As Prepared:
NEW CENTRES OF ECONOMIC POWER – TOWARDS A 21ST CENTURY GLOBAL ECONOMIC ARCHITECTURE
Sanjaya Baru
In Bahrain we meet at a place which, broadly speaking, is the dividing line between the Great Powers of the 19th and 20th Century – the West – and the Rising Powers of the 21st – the East. But this so-called “power shift” is not purely uni-directional – West to East or North to South. New centres of power are emerging in both hemispheres, and old ones declining on both sides. Thus Brazil, in the West, is a rising power, while Japan in the East seems to be a declining one.
Equally, it would be premature to assume that the “shift in prosperity” that we in fact now witness, will automatically lead to a “shift in power”. In China, India, much of East and South-East Asia and parts of Latin America were are witness to the emergence of “new centres of prosperity” that have the potential to become new engines of economic growth.
Whether and when these new centres of prosperity become new centres of power is not very clear. Japan has been a new centre of prosperity for more than half a century and yet has never been a centre of power – and from Mr Takenaka’s presentation yesterday it would seem Japan is willing to abdicate whatever power it has to China!
If the new centres of prosperity were to emerge as new centres of power there would still be the question whether the resultant “power shift” would only be in terms of economic outcomes, or also result in the emergence of new economic perspectives.
After all, ever since the beginning of the industrial revolution, the West has dominated the global economy not just in terms of economic outcomes but also economic ideas. Will the emergence of new centres of economic power also imply the emergence of new centres of economic thinking? If so, that would have a profound impact on the way the global economy is governed.
However, as we go forward, and as institutions of global governance adjust themselves to new power and wealth equations, the debate will shift to the ideological implications of the changes under way. This has been best captured in the question whether the now discredited “Washington Consensus” on economic policy will be replaced by a “Beijing Consensus”. Would the so-called “Washington Consensus” be replaced by a “Beijing Consensus”? Or, would the Middle Way of free market democracies like Korea, Brazil and India gain greater acceptance?
Just as the implosion of the Soviet Union and the centrally planned economies of Europe had a profound impact on thinking about state, markets and economic policy, so also the combined effect of the Asian and trans-Atlantic economic crises and the Great Recession has been to bring into question the existing paradigm of economic and financial policy.
I believe we live in an era in which both the structure of power and the paradigm of policy are in transition and changes in both will shape the structure and content of the new global economic and financial architecture. The G-20, as yet an evolving concept, is the womb in which this new architecture will take shape.
In the past two years, the discourse on globalization and strategic affairs has focused largely on the changing economic weight of different powers. Even in the discussion on new global economic architecture the focus remains on vote shares and power equations based on economic outcomes – GDP, share of trade and investment flows, foreign currency reserves, savings and investment ratios, and the like.
As China’s economic importance grows will its views on economic policy gain ascendance over America’s? Will the thinking of G-20 be very different from that of the G-7? Will a higher vote in the International Monetary Fund for China and India imply a change in the way the IMF will view policy? Indeed, will regionalism gain over multilateralism with both East Asia and Western Europe presently focused on regional responses to their economic problems?
It is now commonplace that the global architecture of governance – both economic and political – that came into being after the Second World War is no longer capable of managing the emerging global system. The creation of the G-20 is a recognition of this reality. But we will have to await the evolution of the institution of the G-20, and of the debates in it, to understand the direction in which the world will move.
I am often struck by the casual manner in which we discuss the creation of the G-20 – forgetting the bitter battles that have in fact been fought between 2002 and 2008 on the idea of moving beyond G-7 & G-8.
The composition of the G-20 might change, indeed should and will change, but the principle of a more widely based ‘board of management’ has come to stay. This reflects the multi-polar or poly-centric character of the global power system. In creating the G-20 the United States has shown great prescience. However, it will have to take the next steps in working with other major powers to re-orient existing global institutions to reflect the new realities of power and create a new institutional architecture for global governance.
What are these “new realities” of power? Very clearly the United States remains in a class of its own, and is likely to remain there for the foreseeable future. We are not yet in the so-called “post-American world”! What is impressive about the United States is its ability to manage the emergence of new centres of power and prosperity in a manner that ensures it remains the number one power – economically, technologically, militarily and culturally.
It is at the second rung that change is under way. The European Union, China, Russia, Japan and, increasingly India, Brazil and Saudi Arabia inhabit this region. The third rung of the new power pyramid has in it, what Goldman Sachs have dubbed the “Next 11” – Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam. Among these I would watch out for Indonesia, Korea, Turkey and Viet Nam. Iran has the potential if it returns to being a normal nation.
But such a large group of countries cannot become the ‘board of management’ of the global economy. The G-20 has to congeal into a more cohesive and effective group – perhaps a G-12, with the EU and ASEAN, having one representative each.
