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When does protectionism become a legitimate argument?
Two days ago British people were making a protest with the slogan "British jobs for British workers". The world is going through a process not we are unfamiliar with but we have forgotten for a period of time. This transition period will eventually end. The unknown element is what is going to happen at the end of the transition period. What is going to happen next is closely related with what we are going to do nowadays. What is going on? This is: The mechanism ensuring the functioning of the global economy with liberty is not working anymore. In such a period, there are two options ahead: We will either acknowledge that global crises require global solutions and introduce global measures along with the rest of the world or say "everyman will shape his own future". The fatalism in the latter only renders protectionism as a norm. The opponents of protectionism shall set forth some concrete suggestions regarding the "financial architecture of the global transition period" for the interim period we are in. Empty talks will not make any good. It is not possible to slide over this period with the "protectionism is bad" motto. Let us see why.
The week before, in this column I mentioned the estimations of the Institute of International Finance (IIF) for the international flow of funds in 2009. The flow of funds towards developing countries fell from 929 billion USD in 2007 to 466 billion USD in 2008. And the IIF estimated that the amount will fall down further to 165 billion dollars in 2009. This, in the process of fund flow liberalization, implies a kind of a "return back to pre-1980 period". The beginning of the period of liberalization we are leaving behind is 1980. The regulations enabling the development of markets in US Dollar terms out of the US were introduced in 1980s. Let us put it differently: The global financial architecture that ended the period where international flow of funds were taking place as financial flows between states and provided fund flows by the financial markets was built in early 1980s.
In this context, global financial architecture means the construction of the channels through which funds will flow. In today's case, here is the problem: The amount of the funds flowing towards Turkey through these channels which enable the connection to the central financial system will be less than the past. Therefore, the "policy coordination" between the countries integrated into the global economy will not happen automatically. This is why the bitter issue of today is the "global policy coordination". It is unknown how the policy coordination which was ensured automatically by the market mechanism itself through the fund flow channels will be maintained from this point onwards. The financial architecture of the global economy is not working anymore. Remember the old mechanism: The flow of funds towards countries that did not take the necessary measures gradually fell down and then the adjustment process began. Then the IMF stepped in and the adjustment was ensured. Now, the system is not working as such. In an interim period where Washington is more important than New York with respect to fund flows, states will have to involve more and more in the policy coordination. This is the first point.
Let us make the second point: International flow of funds has started to move away from developing countries and accumulate in the US. The reason behind this for now is not the growing budget deficit of the US and its outcomes. We are not at that point yet. However, we will eventually arrive at that point. The reason behind the accumulation of funds in the US is the fact that mechanisms like hedge funds that transfer funds to developing countries like Turkey are becoming extinct or shrinking in shape. Therefore, once the things we argued at this column just in the mid 2008 started to become true, the risk of a contraction in the amount of funds flowing to the developing countries have increased. There is a structural reason for the contraction of the flow of funds towards developing countries. This is the second point. And the third point is apparent: Due to the growing budget deficit of the US, it is necessary to expect that the contraction of funds flowing toward developing countries like Turkey further deepens. We still have issues to solve.
So, what shall be done? If the funds did not completely disappear, there exists a need to introduce a transition period regulation aiming at the transfer of funds towards countries like Turkey. A new mechanism with definite rules re-ensuring fund flows between states shall be established to minimize the damage of the quantity adjustments of the period. The challenge is opening the obstructed road by building a temporary bridge. Of course the IMF can assume this role. The meaning of the 600 billion USD borrowing demand of the IMF can be traced at this point. However, it is impossible for any actor including the IMF to borrow in these markets and accomplish the target alone unless the global policy coordination aiming at the welfare of the global economy is constructed at the states level. Only God can give without taking any compensation. And this is the fourth point of today.
The issue of protectionism will remain on the agenda unless the G20 meetings make progress concerning the global policy coordination and temporary fund transfer mechanisms. If "everyman will shape his own future", protectionism becomes legitimate in such a period. Under those circumstances, we cannot discuss the legitimacy of the policy though we suffer from the results. And this is the fifth point of today.
If the first option is not the best, the second will be. It will be wise for Turkey to get prepared before sitting at the negotiation table.
This commentary was published in Referans daily on 10.02.2009