Author: Peter Drysdale

The meeting of G20 leaders in Washington was just the first small step in coming to terms with the ramifications of the crisis for the international economic and political order. While policymakers globally have moved with remarkable speed to put a cushion under the world economy, the financial and economic uncertainties remain.

The fact is that it’s unlikely the dust will begin settle on the meltdown in the international financial system at least until after the inauguration of President Obama. They are fed by the political vacuum in the inter-regnum between the end of the Bush Administration and a new one under Barack Obama.

What is certain is that the crisis will change the world for some time to come, in two important ways.

The first is that it has set in motion a fundamental shift in thinking in the developed world about reliance on markets to deliver positive social outcomes. Certainly Thatcherism and ‘neo-liberal market economics’ (whatever they mean) are in full retreat. The idea of government intervention and control is ascendant as governments around the world have stepped in to pick up the wreckage of failed financial (and other) corporations. This is bad news in that it will give powerful licence more generally to policies that promote inefficiency and waste and threaten prosperity in an open global economy. The political forces in this direction are powerful. They were part of the foundation on which Obama crafted his victorious political campaign in America.

The more subtle and correct idea that markets only work efficiently if they are nested in rules, regulations and institutions supplied by good and efficient government and that the spectacular failure of markets we have witnessed in recent times is as much a failure of regulation and good government as it is of markets. The worse news is that the failure of regulation and good government is not just a national failure, in America or in Europe, but a failure of global regulation and government, with which the world is seriously under-endowed. It will be very difficult to hang on to, and to defend in the political battlefield, these fine but critical distinctions. The irony is that government failure appears more likely recognised as a culprit than market failure in China than it will in the established market democracies. But it is going to be a hard time keeping the balance between the market and government, everywhere.

The second is that it has set in motion a fundamental shift in thinking about America’s position in the global system, most importantly in the United States itself. This is not just an economic phenomenon: it is deeply political. This shift has been on the radar screen of the more perceptive thinkers for some time, even at the brief height of American unilateralism. The idea that a new architecture for economic and political cooperation with emerging powers was essential to a healthy global system made increasing sense. America is no longer capable of carrying the global can on all fronts; a multi-polar global economy requires stronger and more effective systems of global economic governance. It’s a short intellectual step to the idea of re-inventing Bretton Woods, although this week should remind us that it’s an idea that will be translated into action with patience and will require intellectual and political leadership that is yet to be mobilised sufficient to the task.

But the good news, paradoxically, is that this crisis, if not strictly American-made, is American-centred and America needs international cooperation and a new world economic order to protect its own core economic and political interests more than at any other time in half a century. America is in the sin bin in a super bowl game played by its own rules. So there is hope, more than a smidgen of hope, that there can now be movement on the important business of fashioning a global economic and political architecture more suited to our times; a hope that might have seemed like a radical dream just a year or two ago. The outcome doesn’t have to be perfect. The Atlantic Charter and its birth child Bretton Woods, a product of the last World War, weren’t perfect. But they changed the world fundamentally and have served us pretty well till now.

There is at least a circumstance and a chance now that might be turned to similar opportunity.

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4. Does the Global Financial Crisis need a Domestic or International Response?

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This entry was posted on Tuesday, November 18th, 2008 at 10:00 pm and is filed under Economic Policy, Institutions, International Relations. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.