Rethinking Bretton Woods | Thu, Mar 18, 2010
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As a recovery gets underway, the speed at which trade is regaining its pace, after having fallen in a 12 % last year, is startling observers. Without addressing some important questions about the role that trade is playing in the recovery, however, it will be hard to seriously hope for a recovery that is lasting and sustainable.
The main challenge was, perhaps, summarized by Mr. Strauss-Kahn, Managing Director of the IMF, in Davos. Referring to the growth forecast reports that the IMF is gathering from countries he said such reports “will not add up.”[i] Because exports from some countries are not matched by exports in other countries, he stated many countries will find exports and overall demand falling short of their expectations. As a result, it is expected that overall forecasts for growth will not hold.
This outcome should not come as a surprise. The G20 Leaders meeting in Pittsburgh last year agreed on a Framework for Strong, Sustainable and Balanced Growth where they vowed to “work together as we manage a transition to a more balanced pattern of global growth.”[ii] However, changing the patterns that led to the global imbalances is easier said than done. It requires profound changes to the way that trade links with production and consumption patterns in all countries. Such changes, to be fair, cannot happen overnight.
But in addition to that the policy responses to the financial crises that were developed in forums such as the Group of 20 –and, to a lesser extent, the United Nations-- were conspicuous for the narrow approach taken to address the trade dimensions of the crisis.
As the average export-to-GDP ratio in developing countries more than doubles the average in developed countries, it was logical that what started in the principal financial centers as a financial crisis, primarily hit developing countries through trade-related channels.[iii] Developing countries’ proportionally greater exposure to trade did not, in turn, happen by coincidence. For the last three decades a notable aspect of World Bank/ IMF and donor programs was the growing prevalence of the notion that boosting trade volumes would automatically lead to increased growth and revenue for countries doing so.
It would be myopic to forget that the financial crisis was preceded by a boom in trade of historical magnitude. The nature and features of that trade boom contained, in large measure, the seeds of the bust that followed. As a consequence, the crisis could have prompted a rethinking of the way in which trade was linked to financial structures domestically and globally. Yet, the main trade aspects of the policy responses advocated maintaining market access –e.g. through a revival of the WTO Doha Round and naming-and-shaming protectionism-- and enabling trade finance.
Against this backdrop, the policy responses missed a critical point. Indeed, a recovery that is merely based on a resumption of the skewed trade patterns present in the pre-crisis boom would not offer much reason for celebration.
Unfortunately, there are few signs that a substantial rethinking of the structure of trade and its links to finance has been inspired by the crisis. Though it is early to tell, anecdotal evidence from developing countries indicates that a large part of the rebound is dependent on exports and largely reproduces the export profiles present before the crisis, including the impact that the rise in prices of primary commodities had on export indicators. The recovery is led by China and a number of East Asian economies such as Thailand, Malaysia, Taiwan and Singapore, and it is largely reliant on exports. In Latin America and Africa, countries high exporters of oil, minerals and agricultural commodities before the crisis are seeing their balance of payments prospects improve mostly due to a rebound in prices of the commodities they export. Since commodity prices reached their trough in February 2009—after falling faster and by a larger magnitude than in any previous recession -- they rose a 40 per cent in 8 months (compare this to the rise at an average of 5 per cent per month in the 8 months that had followed previous recessions). [iv]
This also speaks to the difficulties that can be expected in reorienting the engines of entire economies that have been oriented to develop through trade. These problems are not only inherent to developing economies, as the situation of export powerhouses in the developed world show. In a country like Germany, for instance, where exports equated nearly half of GDP before the crisis, the government’s chosen strategy was one of temporarily containing the job losses with safety nets and preserving industrial export capacity while hoping for trade to take a fast upturn. In Japan, where exports before the crisis were a 20 % of GDP, it is reported that exports alone accounts for more than half of the rebound in growth while the domestic market remains in fragile conditions.[v]
Obviously, the necessary changes will take time, but they are not beyond the hands of governments, if action is taken soon. Among those measures that would go a long way to maximize the chances for a more lasting and equitable recovery, countries that can increase their reliance on the domestic market, either because of their size or through measures to expand purchasing power, should do so. All countries would benefit from diversifying their export production base in terms of sectors and markets. It is imperative to develop alternative monetary arrangements to reduce reliance on the US dollar as main reserve currency, by reducing the excess demand for US dollar. Strong regulation of the financial sector at the country level should be geared to facilitate that profits from trade be reinvested in the local economy, and feed an export-investment nexus.
All of these changes call, in turn, for a renewed cooperation in the regulatory framework for international finance that brings to the forefront the trade needs of developing countries.
[i] Giles, Chris 2010. IMF chief warns of reliance on exports, in Financial Times, January 30.
[ii] G20 Leaders’ Statement: The Pittsburgh Summit. September 24-25, 2009.
[iii] More on the explanation of the relationship of different channels such as debt and foreign investment to trade aspects in developing country economies in Caliari, Aldo 2009. Trade Issues Crucial for Effectively Dealing with the Global Financial Crisis in Developing Countries
[iv] Helbling, Thomas 2009. Commodity prices buoyant in year of crisis, recovery. IMF Survey. December 30.
[v] Dickie, Mure 2009. Exports mask shaky domestic outlook, in Financial Times, February 16.