Because imposing tighter international financial regulations may slow global recovery from the current crisis, the new international economic order will take some time to emerge.
The overt change following a severe financial sector collapse and the recession-induced decline in trade volumes has been the emergence of the G-20 group of nations as the steward of the global economy.
However, the emergent order may remain quite similar to the pre-crisis economic order if the United States is successful in containing potential inflationary pressures from continued loose monetary policy and the dollar’s exchange value holds firm. That will eventually require a timely withdrawal of extraordinary monetary infusions being undertaken to aid economic recovery in the United States and the rest of the world.
In addition, reforms to eliminate massive fiscal imbalances in developed countries will be necessary to prevent taxes from escalating and maintain the younger generations’ incentives to continue investing in human and physical capital.
Maintaining tax rates as low as possible is clearly a prerequisite for maintaining future productivity growth and meeting emergent challenges on many fronts: population, aging, energy conservation, climate change, rising healthcare costs and so on. However, skepticism is growing about whether all of the daunting economic policy challenges can be met in a timely manner.
At the microeconomic level as well, the post-crisis economic order is unlikely to stop the erosion of economic security for workers in developed nations — indeed, quite the opposite. If the new regulatory framework being debated successfully preserves the process of global economic integration, workers in the developed world will continue to experience heightened job insecurity and competition from foreign workers.
They would be forced to adapt by acquiring new skills and being more mobile. Thus, policymakers in developed nations will face increasing political pressures to reduce these uncertainties via expanded social protections.
The economic crisis of 2007-09 has provoked different responses from different countries. Most have introduced economic stimulus packages to extend unemployment assistance, expanded public projects, supported investment and provided assistance to financial institutions to enable resumption of lending activities.
Although these supports should be removed as economies recover, they may not be fully reversed as the abovementioned economic pressures from globalization become more intense and unemployment rates remain high.
The new economic order appears likely to focus on subjecting private financial institutions to more stringent regulations so as to reduce their risk exposures. But that would constrain global capital flows, whereas the need is to expand them — and not just in the short-term to hasten recovery from the current recession.
The key for expanding capital flows, especially toward “South” countries, is reforming emerging countries’ financial systems with better corporate governance, less corruption, and growth-oriented macro-economic policies. These reforms are in the interests of both developed and developing economies, as the gains would flow to both.
Overall, forces that would interrupt globalization and those that would promote it are both present. The recent financial crisis has weakened the developed world economies, promoted “beggar-thy-neighbor” policies that benefited some nations at the expense of others and eroded support for continued globalization.
But regional interests may promote globalization in a fragmented form as countries seek to maximize the advantages of international trade and integration without any global power to enforce international laws, norms and institutions. However, such a world economic order involves considerable uncertainty and could ultimately turn out to be unstable.
Distaste for the consequences of a breakdown of the international economic order — what transpired after 1914 in terms of economic and physical destruction from two world wars — may provide sufficient momentum to allow the U.S.-led order to continue for a few more decades.
However, no nation appears capable of stepping into the U.S. role as the United States did when Great Britain was economically spent after World War II. The only candidates are Europe, China and India — but they are each either not interested or economically and militarily not capable of successfully assuming the role of global hegemon.