One noteworthy aspect of the current global financial crisis has been the lack of coordinated international action by emerging nations. The G7 swung into action last week to deal with their own concerns, but there has not been a similar coordinated response from the world’s leading emerging markets – China, India, Brazil, Russia, Korea, et al. On the whole, national governments have largely been acting independently.

Apparently, not everyone is pleased with this. South Korean President Lee Myung-bak on Wednesday called for the creation of new international organisations to deal with the current crisis, and indeed, other pressing issues such as global climate change. Lee even offered Korea as a headquarters for these new bodies (perhaps this is his real motivation). He did not provide any more details, nor did he mention the IMF as having a role to play, perhaps because of Korea’s own humiliating experience with the Fund in the wake of its meltdown in 1997-98. Furthermore, in recent days Lee has been calling for a tripartite Japan-China-Korea summit, presumably to bolster his own country’s dwindling fortunes.

Lee is perhaps right to imply more coordinated action. After all, a global crisis that spills into emerging markets might need a multilateral response. However, there are several reasons why we have not seen and are unlikely to see this:

• Difficulties in coordination: Things have been moving so fast, that there simply hasn’t been enough time for developing world governments to consult one another on their every move. Should the Korean president really wait to hear the opinion of the Cambodian or Panamanian finance minister on intervention to prop up the won? The necessity of speedy responses by national governments to national crises mitigates against coordinated action.

• Logistics: Large gatherings of international finance ministers would inevitably get delayed by logistical and bureaucratic problems. The larger the gathering, the slower the response, and the more likely it would be a least common denominator rather than a bold move.

• Differing types of problems: Unlike the developed states, emerging nations are significantly more diverse in their levels of development, and not all countries are undergoing banking crises. China has not experienced (at least not yet in the current crisis) massive stresses in its banking sector, but some others have.

• Lack of international leader: Ordinarily, the US would be expected to lead the response, but it has been too bogged down in its own problems, which have also severely eroded its credibility and moral standing. However, without a clear leader, there would be the risk of serious bickering amongst the major emerging powers and between them and the developed world. As I mentioned previously, although China and Japan together have US$3 trillion of forex reserves, and could theoretically spearhead an international rescue effort, the rivalry between the two for influence in Asia (and globally) means that neither wants the other to lead it. Geopolitical rivalry also works against China, Russia, and Europe working effectively together. Indeed, Central and Eastern European governments would be weary of Moscow riding to their ‘rescue’.

• Lack of real desire for international action: While many governments are emphasising ‘international’ action, I suspect that this is merely to make it sound like they are not the only ones in trouble. Indeed, most governments would rather deal with their problems by themselves. For example, a Sino-Japanese rescue plan for South Korea might impinge excessively on Korean sovereignty, just like the IMF did. Similarly, the US would not want foreign powers – especially China – to ride to its rescue, for reasons of national pride. In addition, the US’ quashing of Japanese ambitions to set up an Asian Monetary Fund in the late 1990s suggests that Washington doesn’t feel comfortable even with its leading Asian ally taking a bigger role in the region.

Thus, while I expect to see a limited degree of regional coordination, such as ASEAN’s World Bank-backed standby liquidity fund, and today’s IBSA (India-Brazil-South Africa) summit in New Delhi, most emerging market governments will continue to deal with the current crisis by themselves.

Tags: emerging markets, financial crisis, International coordination, response
Posted in: Africa, Asia, Currencies, Emerging Europe, Equities, Financials, General, Geopolitics, Latin America, Middle East, Political Risk, US
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