As governments do more to coax the world economy out of recession, the danger of protectionism is becoming more real. It is emerging in ways that were unforeseen by those who founded our existing global institutions. Unfortunately, the discussion between countries on trade nowadays is very much a dialogue of the deaf, with countries spouting platitudes at one another but no enforceable and verifiable commitments agreed upon. There is an urgent need to reform global institutions — and more dramatically than envisaged by the G20 thus far.
Protectionism is not just about raising tariffs on imports; it is any government action that distorts the global production and allocation of goods, services and capital to favor domestic producers, thereby reducing overall efficiency. So, for example, government pressure on multinational banks to lend domestically, or to withdraw liquidity from foreign branches, is protectionism, as are capital injections into multinational companies with the explicit requirement that domestic jobs be preserved.
Such actions are problematic not only because they insulate inefficient forms of production, but also because foreign countries respond by adopting similar measures toward their national champions so that everyone is worse off. The number of inefficient workers protected by these measures is offset by the number of efficient workers laid off by foreign multinationals responding to political pressures in their home country.
Perhaps of greatest concern, moreover, is that the public, especially in poor countries that cannot undertake offsetting measures, will come to distrust global integration, with multinationals viewed as Trojan horses.
In addition to explicit protectionist measures, governments now plan actions that will affect others across the globe. For example, the large volume of public debt that industrial countries will issue will undoubtedly raise interest rates and affect developing country governments’ borrowing costs. There is little dialogue about how industrial country issuances can be staggered to minimize the impact on global markets, and what alternatives can be developed for countries that are shut out. If developing countries are left to their own devices, they will conclude that they should self-insure by rebuilding foreign-exchange reserves to even higher levels, a strategy that has clearly hurt global growth.
We need a moderate-sized representative group of leaders of the world’s largest economies to meet regularly to discuss such issues, informed by an impartial secretariat that will place its analyses before the group. Initially, the group should only exert peer pressure on its members to comply with international responsibilities. But, as confidence in the group’s decision-making — and in the impartiality of the secretariat — improves, members might give it some teeth, such as the ability to impose collective economic sanctions on recalcitrant members.
The UN is too large to serve this purpose, and the most obvious candidate for the group, the G20, is not representative. There is, however, a representative alternative — the International Monetary and Financial Committee (IMFC), a group of finance ministers and central bank governors that meets twice a year to advise the IMF.
While the IMFC could be shrunk (for example, if eurozone countries agree to a common seat), the real challenge is to make it a venue in which countries talk to one another rather than at one another. To meet this goal, some changes would be in order.
First, the frequency of meetings should be increased, especially in times of crisis, and the level of a few of these meetings enhanced. So, for example, two meetings a year at the head-of-government level and quarterly meetings at the finance-minister level (with more at the deputy-minister level) would provide ample time for dialogue, and thus for trust-building, and would allow the commitments made by the heads of government to be monitored.
Second, the IMF’s permanent executive board, established in an era when travel was costly and communications difficult, and consisting of mid-level government functionaries, should be abolished. Important decisions should be vetted by the IMFC and others delegated to IMF management. Current executive directors typically do not have the authority to make commitments on their countries’ behalf, so their efforts are often diverted to minutiae. And, in an attempt to preserve its turf, the board constantly attempts to keep the IMFC from discussing anything of substance.
Third, the obvious secretariat is the IMF. Unfortunately, the IMF is not regarded as being impartial, especially by countries that have been seared by its past conditionality.
The IMF has, however, become far more neutral than it is given credit for — though it could take more steps to distance itself from its past. These include abolishing any region or country’s right to appoint IMF management; allowing the IMF to borrow from markets so that it does not have to keep seeking key countries’ permission to expand; eliminating any country’s official veto power over major decisions; and having its agenda set by the IMFC rather than outside bodies.
Industrial countries should be happy that developing countries would take greater responsibility for global economic outcomes rather than simply sulking about their lack of voice and representation. Developing countries, in turn, would gain a greater voice, but would also be forced to contribute ideas (and resources) to deal with global problems.
And maybe, just maybe, we would preserve faith in globalization.
Raghuram Rajan is a professor at the University of Chicago School of Business and a former chief
economist at the IMF.
COPYRIGHT: PROJECT SYNDICATE
Late last month, Beijing introduced changes to school curricula in the Inner Mongolia Autonomous Region, requiring certain subjects to be taught in Mandarin rather than Mongolian. What is Chinese President Xi Jinping (習近平) seeking to gain from sending this message of pernicious intent? It is possible that he is attempting cultural genocide in Inner Mongolia, but does Xi also have the same plan for the democratic, independent nation of Mongolia? The controversy emerged with the announcement by the Inner Mongolia Education Bureau on Aug. 26 that first-grade elementary-school and junior-high students would in certain subjects start learning with Chinese-language textbooks, as
There are worrying signs that China is on the brink of a major food shortage, which might trigger a strategic contest over food security and push Chinese President Xi Jinping (習近平), already under intense pressure, toward drastic measures, potentially spelling trouble for Taiwan and the rest of the world. China has encountered a perfect storm of disasters this year. On top of disruption due to the COVID-19 pandemic, torrential rains have caused catastrophic flooding in the Yangtze River basin, China’s largest agricultural region. Floodwaters are estimated to have already destroyed the crops on 6 million hectares of farmland. The situation has been
The restructuring of supply chains, particularly in the semiconductor industry, was an essential part of discussions last week between Taiwan and a US delegation led by US Undersecretary of State for Economic Growth, Energy and the Environment Keith Krach. It took precedent over the highly anticipated subject of bilateral trade partnerships, and Taiwan Semiconductor Manufacturing Co (TSMC) founder Morris Chang’s (張忠謀) appearance on Friday at a dinner hosted by President Tsai Ing-wen (蔡英文) for Krach was a subtle indicator of this. Chang was in photographs posted by Tsai on Facebook after the dinner, but no details about their discussions were disclosed. With
On Sept. 8, at the high-profile Ketagalan security forum, President Tsai Ing-wen (蔡英文) urged countries to deal with the China challenge. She said: “It is time for like-minded countries, and democratic friends in the Indo-Pacific region and beyond, to discuss a framework to generate sustained and concerted efforts to maintain a strategic order that deters unilateral aggressive actions.” The “Taiwan model” to deal with the COVID-19 pandemic provides an alternative to China’s authoritarian way of handling it. Taiwan’s response to the health crisis has made it evident that countries across the world have much to learn from Taiwan’s best practices and if