Today's date:
Spring 2009

Economic Weight of Brazil, China and India Can Mitigate Global Crisis

Fernando Henrique Cardoso is the former president of Brazil. He spoke with NPQ editor Nathan Gardels in March.

NPQ | Does this first global crisis that has emanated from the United States and now the European banking system require the rising powers of Brazil, China and India to correct? How important are these rising powers—in terms of demand, in terms of savings and investment—in getting the world out of ever deeper recession? Are we witnessing a power shift from G-7 to G-20 as the executive committee of globalization? Should that be reflected in the governance of IMF and World Bank?

Fernando Henrique Cardoso | I do not think that Brazil, India and even China, will be able, by themselves, to correct the dysfunctions that produced the global crisis. But it is true that the economic power of these three countries can mitigate its negative consequences, unless the crisis' breadth and duration in the US and Europe is such as to deeply affect the economy of emerging countries. This may indeed occur if the imports from rich countries are significantly reduced and stay this way for a long time, thus affecting the commercial balance surplus of exporting economies, and also if the credit crunch persists.

China certainly presents a very high level of savings but this is not the case of Brazil. Nonetheless, the three above mentioned emerging countries offer attractive investment opportunities that may compensate for the lack of space for investment in the most developed economies.

I do believe that we are witnessing an enlargement of the number of relevant economic actors. The G-7 as it is no longer expresses the shifts in the balance of global power. Instead, the G-20 is much more representative of today's political and economic reality. But these ad-hoc groups must be institutionalized in order for their decisions to have practical implementation, and this is not an easy task.

NPQ | The US has emphasized a focus on raising "universal demand"—a commitment all around the world from countries that can to spend 2% of GDP on economic stimulus—versus a focus on regulation of global financial markets. Which one is more important, and what specifically do you recommend?

Cardoso | My sense is that global regulation must be enhanced. The incapacity of the Bank for International Settlements to enforce its recommendations led to the current financial disorder. To contain it the Fed acted as if it was the "central bank of central banks," rescuing banking and even non banking corporations, thus going far beyond its legal mandate. It is imperative to strengthen the IMF and the World Bank, increasing its financial capacity and, at the same time, democratizing its voting rights so that emerging countries may have a bigger say in the decisions.

NPQ | As someone who spent many years as an academic studying the world economy from theories of "dependencia" to "the Washington consensus," what do you make of "the fall of Wall St." and the collapse of market fundamentalism in the US? Joe Stiglitz says this is as important a moment for capitalism as the fall of the Berlin Wall was to communism. What model do you see emerging in the US (where, after all, we are debating nationalizing the banks) and the world? How will globalization look different from now on? What are the lessons of trade and capital liberalization from this crisis?

Cardoso | The Washington Consensus was no more than a recipe (including some needed and sensible measures and others much more questionable) to come to grips with the domestic and international insolvency of developing countries. It did not address the problems that globalization posed to all nations, including the highly developed and politically hegemonic. It did not talk about the need for good governance in Washington and in Wall Street or in the City which is our predicament today.

Today's meltdown was indeed created by a combination of successive ultraliberal administrations in the US and UK (with the notable exceptions of the Clinton and even Blair and Brown's periods) and the Internet revolution's capacity to globally fragment and spread out "securitized" mortgages and loans. All this benefited from the leniency of governments and monetary authorities that failed to control the ratio between capital and leveraged papers. If we define this lack of regulation as "market fundamentalism," that is to say, the belief that the market is capable of solving its own entanglements, then we may indeed speak of its collapse.

Probably the temporary "nationalization" or the growing shares ownership by national treasuries in banks' capital will be the way out of today's mess. And I would not be surprised if we were to hear calls for stronger controls over international capital flows. But I don't think this would mean an anti-globalization revolution. It would rather be an attempt to tame the chaotic form it has assumed.

NPQ | In the early 20th century, free trade and globalization collapsed into protectionism and war when there was an economic downturn. Do you worry about the same today? Or, does the "mutual dependencia" of countries (for example Chinese savings and US consumer markets) and interconnectivity of climate change among nations mean that this crisis will deepen globalization—we all have to get out of it together—instead of break it down?

Cardoso | The political configuration to emerge from today's global crisis will depend on the leadership capacity of key countries, including among them China, India, Brazil and other emerging economies, without forgetting Russia for its strategic role in energy policies and as a military power placed between Europe, Central Asia and China.

Obama's Administration seems to have keenly grasped the need for an "international new deal," also including the Islamic world. If the notion of "mutual dependency" is seriously taken into account, especially in respect to the questions of energy and environment, and if the US realizes that unilateralism is too weak to ensure a stable Global Pact of co-responsibility, then we may hope that the way out of the crisis will not be a return to protectionism with the renewed risk of war as its corollary. Indeed an "international new deal" is the way forward to avoid the repetition of the tragedy that led to the Second World War.