Saturday, January 3, 2009

The New Economic Order: Same As the Old Economic Order

. Saturday, January 3, 2009

Dani Rodrik:

It will be a watershed year, ushering a new world economic order--with the disorder most likely coming first. I just don't have the foggiest idea what this new order will look like.

It will be a time when we will all have to change our tune and have to think out of the box. I for one will worry more about growth in the advanced countries than in the developing world, will be warning against the dangers of protectionism, will be singing the praises of the IMF (if its recent actions and pronouncements are a guide), and will fret about too much state intervention. Changing times require changing lines...


Rodrik is certainly not the first to predict a "new world economic order". All sort of talking heads, pundits, economists, political scientists, and politicians have been saying the same. Like the others, Rodrik is short on details ("I just don't have the foggiest idea" is a typical comment). But Rodrik is one of the smartest and most intellectually-honest international economists working, not a soundbyte-seeking talking head or politician, so his pronouncements are certainly worth noting. If he thinks a new economic system is in the cards, then I'll take the notion seriously.

But I don't understand his basis for making such a claim. In the same post he says "the crisis has demonstrated the deep divisions within Europe—on everything from financial regulation to the requisite policy response" and concludes that the best that we now can hope for Europe is that they don't "undermine" the policy actions of the United States. Rodrik also says that China's influence on the global order is likely to decline as they shift their focus to domestic concerns, and that the I.M.F. has been and will continue to be one of the biggest players in this crisis. Meanwhile, falling gas prices signifies a decrease in influence for the energy-exporting countries (e.g. Iran, Venezuela, Russia) that had recently been flouting the U.S. and the 20th-century economic institutions.

So... the influence of China, Russia, and Europe declines and the influence of the U.S. and I.M.F. increases. How does this represent an over-throw of the old economic order?

To be sure, some tweaks to the system will be made on the margin. Perhaps some sort of international banking standards (such as reserve requirements) will be enacted, but these were not the primary cause of the crisis. Perhaps some sort of Tobin tax is put in place to prevent future Iceland-like implosions (although I doubt it). Perhaps greater regulation of ratings agencies will be put into place, but that would likely happen at the domestic, rather than international, level. What else do you want? Replacing mark-to-market accounting practices? Mandating maximum leverage levels? Again, these things may have exacerbated the crisis, but they didn't cause it.

In any case, marginal tweaks to the system do not a New World Order make. Indeed, it seems most likely that the most significant changes to the international financial system in the next year will be the changes made to the domestic financial structure of the U.S. And if that is true, then how can it be said that the age of the liberal international economic order is coming to a close?

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The New Economic Order: Same As the Old Economic Order
 
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