Opinion Cannes of crises

Emerging economies had a rather sanctimonious air about them at G-20. Their governments were not paralysed by domestic politics. They were the drivers of growth,had done prudential financial regulation and could stimulate demand by increased public expenditure. How that has changed. It is very clear that the impending transitions of power in China are making fundamental decisions on the economy more difficult than we had anticipated. Growth remains strong. China has taken strides to boost consumption. But the effects have not nearly been as large to make a dent in correcting global imbalances. Serious Chinese economists like Yao Yang are warning about the risks of asset bubbles and raising questions about the health of the Chinese banking sector. China could probably do another stimulus package,but its pattern of expenditure will have to change drastically.

Then take India. Our self-proclaimed prudential management story has unravelled so fast. Inflation is high enough to cause real worries about growth. We prided ourselves on the strength of our banking sector. As the SBI downgrade shows in a small way,the health of this sector should not be taken for granted. While it is important not to exaggerate the risk,domestic inaction is putting the banking sector at risk in two ways. First,the use of a blunt instrument like interest rates to solve every single problem will make the viability of larger number of projects suspect. Second,infrastructure projects have to now bear the additional cost of delay. The possibility that infrastructure projects will find it more difficult to service their loans is considerably higher and this will have implications for the banking sector as well. In addition,with the fiscal deficit high,no movement on sensible tax reform like GST and the inability to execute current infrastructure projects,the possibilities of a new stimulus are slim. In short,we are as guilty of the sin every single political system is committing: kicking the can down the road. There is no distinctive authority we can bring to the table.

Achin Vanaik evocatively called the G-20 the steering committee of capitalism. But the picture you get is of several people trying to steer a car in different directions,with one hand tied behind their backs,and their eyes looking not at the road ahead,but sideways. What manoeuvring is possible with such driving is an open question. During this crisis,the G-20 has missed a golden opportunity to demonstrate its effectiveness and enhance its legitimacy. There will probably be some action on illicit tax havens,some tepid measures on financial regulation,calls for rebalancing — but no real credible movement on global coordination.

The G-20 can be seen in two frames. One is the classic frame of inter-governmental negotiations with all the compromises and fudging that entails. The second hope for the G-20 was that it would help move global governance out of the obdurate nationalist frames that are producing deadlocks at the global level. It would represent an institution that could rise up to the challenges of an interdependent world. While individual governments may find it difficult to tell unpalatable truths to their populations,collectively the G-20 could at least frame the issues candidly. A mode of socialisation of this group of countries would help create a better common understanding of our common predicament.

The G-20 has proved to be a failure at the second function for several reasons. It failed to directly confront many significant challenges. It failed to send a signal that it understood the depth of the crisis,and particularly the fact that a paradigm shift was needed in the role on finance. Second,the advanced economies still have not fully faced the implications of the current crisis. There are important short-term issues,like the stabilisation of the banking system and the appropriate size of stimulus packages. But what are the implications of the proposition that growth in the US now largely depends on creating a new technology frontier? It can be read in two ways. One is as an admission that standard economic measures won’t be enough in the long run to address real wage stagnation and falling rates of profit in advanced economies. Technology is a shot in the dark. Or it can be read as requiring a very radically different economic focus than what is on the G-20’s agenda. But either way the G-20 does not seem to come to terms with the deep underlying issues. Third,the G-20 was,understandably,preoccupied with financial stability. But the crisis of legitimacy it faces is this. Governments were largely talking to each other or investors. This did not matter much when the issues could be given a narrow technical cast. But when the issues have deep implications for the social contracts within each of the countries,it is odd to think that the G-20 can enhance its legitimacy without engaging wider public concerns.

Two lessons are clear. Your options in a crisis are determined by how wisely you used the good times. Otherwise a crisis can trap you. India needs to learn this lesson. Second,a collection of governments dysfunctional at home cannot collectively compensate for each other’s failings. They can only exacerbate them.

The writer is president,Centre for Policy Research,Delhi,express@expressindia.com