International Policy Coordination or Protectionism?
Lots of worry about the global economy, the lack of an internationally coordinated policy response to the downturn, and about the imposition of protectionist measures. First, Joseph Stiglitz:
A globally coordinated stimulus package needed, by Joseph E Stiglitz, Project Syndicate: This year is likely to be the worst for the global economy since World War II... Unless something is done, the crisis will throw as many as 200mn additional people into poverty.
This global crisis requires a ... globally coordinated stimulus package... [W]hile it is recognised that almost all countries need to undertake stimulus measures (we’re all Keynesians now), many developing countries do not have the resources to do so. Nor do existing international lending institutions.
But if we are to avoid winding up in another debt crisis, some, perhaps much, of the money will have to be given in grants. And, in the past, assistance has been accompanied by extensive “conditions,” some of which enforced contractionary monetary and fiscal policies – just the opposite of what is needed now – and imposed financial deregulation, which was among the root causes of the crisis.
In many parts of the world, there is a strong stigma associated with going to the International Monetary Fund, for obvious reasons. ... It is thus imperative that assistance be provided through a variety of channels, in addition to, or instead of, the IMF...
At their November 2008 summit the G-20 leaders strongly condemned protectionism... Unfortunately,... 17 of the 20 countries have actually undertaken new protectionist measures, most notably the US with the “buy American” provision included in its stimulus package.
But it has long been recognised that subsidies can be just as destructive as tariffs – and even less fair, since rich countries can better afford them. If there was ever a level playing field in the global economy, it no longer exists: the massive subsidies and bailouts provided by the US have changed everything, perhaps irreversibly.
Indeed, even firms in advanced industrial countries that have not received a subsidy are at an unfair advantage. They can undertake risks that others cannot, knowing that if they fail, they may be bailed out. While one can understand the domestic political imperatives that have led to subsidies and guarantees, developed countries need to recognize the global consequences, and provide compensatory assistance to developing countries. ...
And the US dollar reserve-currency system – the backbone of the current global financial system – is fraying. China has expressed concerns, and the head of its central bank has joined the UN Commission in calling for a new global reserve system. ...
Such reforms will not occur overnight. But they will not occur ever unless work on them is begun now.
Next, Charles Wyplosz argues that, in general, quantitative easing is a "beggar-thy-neighbor" policy:
One fiscal initiative not worth emulating, by Charles Wyplosz, Project Syndicate: When the Swiss National Bank (SNB) recently brought its interest rate down to 0.25 percent, it announced that it would engage in “quantitative easing,”... More surprising was the simultaneous announcement that it was intervening on the foreign-exchange market with the aim of reversing the appreciation of the franc. Will this be the first salvo in a war of competitive devaluations? ...
Like most other central banks confronted with the recession, the SNB has reduced its policy interest rate all the way to the zero lower-bound. Once there, traditional monetary policy is impotent...
This is why central banks are now searching for new instruments. Quantitative easing represents one such attempt. ... However, an important issue is rarely mentioned: In small, open economies — a description that applies to almost every country except the US — the main channel of monetary policy is the exchange rate.
This channel is ignored for one good reason: Exchange-rate policies are fundamentally of the beggar-thy-neighbor variety. Unconventional policies that aim at weakening the exchange rate are technically possible even at zero interest rates, and they are quite likely to be effective ... by switching demand toward domestically produced goods and services.
The risk is that countries that suffer from the switch may retaliate and depreciate their currencies. That could easily trigger a return to the much-feared competitive depreciations that contributed to the Great Depression.
The first casualty would be whatever small scope remains for international policy coordination. The second would be the world international monetary system. In fact, one key reason for the creation of the IMF was to monitor exchange-rate developments with the explicit aim of preventing beggar-thy-neighbor policies. ...
Alternatively, it may be that the SNB mostly wishes to talk the franc down to break the safe-haven effect. Having promptly achieved depreciation, it may have succeeded. In that case, the franc will not move much more in any direction, and there will be no need for further interventions. ...
Other central banks have not expressed any view, which may suggest that they do not intend to retaliate, at least at this stage. ... It may also be that notice has been taken of the precedent, and that those authorities that intend to use it to justify future moves are loath to criticize it. In that case, the generalized silence could indicate that all other central banks entertain the possibility of using that option, which would be most worrisome.
The worst of all worlds, by Joseph S. Nye, Project Syndicate: The world economy will shrink this year for the first time since 1945, and some economists worry that the current crisis could spell the beginning of the end of globalization. Hard economic times are correlated with protectionism... In the 1930s, such “beggar-thy-neighbor” policies worsened the situation. Unless political leaders resist such responses, the past could become the future.
Ironically, however, such a grim prospect would not mean the end of globalization, defined as the increase in worldwide networks of interdependence. Globalization has several dimensions, and though economists all too often portray it and the world economy as being one and the same, other forms of globalization also have significant effects — not all of them benign — on our daily lives.
The oldest form of globalization is environmental. For example,... Bubonic plague, or the Black Death, originated in Asia, but its spread killed a quarter to a third of Europe’s population in the 14th century. ... The spread of foreign species of flora and fauna to new areas has wiped out native species, and may result in economic losses of several hundred billion dollars per year. Global climate change will affect the lives of people everywhere. ... The rate at which the sea level rose in the last century was 10 times faster than the average rate over the last three millennia.
Then there is military globalization, consisting of networks of interdependence in which force, or the threat of force, is employed. ... Finally, social globalization consists in the spread of peoples, cultures, images and ideas. Migration is a concrete example. ...
The danger today is that shortsighted protectionist reactions to the economic crisis could help to choke off the economic globalization that has spread growth and raised hundreds of millions of people out of poverty over the past half century. But protectionism will not curb the other forms of globalization. ...
Posted by Mark Thoma on Monday, April 13, 2009 at 12:24 AM in Economics, International Trade |
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