Global recovery and national interests

3rd April 2009 By: Seeraj Mohamed

There is talk about fixing the global economy. The G20 meeting in London in early April is one indication that countries may not exactly agree on specific actions but that they say they must work together to improve the situation. However, history teaches us that we have to be careful. There are huge political and economic stakes. The political leadership of countries will face enormous pressure from citizens and organised private-sector lobby groups to act in their national economic and political interests. The tensions between the leaders of European countries and the US are already showing. There has been trade protectionism by most developed countries. Therefore, the rhetoric at international gatherings may be about solutions that suit all parties but the actions of individual countries may very well undermine global efforts for a coordinated solution.

The period after World War II provides interesting lessons for us today. Many European countries were devastated by the war and needed huge inflows of capital for their recovery. The US economy, which had grown at a relatively fast pace during the war because of increased production for the war effort, faced a collapse in growth because of the end of the war. Further, they had to create employment for hundreds of thousands of soldiers returning home. At the time, there was huge illegal capital flight from Europe to the US. Wealthy Europeans were afraid that their governments would nationalise their wealth, tax them or force them to invest in the rebuilding of their countries. The European governments asked the US government to tell its banks to stop accepting the funds from illegal capital flight from Europe. The US government refused to cooperate. The inflow of European funds that could have been put to use to rebuild the European economies was used to help the US banks and funded the creation of US jobs. Eventually, the Marshall Plan was developed, which offset the large levels of capital flight from Europe to the US and provided finance for the rebuilding of Europe. Of course, the implementation of the Marshall Plan gave the US much power to influence economic and military policies in Europe.

The US also chose to maintain high tariff barriers and protection from imports after the war. The Europeans required revenue from exports as they were rebuilding their industries but the US was not that sympathetic. They were focused on their own problems and the production and exports of their companies. Today, developed countries will want to rebuild their industries to recover from the crisis and to create jobs. They will want to limit imports to their economies but will lobby for the markets of their trading partners, especially developing countries, to be open to their exports. Countries such as the US and Britain have a strong interest in re-emerging as global financial powers. Even though their financial institutions are damaged now, they remain the most powerful financial institutions in the world. Further, there is a huge investment of public funds to rescue the financial institutions in those countries. One way in which they could help their financial institutions is to ensure that other countries are open to the services provided by their financial institutions.

Developing countries have to be vigilant during these times because the most powerful economic and military countries usually end up shaping the institutions of the global economy. Ultimately, it is in the interests of the most powerful developed economies to promote solutions to the global financial crisis that do not regulate finance too strongly. They will also not support too much global coordination to control financial institutions. They will want a trade regime that supports their industries and not those of other countries. They may see the developing world as markets and not as partners in their efforts at economic recovery.