Globalizing Asia or Asian Globalization?

Plenary session 2

Howard Davies, Director, London School of Economics and Political Science:  Everybody understands financial growth, I won’t go through the  numbers.  But it’s also clear that the economic and financial architecture of the global economy has had trouble adapting to growth.  For example, 10 out of 15 members of the Basel committee are from Europe.  Institutions are reacting rather slowly.  It’s hard to tell countries to obey rules of conduct if they are not involved in formulating them.  Also, we have not kept up with Islamic banking.

It’s easy to say the architecture should change.  More difficult to achieve it.  At LSE last week we had a talk by Paul Kennedy.  He gave a vivid description of how each potential member of the security council generated forces against them, and how that made it difficult to change.

A cautionary note on the financial side.  In 1978,  28% of banking assets in London were held by Japanese banks.  Today it is 3-4%.  So Asian growth in financial markets is not necessarily a straight line.  Some think this is a cautionary tale for Chinese banks. 

Mario Monti (President, Bocconi University) I would like to begin to focus on the way the European experience offers lessons for Asia. 

Thoughts on 2 phrases from previous speakers.  “Asianization of globalization”.  Kishore is right. Asia is the key driver.  2nd sentence from George Yeo, who asked what is Europe’s role?  That’s mainly for Europe to decide.  He expressed a demand for European involvement, and regretted that the supply is not there.  The E.U. is so concentrated on its own internal integration. 

My statement is globalization is exploding by Asianizing.  But it will implode unless it gets Europeanized.  Globalization is not an irreversible phenomenon.  Globalization happened in the past. In 1914, many indicators of the globalization of the world economy were higher than today.  Yet it collapsed with WWI and attempts to reconstitute it in the 1920s were there but failed.  Economic globalization is probably irreversible, but I see signs of closure, anti-immigration, manifestations of a powerful backlash against globalization.  To keep globalization going, we need to make it more sustainable, more acceptable.  We need more governance of globalization, unless we are willing to see it collapse.

Here Europeanization comes into the picture.  Not in terms of taking leadership, but some of the E.U. model is the best available software for globalization.  2 key ingredients.  Integration of markets by dismantling barriers.  Elements to enhance cohesion.  Globalization at the continental level has happened in Europe because of the integration of markets and dismantling of barriers, accompanied by changes in elements of public policy.

Can Europe take on a more active role in helping the global community adopt similar procedures at the global level?  My answer is yes.  2 reasons:  1) it is often neglected that Europe is now coming out of a long dark tunnel, in the course of which Europe put together a single market, a single currency, and enlargement from 12 states to 27 states.  Not perfect, but in place.  2) since last Friday, the E.U. has a new treaty.  Not a grandiose constitution, but more of a functional set of rules.  More subjects shift from paralyzing realm of unanimity to an area where a qualified majority is sufficient.  An end to the ridiculous 6-month rotation of the presidency.  And for 5 years in a row, somebody with powers of foreign minister of the E.U..  Gradually this will bring a more common foreign policy to the E.U..  So far only in trade, monetary and competition policy has the E.U.  been able to speak as one.  Because Europe can act and speak as one, there is strong cooperation between Washington and Europe in these areas. 

In 2002, even at moment of huge transatlantic tensions about Iraq, yet in the area of competition policy it was possible to launch an international competition network.  I hope that by the new treaty there will an extension of this kind of effectiveness through unity.  It is my hope that Europe can supply the greater demand that George Yeo spoke of.

Arvind Panagariya (Jagdish Bhagwati Professor of Indian political economy, Columbia university).  Was chief econ of the ADB.  Book:  India emerging giant.

If there is going to be an impact in the short-medium run of Asianization, it is important how institutions are run.  Can they accommodate major changes in the economic side -- i.e. the enormous increase in weight of Asia in economies. 

Want to talk about economic organizations like the WTO, IMF and World Bank.

The WTO has been relatively flexible in adjusting to change.  Maybe because it is the youngest  institution.  There is equality in terms of one member one vote.  2 major functions:  1 – implementation of existing agreements.  In negotiations, larger countries have advantage, but recently see power shifting in these negotiations.  10 years ago, the U.S. and Europe led agreements.  Today we have a new quad: U.S., EU, Brazil, India.  Negotiations cannot move forward unless developing countries are on board.  China has chosen to sit back.  This is an institution where new countries have been able to exercise their power and weight.

