The global economic crisis has sparked short-term divergence of economic performance between the West and emerging markets, and thereby accelerated the longer-run convergence of the latter on the former. This Shift to the East is also even more evident in international trade and FDI than it is in other channels of globalisation.
But emerging markets’ political and economic institutions, and intra-regional divisions, continue to hold back their rise. That means the Shift to the East will not translate into Chinese or other emerging-market leadership for a long time to come – if ever. The USA is still the fulcrum of international relations, and the world is far from being “post-American”. Thus the economic shift to emerging markets, accelerated by the crisis, does not translate into a paradigmatic shift in global political-economic order. But it does insert more multipolarity and uncertainty into that order, and leaves more of a leadership vacuum.
Governments’ responses to the biggest deglobalisation since the Depression did not precipitate a descent into 1930s-style protectionism. Domestic crisis interventions – a combination of bank bailouts and expansive macroeconomic policies – took priority. Traditional protectionism hardly increased; borders remained open. But crisis interventions and the return to Big Government leave the West with crippled public finances and more restrictions on competitive markets. Also, they threaten to spill over into creeping protectionism of the subtle, non-tariff, regulatory variety.
The short-term challenge is to arrest the slide to Big Government at home and creeping protectionism abroad. The medium-term challenge is to get back on track with trade and FDI liberalisation combined with domestic structural reforms – substantial unfinished business left before the crisis struck. The BRICS and many other emerging markets still have big pockets of up-front trade and FDI protection. They have even higher domestic (though still trade-related) barriers embedded in services regulation, intellectual property rules, public procurement, customs administration, food-safety and assorted product standards, and com- petition rules. They do badly on business-climate indicators compiled by the World Bank and other organisations. But “second-generation” reforms to tackle these barriers are much more complex and politically sensitive than the “first-generation” reforms of the Washington Consensus heyday. Compared with border barriers to trade and FDI, domestic regulatory barriers are defended by more powerful, entrenched interest groups, uniting insider elites in government, business and unions, usually with the public sector and the organs of the state at their core.