Column: The America Asia issue of our time

Written by Michael Walton | Michael Walton | Updated: Oct 16 2009, 03:43am hrs
Globalisation needs to be managed, or things could get nasty. I f globalisation is associated with heightened insecurity or social injustice, apparently fringe sentiments could become mainstream. Think of the consequences of stalled globalisation between the two World Wars.

So what does the management of globalisation look like in the wake of the financial crisis At first sight, surprisingly good. The crisis itself was a disaster. Yet the response, while far from perfect, had some genuinely positive features with respect to global management. There was impressively widespread adoption of expansionary fiscal-monetary policies to offset the crash, both in rich countries and in major developing countries, including China and India. The IMF moved swiftly to support contracyclical policies, consistent with its new aspiration to be an instrument of international collective insurance; and it quickly got additional resources to further this end. And the G-20 group of countries surged into prominence, with the G-7 increasingly (and hopefully) eclipsed in the realm of international management.

Two other things became clear as the crisis unfolded. First, as in Keynes diagnosis of the Great Depression, there is not a fundamental crisis of capitalism, but a failure in its management. This requires better domestic and international instruments. Second, there was a symbolic push to the relative rise of Asia in the global economy. In the short run, most of developing Asia displayed impressive short-run resilience, even as rich country growth turned negative and exports were crashing.

It is, however, way too early to celebrate global coordination. Future management challenges will be a lot tougher. The crisis was unusualthe private interests of nations were largely aligned, and action was not crippled by the burden of inappropriate ideology, as it was in the 1930s. The decline of US dominance, and the relative rise of Asia, while surely good, greatly magnifies the coordination challenge.

Most problems of global action, whether in the area of financial regulation, trade, climate change or international terror, involve collective action to manage a common good (or bad). This week Elinor Ostrom shared the Nobel Economics prize for her work on the management of the commons. She has explored how sophisticated coordinatory mechanisms have often evolved for the governance of the local commons. But such local arrangements typically emerge from intensive social interaction over long periods of time, and can be particularly hard when participants are heterogeneous, with conflicting interests, and in the absence of a dominant actor. Thats the essential insight on why managing globalisation is hard in general, and getting harder.

Take the seemingly relatively conflict-free area of economic management. The IMF has behaved very differently in the current crisis. But it is currently run by a politician-economist from the French socialist party, in Dominique Strauss-Kahn. In the future it may well revert to type, and countries will be appropriately cautious about putting their insurance eggs into that basket, absent fundamental governance changes. A countervailing Asian monetary fund may sound attractive, but its hard to expect much, given the levels of mistrust between Japan and China or between China and India, not to mention resistance from the US and Europe.

If we look at a really hard area, such as climate change, the challenge is much greater. The prospect of a good agreement in Copenhagen over climate change looks dim, when failure to tackle that collective action problem could lead to a real disaster for the world, orders of magnitude worse than the financial crisis.

So the good news is the growing awareness that the balance of power in the management of globalisation has shifted. The bad news is that this is only the beginning of the problem. There are no obvious easy answers. The idea that nation-states will delegate power to global governance arrangements is utopian. The emergence of the G-2, of the United States and China, as a coordinatory arrangement, could be a good thing for shaping proposals, but does not solve the problem of collective action among heterogeneous nations. A first step is to recognise what is at stake. Globalisation is needed for the transformation from deprivation to prosperity. Global management is needed to sustain, and not destroy, this. If globalisation is ill-managed, in particular if it is seen to be a source of insecurity and injustice, the backlash could be severe. Tackling this is a central challenge of our times.

The author is at the Harvard Kennedy School, the Institute of Social & Economic Change, and the Centre for Policy Research