"Doomsday Scenario" of Protectionism?

Dani Rodrik says that if we don't act quickly to support emerging markets’ currencies, we could be headed for a "doomsday scenario of a protectionist vicious cycle reminiscent of the 1930s":

Save the Emerging Markets, by Dani Rodrik, Project Syndicate: If the world were fair, most emerging markets would be watching the financial crisis engulfing the world’s advanced economies from the sidelines... For once, what has set financial markets ablaze are not their excesses, but those of Wall Street. ...

Instead, emerging markets are suffering financial convulsions of possibly historic proportions. The fear is ... that their economies could be dragged into much deeper crises than those that will be experienced at the epicenter of the sub-prime debacle.

Some of these countries should have known better and might have protected themselves sooner. There is little excuse for Iceland... Several other countries ... such as Hungary, Ukraine, and the Baltic states, were also living dangerously...

But financial markets have made little distinction between these countries and others like Mexico, Brazil, South Korea, or Indonesia, which until just a few weeks ago appeared to be models of financial health. ...

[E]merging-market countries are victims of a rational flight to safety, exacerbated by an irrational panic. The public guarantees that rich countries’ governments have extended to their financial sectors have exposed more clearly the critical line of demarcation between “safe” and “risky” assets, with emerging markets clearly in the latter category.

Economic fundamentals have fallen by the wayside.

To make matters even worse, emerging markets are deprived of the one tool that the advanced countries have employed ... to stem their own financial panics: domestic fiscal resources or domestic liquidity. Emerging markets need foreign currency and, therefore, external support.

What needs to be done is clear. The International Monetary Fund and the G7 countries’ central banks must act as global lenders of last resort and provide ample liquidity — quickly and with few strings attached — to support emerging markets’ currencies. The scale of the lending that is required will likely run into hundreds of billions of US dollars, and exceed anything that the IMF has done to date. ... Moreover, China, which holds nearly $2 trillion in foreign reserves, must be part of this rescue mission. ...

In the absence of a backstop for emerging-country finances, the doomsday scenario of a protectionist vicious cycle reminiscent of the 1930s could no longer be ruled out. ...

So when the G-20 countries meet in Washington on Nov. 15 for their crisis summit, this is the agenda item that should dominate their discussion. ... The priority for now is to save the emerging markets from the consequences of Wall Street’s financial follies.

Comments

[Give Up]

"The scale of the lending that is required will likely run into hundreds of billions of US dollars..."

Goods and services ultimately have to be paid for with other goods and services. Who is volunteering to give up all of these goods and services so they can be loaned to the third world?

[Bupa]

The financial crisis is likely to become a humanitarian crisis. Many developing countries will be collaterol damage. The IMF has $250 billion available. That's not enough. Hungary, a country of only 10 million people, took up nearly 10 percent of the IMF's lending capacity. What's going to happen to countries further back in the qeue?

[sargon TM]

Generals always fight the last war. So do economists. They feel, in my opinion correctly, that protectionism made the great depression both deeper and wider. Thus, we are vigilant for the least sign of protectionism.

This vigilance is right, and makes it less likely that protectionism will contribute to the downfall of the world economiy'. But bailouts are very similar to protectionism: we throw good money after bad in a vain attempt to maintain the local status quo. We are now more than a year into an orgy of competitive bailouts. Sound banks in countries with sound banking systems are being bailed out to allow them to remain competitive with banks that have governments supplying them with limitless capital.

As the net widens, AIG, GE, GM, the fraction of the economy distorted by bailouts widens. A good case for bailouts in one sector, e,g, commercial banks, is the basis for irresistable arguments in others. (When you squeeze a bubble in one dimension it merely expands in another.)

Of course, as Rodrik argues, we can only stop this by international cooperation. Are you optimistic that there will be international cooperation? Neither am I.

[Gegner]

Jobs are the tools with which you 'maintain' your society. Remove those tools and you don't have anything to work with.

There must be a 'balance' between producers and consumers or your social model collapses.

Trade has its place in the larger scheme of things but there are no examples of a society that has 'traded it's way to prosperity'...sure, there are plenty of prosperous traders, but they got that way by exploiting producers.

In a time of unprecedented wealth, never have so many been so impoverished. Which is the 'typical' outcome of a social model based on global trade.

Only the traders benefit.

[MyLessThanPrimeBeef]

Human nature is such that you feel worse if you have a pile of dirt that is worth $2, then someone comes along and says it's worth $10 before another who says it's really $2 than if you have always been told that that pile of dirt is $2.

Why?

Because, as the physicists would say, we live in a world of friction and outcomes are path dependent.

In Heaven, or in Plato's world of Ideas where perfect circles exist, there is no friction and outcomes would not be path dependent. It doens't matter if we go through these boom and bust cycles, as long as we end up at the end position.

I don't know how to get rid or or minimize the boom and bust cycles except keeping our worth at $2 constantly, which might suggest that we slow down 'progress' in particular and just slow things down in general.

[calmo]

So many well meaning comments here, but the one I'm waiting for is from that poster in Africa...who will resurrect this thread in a year or 2, to let us 1st world people know how it is.
But in the meantime...from 'Give Up'asks:Who is volunteering to give up all of these goods and services so they can be loaned to the third world?not all of us Good Samaritans who are retreating towards the exits as I type, yes?
from Bupa who asks:What's going to happen to countries further back in the qeue? and that includes the Swiss, yes?

[NCI]

My impression is that the same economists who got us into this mess, are now trying to prevent the one route by which the US worker may be salvaged. They are a part of the problem, not the solution.

Although we may have exceptions (such as with Canada, which is the 51st state anyway), the US should pursue a path of aggressive self-sustaining policies. We should build up our own industries by placing high tarrifs on imported goods, seal the borders to further immigration. We should break up narcissistic monopolies such as Microsoft (40 billion to buy back it's own stock- now that's a company with NO ideas). If the world moves slower, so be it.

Economics is not fate. I now believe the academic and executive elite of the US will only pursue policies to the detriment of the greater good. They are a cancer.