Big challenge for Asia is the rise of bilateralism and the rise of protectionism.  Asia needs to think out and react to in substantive way.  One solution is to push the Doha round through.

Financial institutions like the IMF and World Bank have a clear distinction whether developed (part 1)  or developing (part 2) country.  These institutions are dominated by developed countries.  Developing countries have little voting power.  It is an unequal relationship.  China, which has large weight in the global economy has less voting power in the IMF than Belgium.  Clearly something needs to be done.  Capital infusion needs to be accompanied by a shift in voting power.  I don’t see that’s going to happen.  So countries are accumulating reserves in order to self-insure.

That leaves the system in the lurch.  Nobody consults the IMF in New Delhi. 

The World Bankis a huge organization.  It’s not clear what its 10,000  employees are doing.  There was a time it had a focus.  Economic reforms.  But now it is losing focus.  The current president wants to go into climate.  Bring back what wealth has gone out of countries.  I’m not sure that is a good strategy for world bank.  I’m not sure why a part 1-dominated institution should advise developing countries.  So if there were a reform of the World Bank, maybe downsize it, give it more focus.  If  the World Bank has good knowledge to disseminate, let it meet the market test.

Andrew Sheng (Chief Advisor of the China Banking Regulatory Commission).

Asian impact?  Not much.  Maybe in 30 years.  To put numbers in perspective, Asia is punching below its weight.  1/5 - ¼ of world trade and world GDP.  Stock market capitalization, 15%.  Post-Bretton Wood world of free trade.  That endowment is responsible for Asia’s growth.  Asia created a global supply chain on the back of American consumption.  Asia is mimicking european mercantilism and succeeded in the global supply chain with relatively protected services and a financial structure which is now being challenged.

So go back to old idea of… if Asia in 1830 was 70% of world GDP, and now moving back in that direction after dropping to 10% in the last century… why did Europe overtake Asia?  Demographics, governance, institutions, science and technology.  The same issues face Asia today.  How too get governance to develop science and technology.  We are reaching a stage where if all Asians consume like Americans, there are not enough resources in the world.  We’ve gone market, but realize that the market doesn’t solve all problems.  The issue now with Asia is we have super-savers who cannot have enough money to consume.  How do we build Asian institutions that preserve our savings rather than destroy it?  Changing environment has reemerged in staggering numbers. Asia accounts for 11% of world GDP.  World’s financial assets are 190 trillion.  Asia’s represent 38 trillion, of which 19.8 is Japan.  Asia’s financial assets are only 20% of the world’s, so what happens to the Bretton Woods architecture?  If you add up the balance sheets you get 950 billion dollars.  Which is 0.5% of total global financial assets.  Less than the reserves of China today.  That goes to show the difficulties of trying to manage global architecture through Bretton Woods architecture.  The reason is the Asian financial crisis.  Asians thought we were the best friends of the dollar… but when we  needed Bretton Woods institutions, we didn’t get it. Every Asian country swore this wouldn’t happen again and started to build large reserves. 

What are the issues for Asian participation in the global financial architecture?  We need more dialogue.  Asia is struggling with, “what is Asia”?  The body had changed, but the mind set has not.  There is insufficient domestic analysis – think tanks -  to think this through.  I learned that foreign policy is domestic policy spoken for foreigners.  How do you deal with the fact that increasingly your enterprises are global?  Governmental structures need to change a lot because Asian structures tends to be top down.  Hit has to be much more of a matrix in order to be flexible, resilient.  It is a fundamental problem.  Is it Asia globalization or is it being globalized?  That is the spaghetti bowl story.  Did Marco Polo bring spaghetti to Asia or from Asia?  Who cares?  It’s all over.  As long as we all enjoy globalization but don’t try to say mine is better than yours… anyway the world is measured in terms of McDonalds.  That is going to be the global currency.

Howard Davies.  Quick questions. 

Andrew Sheng.  I think Europe offers very useful ideas.  The model in Asia will be quite different from the European path, partly because the dynamics are so different.  In Europe the  largest economy is 13% of E.U.’s GDP.  In Asia, the largest is ½. 

Because of historical reasons, the idea of developing Asian policy is some distance away.  We won’t have the European solution of using a single currency to buy a coordinated policy.  I think in Asia we will go toward mutual recognition.  It will be messy, but I see hope.  Bilateral will eventually become multilateral.  The most successful part of European integration is this network of banks talking informally.  Much more successful than in Asia where there is no single forum where regulators can get together.

q. nanyang tech u.  – is the E.U. model valid for globalization?  E.U. is regulatory.  Asia is de-regulatory.  If we look back to Europe, there is increasing intra-europe integration, but integration with the rest of world is decreasing.  Take the long-term view, say 2000 years. Isn’t Europe likely to return to its role as promontory of Asia?

