Economic recovery has been slow in the United States and Europe since the global financial crisis of the last decade. The initial policy response to the crisis was active and positive, coordinated through the creation of the G20 leaders’ summit, and suggested that the lessons of the Great Depression had been learnt. But fear of debt and sharp turns towards austerity in key countries, as well as competitive exchange rate depreciations, have led to a downward spiral of low growth, depressed investment and secular stagnation.
This year marks a decade since the beginning of the global financial crisis. While the economic aftermath of the collapse in global financial markets has not been as bad as that of the Great Depression, political systems have not produced an answer to the problems that slow recovery brings. Last year the United States took a turn towards populism and protectionism with the election of Donald Trump. Europe is still trying to keep its integration experiment alive with countries on the periphery on life support. And the United Kingdom voted to exit the Union, beginning a process of undoing decades of painstaking political and economic progress in building European unity and prosperity.
The United States led the creation of postwar global institutions and an economic system that witnessed the greatest period of economic expansion and reduction in poverty the world has ever seen. China and the countries of Asia that have joined and committed to that system have prospered. The advanced economies that underwrote the rules-based order and invested in keeping it open and functioning are now in retreat.
The global economic tailwind that provided a favourable climate for the growth of emerging economies has now turned into an unfavourable headwind. Australia, Canada, Japan and a handful of other advanced liberal democracies have weathered the storm but they themselves are too small to prop up the global economy.
In this week’s lead essay, Mari Pangestu and Shiro Armstrong argue that Asia is now the global economy’s best hope. ‘Populist anti-trade and anti-immigration sentiments seem to be capturing the North Atlantic’, they say, and ‘given Asia is still growing faster than the rest of the world it has a peculiar responsibility to protect the global system’.
Whether Asian leaders individually or collectively are ready or not, ‘Asian economies need to lead the push-back against protectionism and inward lookingness’.
Global trade growth has slowed dramatically. Before the global financial crisis it was close to double the rate of global GDP growth — now, global trade growth is slower than global GDP growth. Three-quarters of the trade slowdown comes from a lack of investment and dynamism in the large advanced economies. The rest is due to protectionism, global value chains reaching their limits without new large countries joining, and China’s rebalancing towards a consumption and services-led growth model from one of export and investment-led growth.
Pangestu and Armstrong argue that the slowdown in trade and growth — and the fact that the economies which have thus far been guarantors of the global regime are starting to turn their backs on it — will make it harder for developing countries to achieve higher or even middle incomes.
The global economic system needs leadership. If the United States and Europe are not going to lead by example or underpin the global regime, who will?
Should China provide global leadership? The Kindleberger Trap — the idea that the United States failing to provide global public goods as it surpassed the United Kingdom in economic power led to the economic disaster of the 1930s — would suggest that China should.
It is unlikely that China can provide that leadership and global public goods on its own. It may be a large economy but it is still a developing country. And the established powers will have a harder time than otherwise in accepting Chinese global leadership given its different political system.
But China playing a central role will provide the best chance of resisting protectionism and keeping the global system open. So what should that leadership look like? Pangestu and Armstrong suggest collective Asian leadership around the deep common interest of maintaining development.
The best way for Asia to help the world will be for it to help itself. Strong unilateral action on difficult reforms will benefit the individual countries undertaking them but also act as a positive force externally. Doing so in concert would not only boost Asian trade and growth, but would also boost the global economy given that Asia is now such a large part of it.
Global institutions will need support and can provide the platform for Asian collective action. The initiatives within the WTO such as the Trade Facilitation Agreement and Environmental Goods Agreement need strong commitments and momentum that Asia can provide. The efforts at the G20 to keep the global economy on track require active support by the six East Asian members.
Building regional institutions and reaching credible agreements at the regional level will also be important. The East Asian Regional Comprehensive Economic Partnership and other arrangements will need to be ambitious and demonstrate openness to rest of the world. Now is not the time to create inward-looking arrangements and de-link from the global economy but a time to engage and support it. That will buttress liberal international forces in the United States, United Kingdom and Europe and might just help make the difference in keeping the global system open.
The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel, Amy King and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.