FOR decades developing countries have criticized the global economic order for what they called its imbalance, the dominance of a few rich countries over the numerous poor countries, particularly their power to determine commodity prices and financial flows.
They even proposed the establishment of a New International Economic Order that would equalize economic power among nations. However, efforts toward equalization have met with limited success.
This has to be at the core of the remarks made recently by Indian Central Bank Governor Raghuran Rajan before a university graduating class.
As reported, the governor said that global rules are tilted in favor of developed economies and the onus lies on emerging markets to reframe them to ensure fairness for all. If developing countries were weakening their currencies, they would have been labeled manipulators. But there are no such limitations on the use of accommodative policies in advanced countries.
“There is a concern that the rules of the game are not clearly set in the international world.”
This space espouses the idea that individual countries must pursue policies they consider to be in their best interest, never mind that their neighbors think these are prejudicial to them.
For example, we support the Japanese government’s weakening of the yen, as a component part of its general expansionary policy, even if some observers say that such weakening hurts other countries. We even gave endorsement to the Chinese government’s refusal to revalue the yuan, notwithstanding the United States position that it should. We also support such arrangements as free-trade agreements, customs union and regional integration, among countries, because these are conducive to the acceleration of the development of participating countries.
The intention is not to injure neighbors but to allow them their own freedom to mobilize measures to benefit their own people. The international order may be put under stress but it has overseers to see to it that it does not keel over.
The theory of second best says that so long as the world economic system is riddled with different tariffs, quotas, taxes and other exchange-restricting measures of participating countries, small groupings of countries that promote freedom of exchange among them represent an improvement over that global order in which no such groupings exist.
The ideas expressed above clearly represent second best solutions. They do not necessarily promote global free exchange but they certainly do not impede it.
The global capitalist order is characterized precisely by the inequality of economic power between the investing class and the working class. Revolution after revolution have been launched and pursued in every nook and cranny of the world but they all have failed; the inequality is still there, in fact, it will intensify as the 21st century unfolds, according to French economist Thomas Piketty.
But this should not mean abdication of efforts to reform the system, only to find new ways to “rebalance” it. Rebalancing will give developing countries opportunities to grow and develop in a level playing field.
Image credits: Jimbo Albano