Many have already pointed that as the current crises are affecting global economies alike, a glbalized solution is better option. But as it is clear that global economic eco-system is not homogenous, we can not have a global solution. We can have a solution that addresses local challenges within the globalized framework.
For example consider Asian economies: Some of the Asian economies like China, Taiwan, Malaysia, and Vietnam. They have been strong manufacturing bases whereas states like India have been very strong in IT / IT enabled services.The trade flow helped these states to accumulate forex. In that process some of the states have gathered excess of reserves. They justified this as a resource to meet the external trade and debt payments requirements. Another regular explanation has been “to counter risks that prevailed during Asian financial crisis”. There have been various opinions about “How much (of reserves) are sufficient?”. Guidotti-Greenspan rule tells that reserves should equal to short-term external debt (one-year or less maturity), implying a reserves-to-short term debt ratio equal to 1. The rationale is that countries should have enough reserves to resist a massive withdrawal of short term foreign capital. The central banks at these states have invested heavily in US treasuries to secure value of those forex reserves. Even though the Chinese premier had expressed his concerns about the USD recently, the statistics show that China still ended up bying few more billions of USD - T bills (total accumulation stands in excess of USD 700bn).
They swapped the opportunity cost that they incurred by not spending (some of those excess of reserves) to boost their internal consumption with protection against currency crisis. In most of these economies, capital allocation for infrastructure development, education and healthcare has been insufficient. End result is under-development and over dependence of export revenues of certain industries in those economies. If the IT / IT services industry in India has been very strong, Indian economy would have able to fare better during this meltdown. In addition to what they export, if the internal consumption in China is strong they would have been insured to some extent.
During the current crises, a solution for a manufacturing economy might not be a very good solution for a service oriented economy. A solution suitable for EU / USA is not entirely helpful for Asia. Western countries have subprime crisis that has lead to financial institutional failures which have resulted in credit & liquidity crisis, markets meltdown. Economic crisis were a consequence of the above all. The origin of subprime crisis can be found in cheaper credit availability to the western consumers thru excess savings from Asia. The Asian economies derive part of their GDP directly from the exports to Western states and some of the other part indirectly. Therefore they have economic crisis that had their markets meltdown. The economic crises in Asia are originated out of excessive dependency of export of (goods and services) to western states. Global financial markets integration had accelerated the meltdown. As the origin and nature of problem is different for states, it is very difficult to have a common solution.
A common solution would find resistance based on domestic political compulsions that governments face. Even though the ECB wanted to reduce the Euro area interest rates, they failed to reach consensus as the German central bank and some others have concerns about inflation as a result of very low interest rates. Their stance could be justified in large capital that these governments have supplied into markets. To counter this, it was suggested to empower IMF to take a proactive role in helping developing nations, while the donor states pitch-in more monies. However given the large sums that many western states in G-20 have spent for their bank rescue and stimulus packages, they are constrained in that front as well. Countries like China are willing to shoulder additional financial responsibility, if they get more voting rights at IMF etc. It is clear that national political goals are more important. Even this type of solution has its own limitations.
On top of that, countries like China & India have to improve their internal consumption immediately. For that western style of stimulus is just not enough. For a service oriented economy like India, the vast opportunity lies in government sector. This sector has limited IT penetration. If the advanced IT tools are deployed, with government spending, Indian IT companies get revenues that are independent of global economies. China has already changed economic policies in the form of offering loans to SME and individuals to boost consumption and ensuring liquidity at the banks to meet the additional capital requirements.
The current crises have their origins entangled. Globalization & financial innovation and integration have made them complicated. The solution for G-20 lies in working together and collectively lifting the smaller states out of rut while pulling themselves individually.
Srikumar Aduri is an active researcher in global macroeconomic policies and European Energy markets. email: adurisrikumar@yahoo.com