SINCE mid-March equity markets have been driven by cheery folk who can see their way through the murk of today's financial trauma to the sunlit uplands beyond. One of the more powerful props to their optimism is a belief that the forces of liberalisation unleashed after the cold war will continue and that emerging markets, which have been growing at about 7.0 per cent a year, will have an ever more positive influence on global economic growth.
The trouble with this heady vision is that liberalisation is under attack across the developing world as the poor struggle to cope with rising food and energy prices. At the same time, the seizure in the developed world's financial system is causing people in emerging markets to adopt a more sceptical view of an Anglo-American model of capitalism that places heavy reliance on capital markets.
These trends are combined in the most extreme form in India, where the government led by the ruling Congress party has intervened to manage the prices of food, fuel, cement and goodness knows what else, using caps, subsidies and export restrictions. Having banned trading in wheat and rice futures because it did not like the prices the markets were throwing up, it then suspended trading in soyabean oil, potatoes, chickpeas and rubber. Pandit Nehru, architect of India's long years of economic stagnation, seemingly lives again.
The developed world has its own version of the backlash against liberalisation. Resentment in the US and Europe against the slow appreciation of Asian currencies against the dollar and the euro is adding to protectionist pressure, especially in the run-up to the US presidential election. Sovereign wealth funds engender political hostility.
It is difficult to know how far liberalisation will go into reverse. But the consequences of such revisionism are potentially explosive for the markets, since they point to slower global growth. And the protectionist pressures are unlikely to go away, not least because exchange rate policy in China is unlikely to change much, even though it is arguably in China's interest to change.
Chinese policymakers clearly believe that a big appreciation of the currency would inhibit the creation of new jobs needed to absorb 200m or so rural workers into the cities. So export-led growth will continue, to the discomfort of North America and Europe.
Yet for all the scepticism about the Anglo-American way of doing capitalism, it is hard to see how high-saving Asians - or the petroeconomies - can do without capital market help. Reserves continue to accumulate and the sophisticated financiers in New York and London are still busily recycling this financial wealth, even if the financialisation of their economies has decelerated. Do not forget that all those new-fangled credit markets now in seizure were partly a response to the needs of savers in the developing world. In the absence of sophisticated western markets, excess Asian and petro-savings would have been profoundly deflationary. China, in particular, will continue to practise what I call reverse financialisation by maintaining capital account controls and outsourcing the task of financial intermediation to the US and Europe. A policy of fostering industrialisation while neglecting the development of the financial system has, after all, delivered living standards that have risen 10 times faster than in Britain during the first Industrial Revolution.
As for sovereign wealth funds, the west would be unwise to be too hostile. They are another instrument in the recycling mechanism. And the petro-sovereign wealth funds are a dangerous target. Some think the return on oil in the ground is currently greater by a mile than the return on US Treasuries. At the annual think-in this month at Pimco, the giant bond fund manager, Michael Spence, the Nobel prize-winning economist, reminded me that keeping oil in the ground could be the oil producers' natural response to any attack on their pouring money into the west.
The relationship between the two sides in this recycling exercise is in a state of unstable equilibrium. But it would be foolish not to recognise their interdependence.
John Plender is an FT columnist and chairman of Quintain plc. Under syndication arrangement with FE
