiveness and other concessional financial flows are urgently needed, and will help, to provide low-income countries with some temporary relief. But what is essential for their long-term development is to increase their capacity to take the risk of external shocks and instability in export earnings. To do so, a different development and industrial strategy is required to diversify and upgrade their structure of production and trade.