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Tuesday 22 Aug 2017 | 15:30 | SYDNEY
Tuesday 22 Aug 2017 | 15:30 | SYDNEY

Financial crisis: Bad for the West, but also the rest



14 November 2008 14:57

Such has been the scale of the global financial crisis that it is increasingly assumed it will mark a watershed for the world economy. In particular, many observers seem to see it as heralding the decline of the West and the rise of the rest. That might well be turn out to be the case, but it seems to me far from a foregone conclusion.

At first sight, the argument that the financial crisis is accelerating the decline of US economic predominance and simultaneously stimulating the rise in relative power of the emerging world seems pretty straightforward. After all, the epicentre of the crisis has been the US, and much of the fallout has been concentrated around the Atlantic economies. Certainly, there can be little doubt that the blow to US prestige and credibility arising from the effective collapse of its financial system is substantial. Not to mention the looming cost in terms of foregone growth and increased government debt. 

Then there is the grinding of teeth occasioned in East Asia (and elsewhere) at the marked difference in the economic policies now being followed by Washington as opposed to those it propounded during the 1997-98 crisis. The decision to turn to the G-20 also reinforces the idea of a diffusion in global economic power. All of which seems a reasonable interpretation of events. And yet...

One of the key features of the world economy in recent years is that in many ways it has turned out be particularly congenial for many emerging markets. Or to put it another way, the international economic environment has been very helpful in terms of facilitating the Great Convergence. This is not to say that external conditions have been the driving factor behind economic success in a China or an India – clearly, domestic policies have been at the heart of the story. Nor is to suggest that there haven’t been important downsides, such as volatile international capital flows. 

But equally clearly, the external environment has been a positive for convergence. So if the financial crisis does trigger a fundamental change in the way the world economy operates, it is not obvious to me that this will result in an acceleration of the convergence process. It may well do so. But it is also quite easy to tell stories in which the opposite is true. Think of a world economy marked by more protectionism, slower growth, and greater economic nationalism. That's not an environment likely to stimulate rapid convergence, except insofar as we might all fall down together. 

If the future of the world economy really is up for grabs, policymakers are going to have to make sure that the outcome is a good one for all of us. To that end, maintaining an open world economy needs to be one of the main objectives of this weekend’s G-20 leaders meeting.

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