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Ashima Goyal: Overcoming cognitive barriers to achieve equal cooperation across countries

Updated: Jan 7

Ashima Goyal, Professor at the Indira Gandhi Institute of Development Research

Ashima Goyal, a professor of economics at the Indira Gandhi Institute of Development Research, Member of India's Monetary Policy Committee. Her research interests are in the areas of institutional and open economy macroeconomics, international finance and governance. His recent research achievements include a Concise Handbook of The Indian Economy in the 21st Century and Macroeconomics and Markets in Developing and Emerging Economies.

Overcoming cognitive barriers to achieve equal cooperation across countries

1. Your article shows that policy advice and action are highly asymmetric at present. From your perspective, why does this phenomenon appear? Could you please give some suggestions for G20 to deal with it?

Very unequal power in the past that has resulted policies and processes that suit advanced economies (AEs) but are not always appropriate for nations at different levels of development.

Partly because of this continuing asymmetry G-20 failed to protecting emerging market (EM) growth after the global financial crisis (GFC). For example, ten major EMEs had a mean IIP growth rate of 4.3 pre-GFC (2000-08) and just 1.3 post-GFC (2009-17). Since EMs now account for more than 50% of global growth, this failure hurts AE growth also.

Sometimes failure is because research is concentrated in and about AEs. G-20 can help to build up a body of case studies for balanced context-based advice that co-ordinates monetary policy and macro prudential (MaP) regulations with capital flow management, and creates better understanding of the nuances of EM risk premiums and interactions among policies and their variation with levels of development.

G-20 should ensure that AE CB communication and actions are nuanced enough to prevent a recurrence of the 2013 taper tantrum on exit from quantitative easing (QE).

EMs are advised to reduce fiscal spending to reduce reliance on and risks of foreign borrowing, while AE governments are advised to borrow more at the low interest rates prevailing. Countercyclical stabilization funds and swap lines should be symmetrically made available especially to ensure adequate spending on health and vaccination.

QE and the AE regulatory focus on banks have increased the volatility of portfolio flows to and from EMs, creating large fluctuations in interest and exchange rates, and therefore growth rates. EMs should not be left to handle capital flow volatility alone. Source countries should be asked to apply prudential regulations for non-bank financial intermediaries. This would reduce arbitrage and capital flow volatility.

2. You claimed that international policy coordination has become more relevant in the post-crisis era. However, there are some difficulties for the members of G20, as the west is dividing the G20, and there are conflicts among some of its members. What do you think of this kind of contradictory phenomenon, when we need cooperation without an harmonious status quo?

Hirschman’s famous book was titled “Passions versus interests”. As nations become more intertwined economically old and new grudges should give way to working together on their common interests with mutual respect and fairness. It is especially important for emerging markets to work together to counter the historical status quo.

3. The driving force of G20 leading financial reform is the common interests of its members. After the outbreak, the economy of the G20 has been severely damaged. Will the common goal of restoring the economy further promote deep G20 cooperation? How will this cooperation take place?

The vaccination inequities and possibility of new variants make it clear that unless all are safe no one is safe. The externalities involved make it necessary for all countries to work together. Otherwise the shocking damages we have seen can recur, for example, from climate change.

Markets and AEs would also benefit from lower volatility. Less protection of capital incomes and rise in labour incomes would reduce political pressures because of rising inequalities within AEs themselves.

Coordination failures continue due to misperceptions that AEs are the major drivers of global growth. Greater cross nation equality makes cooperation more feasible if perception blocks are overcome and two-way spillovers recognized.

4. The meeting of G20 finance ministers and central bank governors recently concluded in Venice, Italy. The meeting reached a historic agreement on a more stable and equitable international tax framework to guide global tax reform. How do you think of the reform? What is the impact of this reform on global capitalism?

One of the major successes of G-20 has been in tax harmonization to reduce base erosion and profit shifting (BEPS). It will allow for more even taxation of capital and labour income, since capital will be less able to escape taxes through mobility. More needs, to be done, however to make it possible to tax where economic value is created, not on the basis of residence alone.

BEPS had to act against the same type of lobbies that resist stronger regulations on financial firms. It shows such action is possible against strong corporate lobbies.

Editor Assistant Research Fellow: Xianglin Gu

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