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Coordinating the Growth Transition to a Multipolar World

Jamus Lim's picture

Two recent op-eds, one by Gordon Brown and another by Zhu Min, made the call for a global growth compact: one where the asymmetric growth patterns of the West and the emerging world need to be coordinated, to mutual benefit; the failure of which would be due to a prisoner's dilemma outcome of self-defeating coordination failure. The thrust of the arguments is that consumption in the emerging world remains low relative to the advanced economies, and until export-and investment-led growth patterns in the developing world fully transitions toward greater consumption, policy coordination is required to support growth in both groups.

The need for international policy coordination to support growth dynamics is an argument entirely consistent with our new multipolar world economy. Indeed, with global growth poles being more equally distributed today than they ever have in modern economic history (see figure below), but the internal dynamics of growth remaining distinctly different between advanced and emerging economies, it does appear critical that coordination of some form would be necessary to avoid mutually-assured deceleration.


Source: World Bank staff calculations, from World Bank WDI database.
Notes: Indices of multipolarity calculated from data on real growth rates, PPP-adjusted growth rates, and U.S. inflation-deflated nominal country growth rates (adjusted for Harrod-Balassa-Samuelson, or HBS, effects).

But the op-eds left details on the crucial question of exactly what policies would be required tantalizingly vague. There is some acknowledgement that protectionism do the cause of international coordination no good, but reciting the refrain of being vigilant against such sentiment offers little by way of securing growth, rather than just action aimed at preventing it derailment. Moreover, a focus on one channel of global growth transmission---trade in goods and services---leaves out other important channels by which international policy coordination may matter, such as along financial, migratory, and technological flows.

 

With regard to trade, inasmuch as preventing the emergence of new barriers to trade is important, it is just as crucial that trade be facilitated. With Doha at at impasse (and trade restrictiveness already at historical lows), the gains from reducing tariff and nontariff barriers are diminishing. Far better to target the manner by which modern trade is conducted---along a supply chain---and promote the easy flow of trading activity in a multidimensional way.

Other channels matter too. The global policy discussion has stressed the idea of coordinating financial-sector policies and regulatory frameworks. But this focus harps on the command and control of international capital flows, and leaves the issue of supporting such flows unspecified. Indeed, while there are legitimate reasons (PDF) why excess volatility from (especially) short-term portfolio capital may be detrimental, most would agree that stable FDI inflows are generally desirable. But promoting FDI is as much a matter for national policy as it is international, especially with regard to improving the investment climate and overall business environment (PDF).

Promoting migratory flows can also make a difference. To build a domestic political consensus for supporting immigration in the West---where economies remain mired in high levels of unemployment---governments in advanced economies need to recognize that education serves not only a actualizing role (education as consumption) but also a preparatory one (education as investment): the need for targeted, increasingly specialized higher education has never been more urgent. Preparing the workforce with practical education necessary to be competitive in a globalized economy is entirely consistent with developed economies' traditional comparative advantage in high-skill, capital intensive workplace (A recent report by McKinsey underscores many of the main points). And even for sending nations, the empirical literature is increasingly finding evidence in support of the notion that nations with large diaspora stocks do not so much suffer from brain drain but that emigration may even generate brain gains.

The bottom line here is that international policy coordination to promote growth in a multipolar world is more complicated than simply expanding the game theory of international bargaining to N number of players (although, admittedly, that is actually pretty hard). It requires us to pay attention to the different channels by which a major economy's economic activities can flow across borders, how these can generate spillover effects on other economies, and---if such spillovers are positive---how these may be promoted, both through explicit international coordination (read: treaties) as well as through domestic action.