Robert Zoellick, President of the World Bank Group, gave a speech today at SAIS. He shared his views on the crisis, especially what's up after the global financial crisis. He blames the rational choice theory and the lax oversight by central banks. He argues that the US won't have the same economic clout as it had before the crisis. China, India, Brazil and other developing nations will emerge more stronger than ever. This won't mean that the US will totally lose its clout. It will still have influence over economic and political matters but not to the extent prevalent before the crisis. He opines that that addressing large deficits and controlling inflation would determine the strength of the dollar and the US economy. Trade protectionism due to the global financial crisis has been a "low-grade fever but the temperature is rising." Similar point was also made by other economists as well. He also called for harmonization of the Doha Round with regional agreements. The IMF's managing director also gave similar speech last week.
Some seeds of today’s troubles were sown by the responses -- or lack of them -- to the financial crises of the late 1990s. After the Asian financial crisis, developing countries determined they never again wanted to be exposed to the tempests of globalization. Many “insured” themselves through managing exchange rates and building huge currency reserves. Some of these changes contributed to imbalances and tensions in the global economy, but for years governments muddled through amidst generally good growth.
...the alluringly simple design of “rational markets” theory led regulators to take a holiday from the realities of psychology, organizational behavior, systemic risks, and the complexities of markets and humans.
The current assumption is that the post-crisis political economy will reflect the rising influence of China, probably of India, and of other large emerging economies. Supposedly, the United States, the epicenter of the financial crisis, will see its economic power and influence diminish.
The future for the United States will depend on whether and how it will address large deficits, recover without inflation that could undermine its credit and currency, and overhaul its financial system to preserve innovation while adding to safety and soundness.
Over 10 to 20 years, the Renminbi will evolve into a force in financial markets.Countries and markets may also experiment with financings denominated in Special Drawing Rights –or SDRs— which reflect a portfolio of major currencies. [...] Of course, the U.S. dollar is and will remain a major currency. But the Greenback’s fortunes will depend heavily on U.S. choices. Will the United States resolve its debt problems without a resort to inflation? Can America establish long-term discipline over spending and its budget deficit? Is the country restoring a healthy financial sector capacity for innovation, liquidity, and returns, without producing the same risk of big bubbles and institutional breakdown? The dollar’s value will also depend on the extent to which we see the return of a dynamic, innovative private sector economy.
Central banks performed impressively once the full force of the crisis hit. But there are reasonable questions about how they handled the build-up, including asset price inflation and significant failures of supervision. We have yet to see whether Central Banks can handle the recovery without letting inflation get out of control.
On the protracted Doha Round:
The Doha Round could cut, discipline, and even eliminate some agricultural subsidies that for years were left outside the rules-based trading system. It could modestly open markets for manufacturing and agricultural goods in developed and major developing economies. It could “bind” barriers of major developing countries at much lower levels, increasing the sense of mutual contributions and limiting the risks of big jumps in tariffs. The Doha Round could also open service markets and cut developed country tariff peaks that limit basic manufacturing and value-added production in poorer countries. The Round could correct rules that have been bent to limit trade too freely. These are real gains and would demonstrate the capability of developed and major emerging economies to compromise to achieve a mutual and systemic interest.
We need more help for the poorest countries that have been less able to seize growth opportunities from trade. [...]The new agenda needs to build on early efforts by WTO’s Director General, Pascal Lamy, supported by the World Bank Group, to link trade facilitation to aid for trade. To capitalize on lower barriers to trade, poorer countries need: regional integration to build bigger markets and access for land-locked countries; energy; infrastructure; logistics systems; ready access to trade finance; assistance with standards; and streamlined customs and border procedures.
On Africa's potential:
Over time, Africa can also become a pole of growth. The messages I hear in most African countries are the same: Africans want energy, infrastructure, more productive agriculture, a dynamic private sector, and regionally integrated markets linked to open trade. It is a message one might have heard in a devastated Europe 60 years ago.
China’s African prospects -- which include resource development and infrastructure -- are likely to be complemented by others. Brazil is interested in sharing its agricultural development experience. India is building railways. These are the early days of a trend that will build.