If a balanced G-20 or G-15 is not adequately pro-active, there is the danger that regionalism may gain ascendance over multilateralism. We already see in East Asia the Chinese drive to create an Asian Monetary Fund. In the on-going crisis in Europe we see some elements emphasise the importance of regional institutions over multilateral ones. The United States shows no energy in reviving the Doha Round of WTO. An alphabet soup or noodle bowl of regional organizations has been created instead.
These trends towards regionalism do not augur well for global management and for stable growth of the world economy. It is important, especially for the world’s middle and small nations that multilateralism in trade and finance is strengthened and regionalism is not seen as a substitute, but a complement to multilateralism.
As Montek Ahluwalia said here the G-20 could serve as a closed door consultation between key heads of government that then return to existing multilateral forums to address the challenges facing the global economy.
India and the World
India’s approach to globalization and global governance has been shaped by her own experience of recording higher rates of economic growth within the framework of a more open economy. India’s strategic priority remains her own economic development. India seeks a global and regional environment and architecture that will facilitate its economic development and the well-being of its people. India’s new thinking on foreign policy was best articulated by Prime Minister Manmohan Singh in his first address to the Combined Commanders’ Conference in 2004, when he said:
“Our strategy has to be based on three broad pillars, first, to strengthen ourselves economically and technologically; second, to acquire adequate defence capability to counter and rebut threats to our security; and third, to seek partnerships both on the strategic front and on the economic and technological front to widen our policy and developmental options.”
Further elaborating this view Dr Singh told the Institute of Defence Studies and Analysis at a 40th anniversary event in early 2005:
“We must balance the pursuit of national interests with a clear appreciation of what other nations perceive as their core interests. To advance our own security interests, we must engage in cooperative, constructive and mutually beneficial relations with all major powers of the world. Most of all, we must engage in proactively strengthening multilateral mechanisms for financial, economic and political security.”
India’s first priority is its own economic development. As India’s former foreign secretary, and now a columnist in my newspaper, Shyam Saran, recently wrote in the Business Standard:
“India’s relative power globally has outstripped the indices of personal and social well-being, unlike in the established industrialised powers, where they have historically moved in sync. We will need to overcome the ambivalence this creates and embrace a more proactive regional and global role in line with our national power. A seat at the high table should be sought not as an end in itself but as an opportunity to negotiate arrangements conducive to our economic and social development, and the overall welfare of our people. That should be for our agenda for the next decade.”
Mr Saran calls India a “Premature Power.” India therefore seeks a stable global order that will facilitate a smooth transition from the bipolar and unipolar world of yesterday to the multipolar world of tomorrow. Unless multilateral institutions are strengthened, the power vacuum created by the decline of erstwhile great powers will be filled by new claimants. This can set in motion a phase of great instability and conflict like what we saw during the first half of the 20th Century.
Let us recall the fact that it was the destabilizing effects of the Great Depression, at a time when the Soviet Union was on the rise, that initially made western powers be accommodative of Hitler’s rise. It was the inability of European powers to reverse the economic consequences of the Great Depression and the political consequences of the rise of Stalinism and fascism that led to the Great War. It is out of that chaos that we inherited a multilateral system of economic governance that is today in need of repair.
India’s position is, to be sure, defined by two seemingly contradictory perspectives: One, as a re-emerging economy and a rising power India seeks a re-structuring of existing international regimes and institutions. It is, therefore, a revisionist power. Two, as a firm believer in rule-based conduct of international affairs India seeks strengthening of multilateral regimes and institutions.
Thus, in the case of trade policy, India remains firmly committed to multilateralism and to the strengthening of the World Trade Organisation, but at the same time would like to ensure that the Doha Round adheres to its original commitment to ‘development’; at the IMF India has supported the infusion of funds into the IMF but at the same time has sought appropriate policy conditionality based on the experience of the emerging economies.
I believe this is also the approach of countries like Brazil and South Africa. They would like a stable global order that is more representative of existing realities and a strengthening of multilateral institutions, but one based on new thinking on economic policies that is reflective of the experience of the past decade and more.
However, even as India seeks to strengthen the multilateral order, it will remain actively engaged in building regional institutions, so as not to be left behind. For this reason India launched its “Look East Policy” that has now enabled India to be a member of the East Asian Community building process.
More recently India has launched a “Look West Policy” aimed at re-connecting with the member countries of the Gulf Cooperation Council. India has historic, cultural, indeed civilisational, ties with the Arab world. Today it has strong economic, people-to-people and business-to-business links with the region. These links, and India’s own economic interests and energy and maritime security considerations are driving its strategic engagement with the Gulf. India will be actively engaged in community building within its east Asian and west Asian neighbourhoods, around the Indian Ocean region, but work consistently with other major powers to build a new, more representative, global architecture of economic governance.
