The Hindu Business Line : Tilting at ideological windmills

The summit of the leaders of major economies that took place on November 15 lived up to its expectations — nothing much was expected out of it! So what little was achieved was welcome. Here were the leaders of 20 major economies of the world, developed and developing, accounting for over 85 per cent of the economic activity of the world, and it was just a collection of missed opportunities. But it was also, probably, an indication that these leaders want to be seen to be doing something though they do not really know what is to be done, other than tweaking a few regulations here and there.

It is, of course, good that these leaders meet regularly to shake hands and get to know each other. But that should take place at a beach, over fine wine. This meet was taking place in the midst of a serious global crisis, with major developed economies in recession, and enveloped by a host of problems that arose due to poor economic management, and all that they agreed on was that there was need for coordination.

They also agreed that they would continue doing whatever it takes, and this means that each nation would do what it anyway planned to do. This could have been achieved by an exchange of e-mails.

Ideologically loaded

A fundamental problem is that the nations of the world are caught in an ideological bind. The Europeans, led by French President Nicolas Sarkozy who initiated the idea for this summit, are more Keynesian in their outlook. They are looking for greater government regulation and intervention, and are also willing to go to a cross-border regulatory agency to achieve it.

The US President is not in favour of that level of activism and would like each nation to fix gaps in its own regulatory framework and keep interference in the market to a minimum. This is not too wide a gap to bridge. The problem is when ideologically loaded terms are introduced into the discussion.

At a time when action and firm decisions are required, the US president has taken to tilting at windmills with philosophical debates.

The convenient windmill is that of capitalism and socialism. Bush has been going around giving speeches in favour of free-market capitalism. He reminds us that it is not a perfect system, but it is better than any other, and many countries in the world have seen prosperity by following this path. Just a few weeks ago, the campaign of Senator McCain, the Republican contender for the presidency, tried to paint his democratic opponent as wanting socialism.

What Bush or McCain don’t seem to have understood is that neither capitalism nor socialism in its pure form exists anywhere on the planet. And no market is totally free.

If some sections of the public, or some sectors of the economy, need more assistance than others, the government needs to respond. Capitalism and socialism are dead labels that carry unnecessary baggage. Bringing up those terms is merely a diversionary tactic.

Contradictory US signals

The irony is that the US, till now, has behaved more like a socialist administration than any other, while mouthing capitalism. It has pumped in more money into the economy through stimulus measures such as sending cheques to its citizens, has bailed out more private enterprises, and undertaken more nationalisation of private assets, than any other major economy.

And, yet, by simultaneously talking against government intervention, the US is sending contradicting signals that add to the confusion in the market place of what can, and cannot, be expected from this government. Even the term ‘industrial policy’ remains a bad word in American phraseology. Bush seems to be confused on many other fronts. He accuses, in his article, that two government supported institutions had bought ‘irresponsibly large portfolios of mortgage-backed securities.’ But that is the purpose for which those institutions were set up, namely, to buy mortgage backed securities. The problem was not the size of that portfolio, but that the underlying assets were based on fraud and bad lending practices.

Since the host of the summit brought such confused thinking to the table, not much could be expected as an outcome of the summit. Summits usually take place after months of preparation.

This was hastily arranged, without any clear agenda of decisions to be taken. Successful summits also end with strong declarations of intent. This ended with a whimper, with the leaders directing their finance ministers to meet to coordinate.

Recall what happened recently in the EU. The leaders met and agreed on a coordinated response, and then each went his or her own way making decisions on freezing accounts, and bailing out banks.

If that could happen within the EU framework which has policies and procedures in place and institutions to enable coordination, imagine what one can expect from this motley bunch of world leaders with a lame-duck president as the host.

Room for hope

But then, perhaps, all is not lost. The joint communiqué issued comes quite close to including a mea culpa from the US. It says, “Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.”

It also avoids the distracting terms capitalism and socialism, although their proxies, free-markets and regulation find their places.

The action steps listed mostly deal with accounting standards, need for transparency in financial markets and institutions, and how to regulate those financial markets. There are no indicators of how these countries plan to address the larger issue that is facing the world, namely the slowing down of growth and the creeping recession.

While the collapse of the financial markets has hastened the decline of confidence in the economies and the recessionary trends, fixing the financial systems is not going to pull economies back to the growth path.

The inclusion of developing economies at the table is perhaps a worthy outcome of this summit, and an admission that they are also heavyweights on the global economic front and need an equal voice.

US President-elect Obama stayed away from the summit, sending instead a couple of emissaries who perhaps had the authority to listen and not speak on his behalf. Presumably, he did it because he believed that there is only one person who is the President of the US at a time and that is Bush. That is a noble sentiment and shows his support for the institution of the US presidency. But it was a serious tactical error.

Obama has been talking about a more active role for the government through stimulus and tax cuts during his campaign. Even if he had not firmed up his plans, his presence would have been a great opportunity for the leaders who responded to the US invitation to hear directly from him his thoughts for how the US will respond in the future. The next meeting of the group is to take place in April 2009 and hopefully, by then, the world leaders would have had a few months to initiate some action.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. blfeedback@thehindu.co.in)

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