In Berlin, European leaders agreed to double the lending capacity of the International Monetary Fund to $500 billion. In Hua Hin this weekend, Asian leaders agreed to improve the structure of the Chiang Mai Initiative, the region’s emergency lending pool, and increase its size to $120 billion.
This is a sea change. A year ago, the IMF looked headed for extinction. Turkey was its only client and one-quarter of its staff opted for early retirement. The CMI, created after the 1997-98 Asian crisis, had never lent any money, and stood instead as a silent reminder of the difficulties of Asian cooperation. Now both are springing back to life.
It’s high time for global cooperation — but it has been hard to find a leader. The world’s economies need to work together to stop the ‘adverse feedback loop’ that Federal Reserve Chairman Ben Bernanke highlighted in his Senate testimony on Tuesday. Every economy in recession buys less from others, and every bank that collapses puts others at greater risk.
China was one of the first countries to act, with a stimulus package of nearly $600 billion. The U.S. has now joined with its $800 billion package, and other countries are moving, too.
But most countries have stimulus packages well below 2 percent of GDP, much smaller than those of China and the U.S. Many still hope a world recovery will save them. Unless they act together, it won’t.
Europe has an especially big problem. Many European countries now use the Euro rather than their own currencies, and, from an economic viewpoint, act more like American states than our federal government. Like states, they have to balance their budgets without printing money, so, despite the recession, some are raising taxes rather than lowering them.
This leaves the U.S. as one of the few countries that can mobilize the resources needed to lead a global response. President Obama, fresh to the job, has domestic political capital and global good will on his side, and this is his moment to grasp.
His opportunity will come a month from now at the G20 summit in London, a gathering of the leaders of both the ‘old’ industrial powers and largest emerging markets.
Leading this diverse group will require all of President Obama’s charisma and much skill in ‘leading from behind’-listening, compromising, and allowing others to share credit.
The list of goals to be accomplished urgently is daunting.
- Countries have to empower global financial institutions — especially the IMF and the CMI — to provide lots of help, quickly. The IMF is still seen by many as unhelpful (it’s remembered for using fuel to put out fires in the Asian crisis) and the CMI is not fully operational.
- Countries need to clean up their banks with aggressive government involvement if necessary. We are learning just how hard this is in the U.S. — and it’s even harder in Europe where there is no single regulator or lender in charge.
- Countries must share the fiscal stimulus. Each needs to act, although some, with low debt, will be able to do more than those with high debt.
- Countries should rule out ‘beggar thy neighbor’ policies. The world cannot afford ‘buy at home’ provisions, such as the U.S. wrote into its stimulus package, or artificially low exchange rates, such as China might be tempted to pursue.
These are short-run priorities, but once markets stabilize, other complicated challenges will come to the fore. These will range from the reform of world financial regulations to climate change and trade. But all this will look more manageable if cooperative efforts to fight the crisis begin to work.
In the ashes of the old economic order, a new one is taking shape. It will be based on a coalition of countries perhaps led, but not dominated, by the United States. It will require joint policies inconceivable in simpler times. With luck — and time — these could help to turn the global economy around and lead to more effective ways to govern our incredibly complex world.
Peter A. Petri is a senior fellow at the East-West Center in Honolulu and the Carl J. Shapiro Professor of International Finance and former dean of the International Business School at Brandeis University. Reach him at [email protected]. This article was originally published in the Honolulu Advertiser on March 1, 2009.