Kuala Lumpur, Malaysia — With the Washington Consensus from the 1980s being challenged, President Donald Trump withdrawing the United States from the Trans-Pacific Partnership (TPP), and China pursuing its Belt and Road Initiative (BRI), most notably with its own initiatives such as the multilateral Asian Infrastructure Investment Bank (AIIB), the political and economic landscape in East Asia continues to evolve. Jomo Kwame Sundaram was interviewed about likely implications for developing countries in the region and beyond.
Belt and Road Initiative
What do you think of world growth prospects and China's Belt and Road Initiative?
Although there are some hopeful signs here and there, there are few grounds for much optimism around the North Atlantic (US and Europe) for various reasons. Unconventional monetary policies, especially quantitative easing (QE), have helped achieve a modest recovery in the US, but appears less likely to succeed elsewhere. Such measures have also accelerated massive wealth concentration, which is why a few of the world's richest men own more than the bottom half of the world's population.
The situation is more promising in East Asia due to China's diminished but sustained growth, and its almost unique rising labour share of national income. Most importantly for others, China has been willing to finance massive infrastructure projects, although this has given rise to a host of problems. For example, Chinese contractors are known for using Chinese material and human resources as far as possible, minimizing multiplier benefits for host economies. A few years ago, China's ambassador to Tanzania publicly apologized for the conduct of Chinese firms in Africa, but most others tend to see all Chinese in monolithic terms. Meanwhile, US, European, Japanese, Indian and other competition for influence has helped increased options for other developing countries. However, it is not yet clear that China's BRI and 'alternative globalization' will be enough to sustain rapid progress in the region.
You once said that "If President... Trump lives up to his campaign rhetoric, all plurilateral and multilateral free trade agreements will be affected." Now, with the US having withdrawn from the TPP, why are the Japanese, Australians and Singaporeans still pushing for the CPTPP (Comprehensive and Progressive TPP) with all the others without the US?
It must be emphasized that the US, the EU and Japan have done little to advance trade multilateralism and keep the promise of the Doha Round of World Trade Organization negotiations, flawed as they are against developing country interests. Meanwhile, the Japanese, Australians and Singaporeans are trying to hype up the CPTPP as a political counterweight to China. But as a trade agreement, it will not do much except to strengthen foreign corporate power and further weaken governments, e.g., through its investor state dispute settlement (ISDS) provisions.
Why will the CPTPP have little impact on growth, but will strengthen the power of foreign enterprises?
Let us be clear that even with the original TPP, all projections, including the most optimistic ones by the Peterson Institute, projected very modest economic growth attributable to trade liberalization. US government projections were much more modest. About 85 percent of the Peterson Institute's projected 'growth gains' were attributed to 'non-trade measures', mainly broadening and strengthening intellectual property rights (IPRs) and foreign corporate legal rights against host governments with its ISDS provisions, which they are promoting as features for so-called 21st century free trade agreements. So, for example, if stronger IPRs raise the prices of medicines, the value of trade will also rise! With ISDS, if a government decides to ban the use of a toxic agrochemical to protect farm workers and consumers for instance, it will have to compensate the supplier for loss of profits!
International financial institutions
Do you think the Washington Consensus is threatened by South-led financial institutions like the Asian Infrastructure Investment Bank and New Development Bank?
Although still very influential, the Washington Consensus is acknowledged to have been superseded by new policy prescriptions. Despite recent ethno-nationalist Western reactions, all too many developing country governments still believe that further trade liberalization will boost growth. Meanwhile, financial globalization continues despite its adverse effects for growth, stability and equity.
Now, digital globalization is supposed to have wonderful progressive effects when it has clearly accelerated concentration of power and wealth, albeit with the rapid ascendance of innovative new players able to quickly consolidate lucrative monopolies.
I wish the new multilateral development banks would be bolder, but thus far, they have largely chosen to work within the dominant framework shaped by the Washington Consensus, probably to secure market confidence.
Credit from China's banks, usually benefiting China's corporations, is far more important than what the AIIB and NDB offer. Of course, lending by China's banks has undermined the BWIs' monopolies, and this has already been reflected by new policy initiatives by the West and Japan, e.g., to more generously provide infrastructure finance.
Meanwhile, the World Bank has aligned itself more closely with the UN's Sustainable Development Goals in order to provide its new initiatives to promote market-based private finance such as securities and derivatives besides public private partnerships.
You have pointed out that both portfolio investment inflows to developing countries have in recent years. Do you think it appropriate to resume capital controls, as Malaysia did during the 1997-1998 Asian financial crisis, to counter capital outflows?
With even China reintroducing capital controls, it is important to consider such options. I have long advocated counter-cyclical 'capital account management' to smoothen financial cycles, rather than to only impose controls after a crisis, as effective capital account management must be pro-active, agile, and flexible.
Almost by definition, capital account management is context specific. There are few 'one size fits all' rules. What I specifically called for in the early and mid-1990s is probably no longer relevant or appropriate. The challenge is not to expect the last crisis to recur, but to protect national economic progress from likely future threats.
Capital inflows to sustainably enhance the real economy should be prioritized, not portfolio flows which tend to be speculative, easily reversible, and do not enhance the real economy.
Jomo Kwame Sundaram, a former economics professor, was United Nations Assistant Secretary-General for Economic Development, and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.