Asia and the financial crisis

The United States hopes to convene next month a meeting of leaders from the G-20 group of countries to discuss the international financial crisis and come up with proposals to help prevent the economic meltdown triggered by the collapse on Wall Street last month. India and China have been invited — along with the rich industrialised countries of the G-8 and a number of middle-income emerging economies — but have not yet decided on their level of participation. India’s concerns essentially revolve around two issues. First, the utility of such a summit lies in the level of preparation that goes into it and a poorly prepared summit that fails to generate a consensual framework may prove counter-productive. Secondly, there is little sense in India and other Asian countries like China being asked to lend a shoulder if the United States and Europe are not prepared to accept the democratisation of the governance structure of the global economy, particularly of the World Bank and the International Monetary Fund that are biased in favour of North America and Europe.
If Prime Minister Manmohan Singh decides to go to Washington, he must take with him a clear set of proposals for dealing with the crisis and aimed at bringing about a reconfiguration of the governance structure of these bodies. Everyone agrees that the Bretton Woods institutions have performed miserably in the run-up to the crisis. But the crisis was not simply a failure of supervision on their part. It was a logical outcome of the mother of all moral hazards caused by the power of seignorage enjoyed by the United States since World War II and especially since the 1970s when the heyday of the dollar began in earnest. Simply put, the U.S. was able to live on a perpetual debt cycle secure in the knowledge that its economy would not be pauperised by the inevitable crash in the same way as the economies of Argentina or South East Asia were in the 1990s because its national money serves as the international reserve currency and will never be allowed to lose too much value. During the Asia-Europe Meeting in Beijing last week, there was an acute awareness of the burden of adjustment being cast on other big economies such as China, Japan, India, Korea, and Europe. To the extent to which globalisation has linked the fate of all economies, a certain amount of burden-sharing is inevitable. But India must ensure that the G-20 comes up with a balanced set of proposals that will include the right mix of emergency financial measures as well as long-term structural changes. Above all, New Delhi must closely consult with Beijing, Tokyo, Seoul, and Paris so that Asia and Europe speak with one voice on November 15.