Whether two elephants fight or make love it is the grass that gets trampled upon, is an old jungle saying. The world's middle-income economies, the so-called emerging markets, are not exactly like grass on the ground. But even as big trees in the jungle they are today as worried about 'currency wars' being waged by China and the US as they were, barely four years ago, about their potential 'courtship' in the days of the 'G-2' condominium. Whether the US and China fight or snuggle up, they cause anxiety all around.
Last year Brazil's finance minister Guido Mantega hit out at China for its exchange rate manipulation aimed at edging its competitors out of an increasingly difficult global market. Last week, he hit out at the US after the latter launched its third round of easy money policy, dubbed quantitative easing (QE).
While QE-1 was launched in the immediate aftermath of the global economic slowdown and was hailed as a 'global' initiative in response to the consensus view at the G-20 summits in 2008-09 that the developed economies help boost global demand, QE-2 was criticised as an attempt to devalue the US dollar aimed at boosting demand for US exports worldwide. It was then that Mantega coined the evocative phase "currency wars" to describe the new "beggar-my-neighbour" economic policy of the world's biggest economies.
The world economy has come a long way from the cooperative, consensual days of the Washington DC and London G-20 summits of November 2008 and April 2009. In almost every capital of every major country in the world, political leaders and policy-makers are increasingly preoccupied with domestic economic problems and are unable to devote much time to finding globally or even regionally consensual approaches to economic slowdown, unemployment and inflation.
As a result, countries like Brazil, India and other middle-income economies are beginning to adopt policies aimed at reducing their exposure to these new global risks. India's most recent policy initiatives must also be viewed from this perspective.
From President Barack Obama to President Hu Jintao, from President Vladimir Putin to President Dilma Roussef and, indeed, Prime Minister Manmohan Singh, leaders around the world are finding it necessary to act at home because they have been unable to act on the world stage. The failure of world leadership to revive the world economy and world trade and reverse inflationary pressures has meant that they try even harder to do so at home. To what extent national governments can reverse the tide of economic stagnation and inflation within the borders of one's own country, in an increasingly unhelpful global environment remains a moot question.
While world leaders still meet at summits in fancy places, no recent summit has been able to show the way forward and a way out of the current phase of 'beggar-my- neighbour' economic policies.
One consequence of this phase has been the collapse of the Doha Round of multilateral trade negotiations under the auspices of the World Trade Organisation (WTO). WTO enthusiasts now pin their hopes on a possible revival of the Doha Round, perhaps with altered parameters, after the elections in the US.
For a while some countries hoped there would be a regional option to multilateralism. But the crisis in the eurozone and the nervousness in Asia have meant that neither the European Union nor the many regional groups in the Asia-Pacific region have been able to offer meaningful options. The US tried floating the idea of a new free trade bloc, the Trans Pacific Partnership, but that has not gone anywhere till now.
It is within this environment of global economic unease that India seeks to revive investor sentiment and confidence, get a grip on inflationary pressures, externally and internally induced, reduce its current account deficit and get its fiscal house in order. This is not an easy task. No one should belittle the seriousness of the effort underway in India to recover growth from the jaws of stagflation.
If the Congress was willing to jettison its alliance with the Trinamool Congress to finally extend support to Prime Minister Manmohan Singh and his government, it is only because of the seriousness of the economic situation confronting the country.
To imagine that the Indian government is the only government operating in such an environment of political siege would be wrong. Look at the open fight between President Vladimir Putin and Prime Minister Dmitry Medvedev in Russia on issues pertaining to domestic economic policy. Look at the political shadow play in Beijing where the once powerful Communist Party of China is unable to as yet fix a date for its next party congress. Look at the course of electioneering in the US and, of course, consider the 'policy paralysis' in almost every European capital!
The problem is that while we live in a world in which all economics is global, all politics is still local. There are domestic political limits to what governments can do in responding to a global economic crisis. This rule would apply to India too. It would be wrong to imagine that Prime Minister Manmohan Singh can wave a magic wand and revive the "animal spirits" of Indian enterprise or restore global investor confidence in India, if he is unable to mobilise domestic political support for his initiatives. This is true for any political leader anywhere in the world today.
However, even in this depressing environment it should be possible to work with some ground rules. The first and the most important ground rule has to be that national governments do not export their problems abroad. Beggar-my-neighbour economic policies are, in the end, a zero-sum game.
What the world needs is global leadership within the framework of the G-20, with both the developed and developing economies working together to offer win-win options. Right now that sounds like asking for the moon!
Sanjaya Baru is director, Geo-economics and Strategy, International Institute for Strategic Studies, and Senior Fellow, Centre for Policy Research, New Delhi. The views expressed by the author are personal.