Friday, January 9, 2009

Foggy Thoughts on Decoupling

. Friday, January 9, 2009

Daniel Drezner on the "known unknowns" of the impact of the financial crisis on international relations:

The tight coupling of the global economy caused export-dependent economies to face significant downturns because of the collapse in demand from the OECD nations. These governments will respond to the current crisis by creating the trade equivalent of currency reserves - that is to say, creating a protected space of demand for national champions. The most direct way to do this will be to boost domestic demand while restricting competition from foreign producers. As states plan to expand their fiscal policy, it should be relatively easy - via procurement rules and concentrating expenditures on non-tradable goods - to target new government spending towards domestic firms.

This kind of decoupling would contribute to the unwinding of the macroeconomic imbalances caused by the Bretton Woods II arrangements. It would also, however, be sure to reduce overall economic growth even further. It would also reduce whatever constraints economic interdependence has placed on aggressive action in world politics.

This is, essentially, what Emmanuel and I have been arguing about. He sees decoupling-through-protectionism as a net positive because it would correct imbalances. I see it as a net negative because it seems sure to reduce overall economic growth. In any case, I don't see that decoupling is inevitable, or even especially likely. It certainly has not occurred to this point in the crisis.

I also remain skeptical that it is "obvious," as Drezner says, that the free market model is in peril and that China will benefit (in relative terms) from the financial crisis. I keep hearing that mantra a lot, but I've to hear a strong, persuasive theoretical case as to how (or even why) this shift will occur. As far as I can tell, the new economic order looks a lot like the old economic order: the international community (esp. Europe) waits for the U.S. to make the first move, the old international institutions (e.g. IMF) get back some of the importance they'd lost in the wake of the Asian financial crisis, the global recession knocks down the petrostates by a peg or two, and China steps back a bit to focus on domestic pressures. Most commentators agree on these points even as they say that the old economic order is over, and the new economic order will be massively different. When asked about details of the new order, or the mechanism by which the world economy will move to it, they generally "don't have the foggiest idea" despite being certain of the inevitability of the shift.

Emmanuel may be correct in saying that the only way to get the needed adjustment is through renewed protectionism; Drezner may be correct in saying that renewed protectionism is somewhat likely, but not profitable; Rodrik may be right that a new world economic order is inevitable. All these things remain to be seen. But for my money, the new economic order is going to look a lot like the old economic order, and the needed structural adjustments will come in spite of, not because of, targeted government interventions into the economy. I'll try to say more about that last point later.


Foggy Thoughts on Decoupling
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