Monday, November 21, 2011

Barry Eichengreen - Global Shifts

Global Shifts
Barry Eichengreen
University of California, Berkeley
April 2011

"Shifts happen. We are currently witnessing a major shift in the balance of economic, financial and political power from the advanced countries to emerging markets – from West to East, or from the West to the Rest. This is, of course, not the first time that we have observed this kind of global shift. The rise of the West from the 15th century and its concomitant, the decline of China, was itself an earlier instance, if mirror image, of this kind of shift. (See Figure 1.) The industrial revolution, which gave rise to what is sometimes called “The Great Divergence” (the growing divergence in manufacturing capability and in capacity to project power between the first countries to industrialize, principally in Europe, and other regions) marked another global shift. It is no coincidence that the first industrial nation, Great Britain, came to control fully a quarter of the world’s population and land mass by the end of the 19th century.2 There was the shift in economic power from the pioneer industrializer, Britain, to followers like Germany that contributed to the economic and geopolitical tensions helping to set the stage for World War I. There is Charles Kindleberger’s thesis that that Great Depression of the 1930s was a consequence of the global shift in power from Britain to the United States, one that left an exhausted Britain incapable of managing the world economy and an inexperienced United States unwilling to do so.3 There is the shift after World War II toward the two great superpowers, the United States and the Soviet Union, and the dominance of the U.S. over the Western world (Figure 2). There is then the relative decline of the United States owing to catch-up growth, first in Europe, next in Japan, and finally in East Asia and elsewhere, which gradually closed the per-capita-income gap. The current shift toward emerging markets like China and India (Figures 3 and 4) is usefully seen in this light...."


"...well we cope with this global shift will hinge, therefore, on the adequacy of those institutions and groupings. At the IMF, increases in resources, the creation of new lending facilities, and experimentation with new surveillance instruments such as spillover reports are positive developments. But the slow pace of governance reform continues to undercuts\ the legitimacy of the institution and therefore the effectiveness of its advice. And the fact is that the Fund still has no mechanism for compelling adjustment by countries that do not borrow from it, whether these are chronic surplus countries like China or chronic deficit countries like the U.S. that issue debt in their own currency. The advent of the G20, which gives both large and middle sized countries and advanced and emerging markets alike a seat at the table, is similarly a positive development. But the G20 also has a legitimacy problem; it has no written constitution and its membership is arbitrary (who appointed these 20 countries to run the world?). In the absent of commitments for members, it is prone to degenerate into a talk shop.
In principle, these design flaws can be fixed. The Articles of Agreement of the IMF could be amended to provide for automatic penalties for chronic surplus countries.51 The composition of the executive board could be changed to further enhance the representation of emerging-market countries, and G20 membership could be reconfigured to match that of the executive board.52
In a world of sovereign states and especially in a world without a single dominant power, international collaboration also requires a shared diagnosis of problems. When one contemplates issues like the sources of the Chinese current account surplus or the U.S. deficit, it is clear that consensus remains elusive. Here there is an important role for entities like the IMF, which can act as impartial arbitrator. Thus, the need for governance reform to lend the Fund the legitimacy and the need for intellectual consensus are inextricably linked.
Part of this intellectual consensus must be appreciation on the part of the once dominant power that, if it can no longer take adequate action unilaterally, then power-sharing through legitimate institutions is preferable to clinging to the past. Here the United States has shown the foresight to be an advocate of reforming IMF quotas and executive board representation and of shifting the focus of international collaboration to the G20 from the G7/8. Europe has been somewhat less enthusiastic about increasing emerging-market representation in the IMF executive board..."


"...One of the indisputable lessons of history is that with shifts in economic power come shifts in military power. For half a century China has concerned itself mainly with disputes on its borders; it has therefore concentrated on developing land-based forces, something that prevents it from projecting power across long distances. China, it is said, has not had a naval tradition since Zheng He, giving the U.S. navy free rein in the Pacific and even the East China Sea and limiting the scope for conflict between the two countries. But the idea that China is incapable of challenging the U.S. at sea may ultimately become yet another casualty of the shift in the balance of economic power between the two countries. China may still lag behind the U.S. in the number and sophistication of its warships (submarines may be a different story) but, as with many things Chinese, change is now coming faster than many experts anticipated as recently as five years ago. China’s decision in 2009 to dispatch a naval force to escort Chinese shipping through the Gulf of Aden in order to protect it from Somali piracy, is a case in point.
An obvious place where economic and political risks come together is energy security. China is painfully aware of its dependence on imported energy. Late 19th century Germany and late 20th century America were both accused of using military means to enhance their energy security. China has already taken other steps, mainly in the form of direct foreign investment, in the effort to secure its energy supplies. Some imagine a scenario in which it could go further, threatening or even using military force to install friendly governments in Eastern Siberia, elsewhere in East Asia or even elsewhere in the world.
Of course, there are other more benign ways of ensuring energy security.53 These include eliminating subsidized energy prices for households and state enterprises to limit consumption and developing new technologies to reduce dependence on imported fossil fuels. It all comes down to the economics. And the politics...."


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