April 29th 2006

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Articles from this issue:

COVER STORY: Taking stock of the wheat scandal

EDITORIAL: Watering Australia: a national priority

BORDER PROTECTION: Why Australia needs naval, air force bases in Torres Strait

NATIONAL SECURITY: Lives endangered by latest intelligence leaks

ENVIRONMENTALISM: How the Great Barrier Reef is mismanaged

STRAWS IN THE WIND: Labor misses the bus / All is vanity / Kosovo's mafia / When the bills come in / Open season on Christianity

REGIONAL ECONOMIC POLICY: The end of international economic cooperation? (Part 2)

PERU: Latest Latin American country to turn left

SCHOOLS: The choice so few parents can afford

MEDIA: ABC's Easter assault on Christianity

THE WEST AND ISLAM: No alternative but to defend our values

Social cost of unfettered capitalism (letter)

Robert Manne's media critique defended (letter)

Why have a Department of Foreign Affairs? (letter)

CINEMA: Caped crusader for the know-nothing left: V for Vendetta

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The end of international economic cooperation? (Part 2)

by Colin Teese

News Weekly, April 29, 2006
In the second of two articles, former deputy secretary of the Department of Trade Colin Teese looks at why the postwar international financial order, which delivered economic growth and prosperity for so long, collapsed; and whether there are possibilities for closer financial policy cooperation in the Asia-Pacific region.

We previously discussed a plan, under consideration by the major economic powers of the Asia-Pacific region, for closer financial policy cooperation. Countries that could be involved in this project include Japan, China, Korea, the ASEAN nations and possibly India.

In this article, we will discuss why such an approach might be considered and, in a necessarily speculative way, what might be the implications arising from this development - generally, for the wider world, and for Australia as well.


What the Asian economies apparently have in mind can be more easily understood if we regard the development as a reaction, at least in part, to the changes in political and economic relations which have been happening, and are continuing to happen, in the world around them.

Even the most casual observer is able to identify important shifts in the way nations are relating to each other, in particular, a return to nationalism. It seems quite likely that the carefully constructed institutions and binding considerations which have kept the world more or less in equilibrium since World War II may be unravelling.

The Allied victory at the end of that memorable conflict created, as we all know, an entirely new edifice for the conduct of international relations. According to the wisdom of the times, an enduring peace required much more than having the right political structures: also essential was a framework that would ensure full employment and an enduring trickle-down of economic prosperity.

The essential underpinning for all of this was understood to be a commitment by the nations of the world to international cooperation rather than the confrontational politics which had characterised the period before World War II.

The United Nations provided the political architecture for the new international cooperation. Within the UN were many subsidiary agencies, including the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (the so-called World Bank) and the General Agreement on Tariffs and Trade (GATT).

These three organisations would carry collective responsibility for managing the world economy and the way individual governments related to it. The IMF was responsible for providing a stable financial system; the GATT would define and administer fair and reasonable rules for the conduct of international trade; and the World Bank would help with loans to fund reconstruction and development of the postwar world.

Fundamental to this structure was the belief in the idea of international cooperation. Within the UN itself and its associated agencies, governments met and discussed cooperatively all of the issues concerning them. Multilateral diplomacy was born.

The United States had emerged by the end of the war as the West's economic and military superpower. Thus it was understood, at least in the Western world, that the US's commitment to the UN system and to a stable postwar international order was absolutely essential.

The US's leading role became all the more important as it became increasingly obvious that the emerging Soviet empire lent only qualified support to UN principles.

This was despite the fact that the Soviet Union, as one of the victorious allies, was a major participant in the United Nations, although, for obvious reasons, it took no part in any of the capitalist-oriented economic agencies.

Despite all the tensions of the Cold War, this international system worked. In fact, it delivered to the West 25 years of unparalleled peace and prosperity and thereby helped to undermine the appeal of communism.

Almost 20 years after the collapse of Soviet communism, the world - including, most notably, the US - seems to have given up on the postwar international system that delivered so many benefits.

In the minds of some, the events and circumstances leading up to the 2003 US-led invasion of Iraq marked the turning point. Certainly, it is true that, in the context of Iraq, the United States made public its bedrock hostility towards the United Nations - repudiating the idea of international cooperation, and expressing, instead, a preference for unilateral action.

Change in attitude

But it has to be said the change in attitude about the value of the postwar political and economic structures goes back much further than 2002-3. And, it had its roots in economics rather than politics.

Cracks in the IMF first began to appear at the beginning of the 1970s. Because the US economy could no longer sustain the idea of a world trade and payments system based on fixed exchange-rate relativities to the US dollar, the Western economies were compelled to allow markets to determine the value of their currencies - what is called the floating of national currencies.

