Abstract
Dear Readers,
Welcome to the tenth issue of the Global Journal of Emerging Market Economies (GJEME). I write both to introduce this issue and to announce forthcoming changes to the editorial management of GJEME—specifically, that this is the final issue over which the editorial team at Emerging Markets Forum (EMF) in Washington will exercise the lead role. From the next issue (the eleventh issue), the lead editorial responsibility for the journal will pass to a new team led by Dr HU Biliang, Dean of the Emerging Markets Institute (EMI), EMF’s sister organization based at Beijing Normal University. However, to ensure continuity and at the request of Dr. Hu, I will work closely with him and act as the co-editor of the journal. Dr. Hu and I together look forward to seeing GJEME reach new heights under the new editorial team and a reconfigured editorial board.
This transition is of great significance for GJEME. GJEME’s new home is not in any emerging market economy, but in China, whose meteoric rise from poverty to affluence continues to inspire and encourage developing countries on every continent. EMI is a joint venture between EMF and one of China’s oldest and top-ranked universities.
As of this issue, the journal is in its eleventh year of circulation. Marking this milestone, I am inclined to reflect on the state of the world economy when we founded the journal more than a decade ago. At that time, the world stood at the precipice of potentially the most devastating global economic crisis since the Great Depression. Since then, most of the world has returned to growth, and spectacularly so in some cases. Yet in spite of recovery, shadows of this crisis linger in the political life of the countries it touched. Whether reflected in the rise of radical politics or in public distrust of global institutions, the crisis casts a long shadow—one with which the policymaking community worldwide has yet to definitively come to grips. With economic dark clouds again on the horizon, it is urgent that policymakers learn from the last crisis before the next one hits.
To help contribute to much-needed public reflection, we focus our attention in the first four articles of this issue on two areas of vital global importance in which echoes of the crisis still resonate. The first, inequality, has been variously deemed a root cause, exacerbating factor, and consequence of the crisis. It is arguably at fault for much of the malaise that has swept across borders over the last decade. Yet in recent years very few countries have succeeded in halting the rise of inequality and rolling back its destabilizing symptoms. At the same time, the relevance of inequality as a global policy consideration—rather than a preoccupation of developed countries only, while developing countries concentrate instead on poverty reduction—has increased. As such, to start this issue we present two insightful articles that discuss the best practices policymakers can turn to in addressing rising inequality. Both of these articles were presented at the Global Meeting of the Emerging Markets Forum in October 2018 in Tokyo, where they aroused a fascinating and introspective discussion. We will be most interested in our readers reactions to these articles by two prominent policymakers on this very topical issue.
Our first article on the topic of inequality was authored by Michel Camdessus, Co-Chair of the Emerging Markets Forum and former Managing Director of the International Monetary Fund. Camdessus makes clear that inequality is not only a “first world problem”: though globalization has led to reductions in economic disparities between developed and developing countries, inequality is higher in emerging economies than in industrialized ones. It rises as an economy begins to develop. He highlights recent studies by institutions such as the IMF that find that rising inequality has a negative impact on growth over the medium term, as well as adverse consequences on social order, of which declining trust in public authorities is but one manifestation. Inequality also puts pressure on various dimensions of people’s living conditions—including education, health, and housing—which can have combining and amplifying effects among them. To reduce inequality, Camdessus urges policymakers to focus on increasing health and education spending on economically marginalized groups, and particularly on children. Additionally, financial inclusion initiatives and investments in the human capital of poor workers are key to promoting social mobility. Progressive taxation is also essential in this context. Further fiscal space to address inequality can be found by cutting regressive spending and taxing environmentally harmful activities. Finally, he suggests that national programs to reduce inequality should be supported by a multilateral initiative on inequality, through which countries could share experiences and best practices.
In the second article on inequality, Montek Ahluwalia, former Deputy Chairman of the Planning Commission of India and former Indian Sherpa to the G-20, begins by noting the recent increased recognition of inequality as an issue of worldwide concern and argues that poverty reduction and development policies need to be recalibrated to address the distributional consequences of rising national income and resultant environmental degradation. Though income inequality has risen in many major developed and developing countries, some emerging economies have also witnessed reductions in income inequality through a combination of two factors: (1) fiscal transfers and (2) the evolution of the market-determined income distribution. Emerging economies should organize their efforts to reduce income inequality around these two areas for intervention. To progressively impact market-determined distributional outcomes, emerging market governments should work to improve economic conditions in the agricultural sector, where most poor workers are concentrated; facilitate the creation of good quality non-agricultural jobs, as these jobs are key to maintaining social order; support job creation in small and medium-size enterprises by guaranteeing robust infrastructure and access to finance; upgrade skill development programs, especially in domains where technological changes are taking place, to invest in the human capital of poorer workers; and support research that is likely to promote valuable innovation, especially in agricultural productivity and diagnostic and curative medicine. Meanwhile, developing countries face more challenges in implementing fiscal transfers than their developed peers do as a result of their limited fiscal capacity. Nonetheless, measures such as progressive taxation, inheritance taxes, property taxes, and progressivity of benefits financed by public expenditure are all potential fiscal means by which emerging economies can redress income inequality.
The second area of vital global importance that this journal issue focuses on is the outlook for multilateralism. In the past decade, multilateral institutions have been shaken not only by the global financial crisis and its aftershocks, but also by the rise of unilateralism and isolationism in developed countries’ political systems and the demands of emerging market economies for a greater share of decision-making power. As policymakers now debate how multilateral institutions will evolve in response to these shocks, we present two articles that probe the future of multilateralism from different angles.
