Today’s highlights are going to be longer than usual. Hyperopia is getting the better part of me. Evidently, “looking too far ahead” is a malady of our times.
Like many people, I am gravely concerned about the state of the world economy and what kind of a social, political and economic order the crisis will leave behind. No doubt similar concerns prevailed at the depth of the Great Depression as people sought to understand and find comfort amidst the events engulfing them. It was not much later when peoples in many lands were lured by the certainties offered by totalitarian demagogues and fascists ascended to power. These days, as we grapple with the uncertainties of our times and seek comfort in “buying American,” I often wonder whether democracy is the exception rather than the rule in human history. I cannot answer that question. However, I have no doubt that we are at another turning point.
I have many concerns and near the top of my concerns is the slow demise of newspapers, not just the paper that leaves my fingers blackened, but the ideas and values that it represents, fighting to stay afloat in the digital tide while trying to hold market forces at bay. Today, when I picked up the Sunday New York Times and read article after article, I was delighted, but ended up fearing the day when I nostalgically might look back to today. Am I just getting old, or is there more to it? In any case, here are the articles that I particularly enjoyed.
Update (April 16, 2009). In “Do Newspapers Matter? Evidence from the Closure of The Cincinnati Post,” Sam Schulhofer-Wohl and Miguel Garrido (NBER Working Paper No. 14817, March 2009) write that “Although our findings are statistically imprecise, they demonstrate that newspapers — even underdogs such as the [Cincinnati] Post, which had a circulation of just 27,000 when it closed — can have a substantial and measurable impact on public life” (HT Economix). According to Economix, Ruben Enikolopov, Maria Petrova and Ekaterina Zhuravskaya, who studied “the impact of Russia’s only independent, national TV channel, NTV, on voting in the country’s 1999 parliamentary elections” reached a similar conclusion: “The authors found that access to NTV increased votes for opposition parties by 2.1 percent, and decreased votes for the pro-government party by 2.5 percent.”
In its wake, the financial crisis has left real economies in tatters. As economic activity grinds down (the IMF expects global economic activity to decline by ½ to 1 percent in 2009), and wealth dissipates (the Asian Development Bank estimates that so far $50 trillion of wealth has vanished during the financial crisis), the world faces a period of “deglobalization.”
Background
Reports* published by the IMF call for concerted policy actions to stabilize financial conditions and to bolster demand. However, current efforts on both counts are deficient: No country has yet identified effective regulatory and policy solutions. So far, the Obama administration has taken an ad hoc approach and its plan to stabilize the financial system (as the IMF points out) lacks “essential details,” while the discretionary fiscal stimulus provided by the G20 countries falls short of the two percent of aggregate GDP target recommended by the Fund for 2009 and 2010. Against this background, declining international trade and global deleveraging and contraction in cross-border lending are creating additional problems for many emerging market economies: global trade volume has dropped drastically (down 6.6 percent in January 2009 versus December 2008 and a three-month annualized average decline of 40.7 percent) and developing countries face a financing gap of $270-700 billion.
The crisis is the outcome of systemic failures and its global dimension is unmistakable. In the long run, nations must institute regulatory and structural reforms that will preempt crises of such magnitude. Some countries have already grappled with institutions that are too big to fail and several are now concerned about institutions that are too big to rescue. This calls for more international regulatory cooperation. But first, the deterioration in world economic activity must be reversed by restoring the financial sector to health and by stimulating economic activity. Both are proving quite difficult. An effective solution for the financial sector – whether it is to nationalize banks or to dispose of toxic assets by other means — has yet to emerge. At the same time, reversing the world’s economic fortunes is proving quite hard because that simply is beyond the powers of nation states acting alone. In fact, if nation states try to protect their own selfish interests in these dire economic conditions, the crisis will likely be prolonged and worsened.
G20 Umbrella
Against this dark backdrop, the G20 umbrella can and must serve two immediate purposes:** One is to provide a platform of agreement for nation states to avoid trade wars driven by protectionism and beggar-thy-neighbor exchange rate policies targeted at capturing shrinking trade volumes. The other is to implement a global and coordinated effort to stimulate economies, because the openness to free trade will not by itself suffice to reverse the decline in the world’s economic fortunes. Once the world economy begins to regain its footing, the G20 nations can start creating a blueprint for reforming and regulating the international financial system. (Although personally I am skeptical about if and how the G20 can devise an effective international regulatory framework.)
Unfortunately, the age-old free-rider problem suggests that all of this is easier said than done: The benefits of free trade and greater economic activity will accrue to all, while the costs will be borne by governments and taxpayers within national borders. Although the U.S. and the wealthier states of the E.U. can seemingly carry the burdens of costly policies to stimulate their economies and clean up their financial institutions, many emerging market economies in Central and Eastern Europe and elsewhere are not in a position to do so. How much will the developed nations be willing to help emerging market countries directly or through the auspices of the IMF and other international organizations when the U.S. and some E.U. nations fundamentally disagree on the relative merits of more regulation or more stimulation?
Other roadblocks, of no less importance, stem from the size and the composition of the G20. The G20 is simply too large to react and to make decisions quickly when a crisis hits. Further, even if the G20 countries are able to overcome the burden of size, will other nations perceive this forum as a legitimate one for guiding the world economy?
Issues for Emerging Markets
The challenges faced by emerging market economies are exemplified by the bailouts by the IMF of Latvia, Hungary, Serbia, Ukraine and Belarus in 2008 and the ongoing talks with Romania and Turkey. As an example of the challenges faced by these countries, the stand-by agreement reached by the IMF and the Ukraine is instructive (other recent stand-by agreements are similar). Are the beneficiaries of IMF’s largesse expected to tighten their belts while other countries are desperately trying to stimulate theirs?
Notes
*IMF, “Global Economic Policies and Prospects for the Group of Twenty Meeting of the Ministers and Central Bank Governors.” (The IMF’s previous report prepared for the meeting of the deputies is similar but differs somewhat in its scope.)
**Dewatripont, Freixas and Portes summarize some policy proposals for the G20. In November 2008, VoxEU.org had published a manuscript (edited by Eichengreen and Baldwin) with more detailed recommendations for G20 leaders.
I don’t wanna fade away
Oh, I don’t wanna fade away
Tell me what can I do what can I say
‘Cause darlin’ I don’t wanna fade awayBruce Springsteen, Fade Away