Under this regime, currencies became a traded commodity rather than the means by which real international trade was facilitated. In the process, the IMF's role also changed. No longer a moderator of currencies, it was to become instead a kind of international financial policeman on behalf of speculatively-motivated financial institutions.

Nor was the GATT, as guardian of international trade rules, immune from these changes. Financial market deregulation and pressure for free trade conspired to made life difficult for the GATT. And so did the pressures applied from the US and the European Union - at entirely the wrong time - to expand GATT rules to cover trade in services as well as goods.

Meanwhile, the vexed issue of agricultural trade subsidies remained unresolved. This latter issue was important, not for itself, but because those who wanted the rest of the world to provide them with new concessions on the trade in services were none other than US and EU, whose farmers were absolutely dependent, and would remain so, on agricultural subsidies.

Both these major players came to the negotiating table with big wish-lists and little to offer in return. No wonder the GATT began to feel the strain.

Nevertheless, a new round of trade-liberalising negotiations was begun, and, at its conclusion in the mid-1990s, the World Trade Organization (WTO) replaced the GATT. No deals had been made on the trade in services, although some kind of outcome on agriculture was cobbled together at the last minute when the negotiations seemed likely to collapse.

Yet, at the very point of its creation, the failings of the WTO had been exposed for all to see. And the world took note. The organisation became unpopular.

The US, at a WTO meeting in Seattle, tried to rekindle interest in negotiations on the trade in services, but it was rebuffed by developing countries. With hindsight, this can be identified as the moment when the US gave up on the WTO. The EU, it seemed, had, less ostentatiously, reached the same conclusion somewhat earlier.

Both began redoubling their efforts to conclude bilateral preferential trade agreements - which they called free-trade agreements - with a variety of trading partners.

This new development is continuing and already has resulted in the emergence of trading blocs covering Europe, North America and, to a limited extent, South America. And, as we now know, something perhaps even more far-reaching is under consideration in Asia.

So what conclusion can we draw? Most definitely, international cooperation is drifting out of favour. What seems to be taking its place is some form of regional cooperation, which, at least as far as economic and financial considerations are concerned, already seems to have undermined the WTO. And the same fate appears to await the IMF.

Economic setbacks

The IMF is in bad odour in Latin America, especially because of the unhappy experience of Argentina and Brazil. Both of those countries suffered major economic setbacks after following IMF economic prescriptions. They have now abandoned that approach, paid back their IMF loans, and are busy constructing an independent financial structure which they can access in future times of need. Effectively, the intention is to freeze the IMF out of that region.

The same sort of thing seems to be in contemplation in Asia - and for much the same reasons, following the IMF's behaviour in the 1997-98 Asian financial crisis. What role then is left for the IMF, given that neither the US nor the EU needs it? This freeze-out is likely to flow on to the IMF's offspring, the World Bank, in its role of supplying loans for development.

The strong possibility is that, in the near future, the major economies of the world will be members of more or less self-contained and regionally-oriented trading and economic blocs. Then, surely it cannot be long before each bloc takes on a regional political and, quite possibly, cultural identity as well. In that event, international relations will be shaped by powerful groupings with diverging cultural, political and economic interests.

In economic terms, it is not clear how Australia would fit into any of this. It is possible, as Prime Minister John Howard probably believes, that we could draw even closer to the US than we are already. But the difficulty with that scenario is that most of our trade is with Asia.

However, compared with the wider strategic implications of a world divided into regional blocs, what happens to Australia is of minor importance. It is possible, even likely, that Asia - underpinned by, say, China, Japan and India - could outpace the other blocs in economic growth and, thus ultimately, in power and influence.

In any event, we must recognise that disputes will arise among the groupings relating to economic political and even cultural interests. The big question is, in the absence of any formal management mechanisms, or commitments to principles, how would these disputes be resolved?

With no overarching commitment to international cooperation, will we revert to a more virulent form of 1930s nationalism? Globalism helped us into that position at the end of the 19th century. Is history about to repeat itself?

Whichever way you look at it, revamping the old General Agreement on Tariffs and Trade (GATT) into a full-blown World Trade Organization (WTO), encompassing more than the trade in goods, does not seem to have worked.

If economic globalism has done anything, it seems, paradoxically, to have rekindled the interest of nations in the virtues of nationalism.

Nobody seems to have anticipated this development, and yet there is mounting evidence of strengthening nationalism.

  • Colin Teese is a former deputy secretary of the Department of Trade

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