Jomo Kwame Sundaram on the Belt and Road Vs. the Washington Consensus

A former high-ranking UN official discusses Asia’s politico-economic landscape.

Jomo Kwame Sundaram on the Belt and Road Vs. the Washington Consensus
Credit: IFPRI/Xinyuan Shang

With the United States under President Donald Trump having withdrawn from the Trans-Pacific Partnership and China implementing the “One Belt, One Road” initiative, how will the politico-economic landscape in the Asia-Pacific evolve? Is the old Washington Consensus being challenged by players from emerging markets, like China’s multilateral Asian Infrastructure Investment Bank (AIIB)? Meanwhile, faced with international and domestic turmoil, how can developing countries like Malaysia cope with the challenges?

Recently, former United Nations Assistant Secretary-General for Economic Development Jomo Kwame Sundaram, who is a prominent Malaysian economist, spoke with Lu Chen to discuss his views on Asia’s political and economic trends. Jomo currently holds the Tun Hussein Onn Chair in International Studies at the Institute of Strategic and International Studies, Malaysia. The opinions expressed in this article are his own.

Based on the World Economic Situation and Prospects (WESP), a flagship report released by your previous employer, the United Nations Department of Economic and Social Affairs, what do you think are the growth prospects and main risks for major economies

Although there are some hopeful signs here and there, there are few grounds for much optimism around the North Atlantic (U.S. and Europe), albeit for different reasons. Unconventional monetary policies, especially quantitative easing (QE), may have helped the Obama period recover a little but at the cost of massive wealth redistribution from wage earners to wealthy rentiers, which is why the world’s eight 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 Belt and Road Initiative and, more importantly, its willingness to finance massive infrastructure projects, typically to be constructed by Chinese firms, although this has given rise to a whole host of problems. For example, Chinese contractors are notorious all over the world for using Chinese material and human resources as far as possible, thus minimizing multiplier benefits for the host economy. The problem has been so serious that the China’s ambassador to Tanzania publicly apologized several years ago for the conduct of Chinese firms in Africa. Ironically, Japanese and Indian competition for influence has also been helpful, but it is not yet clear that Xi Jinping’s “alternative globalization” will be enough for sustained recovery and growth in the region.

You mentioned in one article that “If President-elect Trump lives up to his campaign rhetoric, all plurilateral and multilateral free trade agreements will be affected.” Now, with the U.S having withdrawn from TPP, how do you think this will impact politico-economy in the Asia-Pacific?

Unfortunately, the U.S. commerce secretary and U.S. trade representative have not done much to be more pragmatic… But besides the U.S., the EU and Japan have also done nothing to help trade multilateralism and the World Trade Organization, flawed as it is against developing country interests [has little impact]. Meanwhile, it is quite clear that the Japanese and Australians are trying to keep TPP-11 alive, but it is largely irrelevant, and will not do much for the region besides strengthen foreign corporate power.

Could you please elaborate further on why TPP-11 will have little impact, other than strengthening 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 due to TPP trade liberalization. U.S. government projections were even more modest. About 85 percent of the original “benefits” were attributed to “non-trade” effects, mainly the broadening and strengthening of intellectual property rights (IPRs) and non-judicial foreign corporate legal rights against host governments with its investor-state dispute settlement (ISDS) provisions.

Do you think the Washington Consensus is currently under threat by South-led financial institutions like Asian Infrastructure Investment Bank and New Development Bank?

I wish the new banks would be bolder, but thus far, they are largely working within the dominant framework shaped by the Consensus. For example, not unlike the Chiangmai Arrangements following the 1997-1998 Asian [Financial] Crisis, they seek the Bretton Woods institutions’ stamps of approval. Of course, their establishment has further undermined the BWIs’ monopolies, and this has already been reflected by the BWIs’ new policies and debates. Not surprisingly, the IMF, especially its Research Department, has become bolder and more independent of the Washington Consensus in recent years. Similarly, the Fund under President Kim has sought greater legitimacy for its role by aligning itself more closely with the United Nations and its Sustainable Development Goals. However, it needs to be pointed out that right now, international credit extended by Chinese banks, usually to benefit Chinese corporations, is far more important than what the AIIB and NDB offer.

Do you think Malaysia will be able to fulfill Vision 2020 – attaining developed nation status in the year 2020 – given the current politico-economic conditions?

Short of a miracle, there is no way that Malaysia can become a high income country by 2020, partly because the ringgit has fallen from RM3.2/USD in 2014 to around RM4.3 now, due to the fall of commodity prices and the trust deficit following the continuous 1MDB revelations.

But even more disappointingly, despite some promising reform announcements around the turn of the decade, Malaysia is not progressing. Being developed involves more than being high-income, and biases of old media are worse than ever. If the presence of about seven million foreign workers is acknowledged, productivity growth has been generally unimpressive, and inequality has only gone down because we ignore five million of them. The country is deindustrializing prematurely and high-end services are not growing rapidly. Unsurprisingly about half the population is very concerned about economic matters according to a recent survey.

You pointed out in one article that both portfolio and FDI flows to developing countries have declined and even turned negative in recent years. Do you think it is an appropriate time to resume capital controls like Malaysia did during the 1998 Asian Financial Crisis to counter the capital outflows?

With even China reintroducing capital controls, it is tempting to think about such options. I have long advocated what I can call capital account management which involves far more granular techniques to avoid a crisis rather than imposing controls after a crisis as in 1998.

By definition, capital account management is context specific. There are no one size fits all rules involved. The challenge is not to deal with the last crisis but to protect the national economy from likely future threats. It prioritizes capital inflows to sustainably enhance the real economy, not portfolio and other such flows which tend to be speculative, easily reversible, and do not directly enhance the real economy. What I advocated in the early and mid-1990s may no longer be relevant or appropriate and such management should be agile, flexible, and not driven by panic.

Lu Chen is an international civil servant and a freelance journalist. Her interests include politics, economy and technology.