The first of these two articles was written by Kurt Bayer, former Board member of both the European Bank for Reconstruction and Development and the World Bank, and attracted significant discussion and debate when presented at last year’s Global Meeting of the Emerging Markets Forum. Focusing on the multilateral system of economic cooperation, Bayer highlights the sources of the multilateral order’s current decay: the reluctance of Western countries to allow the recalibration of voting shares in international financial institutions to account for the economic weight of emerging markets, which has led to the establishment of alternative multilateral groupings; the declining favorability of globalization in Western countries (and in developing countries as well in some cases) due to its effects on income distribution and the environment; and, in tandem, the rise of nationalist tendencies in the West, led by the United States’ full-throated rejection of multilateralism. Despite these threats, a regime of global rules is well worth saving, albeit in a reformed state. Under an ideal package of reforms, trade rules would be modified to account for social and environmental concerns and to balance regulatory alignment with national needs; International Financial Institutions (IFIs) would place more emphasis on combating tax evasion, promoting labor rights, and incorporating civil society voices in their decision-making; and small and developing countries would have greater leeway to control capital flows for their benefit. Additionally, emerging markets would gain their fair share of voting rights and access to finance in the Bretton Woods institutions. However, current political conditions are not conducive to such systematic reforms. Plurilateralism, in which cooperative agreements are reached among “coalitions of the willing,” may displace multilateralism as the organizing principle of global governance.
On the other hand, our second article on the future of multilateralism—penned by Liu Hongfei of the China-Europe Association for Technical and Economic Cooperation, Tian Guang of Shantou University, and Kathy Tian of the University of Illinois at Urbana Champaign—considers the Chinese perspective on global governance through the lens of shifting geopolitical dynamics. Though the United States has striven to maintain its privileged position in the unipolar international system that emerged after the fall of the Soviet Union, Liu et al. argue that forces of multi-polarization in global politics will prove to be irresistible. These forces include the economic rise of China, European integration, Russia’s economic recovery, and Japan’s military buildup. Multi-polarization has also been accelerated by global economic openness and the consequent transfer of American technologies to developing economies, as well as by the growing economic weight of emerging markets and the important international groupings they have formed. According to Liu et al., the multipolar world that will inevitably result from these dynamics will be defined by its unprecedented peace, stability, and prosperity for all peoples. Yet a multipolar world will take time to create, and setbacks, including heated conflicts between major powers and uncertain global economic prospects, may delay its realization. Regardless, China should take the lead in promoting multi-polarization and laying the groundwork for a peaceful, development-oriented international order. China should do this mainly through dialogue, the authors contend, but must retain the option of using force when faced with aggressive opponents.
The remaining three articles in this issue focus on the nearer-term challenges that stand before emerging economies. One such challenge is global political and economic instability caused by recent shifts in the global balance of power, the declining role of international institutions, and the emergence of new flashpoints and tools of warfare, writes Yerzhan Saltybayev, Director of the Institute of World Economy and Politics in Astana (recently renamed Nur-Sultan). Arguing that general global instability will likely mark the years to come, Saltybayev seeks to help policymakers prepare for this paradigm by presenting the Astana Club’s rating of global risks for Eurasia in 2019. The result of 30 in-depth expert interviews and a survey of 1,000 professional respondents, this rating identifies the 10 risks most likely to affect the security of the Eurasian region in 2019, including great power and regional power relations, internal conflicts, climate change, cyber threats, and man-made disasters. Chief among these risks are worsening strategic and trade relations between China and the United States. More broadly, the survey results suggest a consensus that Eurasia’s vulnerability to global risks will increase in 2019.
Emerging market economies also face the question of how best to sustain robust growth in the years ahead. This question is complicated by the fact that the Asian “tiger” model of economic development—long touted as the industry gold standard—has lost some of its luster, writes Johns Hopkins-SAIS adjunct professor and Center for Global Development non-resident Fellow Shahid Yusuf. Low growth rates in the original East Asian tigers—and the middle-income trap in which the Southeast Asian tiger “cubs” that followed them are now stuck—beg the question: Will the East Asian development model retain its gilded status in the twenty-first century? Some see Ethiopia’s recent experience as proof that it won’t. Rather than pursuing an export-intensive development strategy, this landlocked East African state has used its massive public investments in utilities and infrastructure to achieve double-digit growth rates since 2004. Over this time period, Ethiopia has outperformed Vietnam, a late-blooming tiger economy that has adhered to an East Asia-style export-intensive development model. Yet Yusuf shows that Ethiopia’s development strategy is unlikely to be sustainable, and though Ethiopia may outdo its contemporary Asian tigers in the short term, its growth model is no replacement for that of East Asia.
However, export-intensive development can be hindered if the infrastructure necessary to bring a country’s manufactures to market is not in place. Focusing on the Indian context, Afaq Hussain, director of the Bureau of Research on Industry and Economic Fundamentals in New Delhi, writes that port infrastructure development has positive effects on trade; however, India’s port infrastructure is currently ill-equipped to facilitate the country’s emergence as an export powerhouse. In addition to machinery being antiquated and harbors too shallow, Indian ports are made inefficient by poor hinterland connectivity and the absence of customs facilities onsite. Competitiveness is also undermined by long turnaround times and the frequent failure of digital customs systems. To overcome these flaws, Hussain calls for increased mechanization of cargo handling, further integration of customs procedures into a digital single window system, expansion of dredging capacity, and development of new railways and inland waterways emanating from ports.
I hope that these articles will spark a robust discussion among our readership and in their respective intellectual circles. At this tumultuous point in history, these articles may provide some clarity to policymakers as they confront some of the most pressing issues of our time.
Finally, on behalf of the whole GJEME team, we would like to thank all our readers for their continued support of our journal. We look forward to seeing it continue to contribute to critical policy discussions in the coming years.