Mario Monti.  You are partly right on first point in the sense that much of Europe’s single market has been built up through regulation.  People tend to see the intrusive aspects of regulation, but in the E.U. model, big liberalization in Europe has been brought from Brussels through regulations to eliminate barriers.  Should there be more attention to play of market and less to regulation?

Second point about integration… expect this from regional integration.  Some people are complaining that it is not as great as they would like.  The crucial point about assessing E.U. integration… has it created a fortress Europe?  I think it has not.

q. ann florini.  Question about sustainability.  You say Asia can’t follow the western path because of resources.  20 trillion dollars is what has to be invested in new energy systems by the year 2030.  We are headed in a very unsustainable direction.  The proposal that the World Bank should be focused more on climate change is because there really is no other actor on world stage who can talk to countries about how to invest in energy.  How do we handle governance?

Arvind.  Why not other groups?  Why say the World Bank is the only organization?  If you say there is nobody else that does not give desirable outcome.  In the end, what the U.S.  treasury says matters.  The World Bank cannot have the competitive advantage in everything.  We do need other institutions to take the lead.

q. min fang from undp. Given the size of foreign reserves in China and the Asia Pacific, is it not policy overkill in terms of insurance in that there is also an opportunity cost because a fraction of some of those reserves would be better invested in other areas like infrastructure?

q. Michael storper.  In this group there is a shared euphoria about globalization and growth.  At the same time there is an astonishing rise in inequality in the world.  This is in part attributable to the usual forces of winners and losers in technology change, and in part because of a change in the financial architecture of the world itself.  What of the possible negative political consequences that might be building as a result of this?  I think there is a lot of anger in the world that we don’t talk about. 

q. univ. of Tokyo.  Andrew talked about the currency issue and said it should be far away in the future.  In Washington there is a lot of heat on the RenMinBi. 12% of GDP current account surplus, and clearly not sustainable.  I have some sympathy for China’s resistance to sharp appreciation.  I think it’s most natural that Asian currencies would appreciate together, to lessen the pressure on china.  Why not talk about coordination of policies in Asia to make sustainable development possible.  Otherwise it will be disarray in currency policies? 

q. auc.  Huge U.S. sovereign debt held in China.  Are we beginning to see the unwinding of that and is it dangerous for the global economy and how much of Asian prosperity is financed by U.S. debt back to china? 

q. hitotsubashi u. – we have other financial problems about the U.S. dollar, assets, monetary policy.  We should see not only globalizing Asia, but globalizing U.S.  There is a great imbalance and need to get together to change it.  Asia cannot take the maximum benefit of globalization without cooperation from the rest of world.

Andrew.  Not going to get into exchange rate issue.  I see imbalance as a demographic issue and not resolved overnight.  The reason I’m not getting into exchange rate is because look at the exchange rates between Europe and Japan, where the exchange rate fluctuates widely.  On the demographic issue, there is a complaint that Asia hasa savings glut.  This is partly due to the financial crisis.  Investments collapsed. We need to spend.

Which country has successfully reorganized its civil service to deal with environmental sustainability?  For the last 50 years, Asia has been the prize taker in everything.  How do we deal with situation where we are suddenly told we will be prize giver?  The whole Asian economy needs to deal with the fact that it is paying high environmental and health costs for GDP growth. 
The U.S. financial markets play a major role in recycling savings.  Asia has not done a good job of this.  How do we mobilize our savings to ensure the future of our children?  We need to deal with it not just on the financial side, but on global issues.  The environmental damage is increasingly seen as a cost we all have to bear.

Mario.  I’d like to pick up on the  question of euphoric narrative.  I don’t participate.  I think globalization is a positive phenomenon because it contributes to the growth process, but there are huge inequalities within countries.  That is why we see backlashes against globalization.  Can the global financial architecture allay these concerns?  No.  One solution that I think would take care of inequalities, unrealistic from a political point of view, is coordination in the area of taxation.  Governments have declining tax revenues from which to exercise redistribution of wealth.  But with the opening up of markets there is an unavoidable erosion of tax base.  It is incredibly difficult to have global coordination of tax policy, but also unrealistic to think globalization can proceed smoothly without.