Amid the shortage of credit, jobs and confidence, the G20 has produced an abundance of commitments. There are 19 uses of the word in the 29 numbered paragraphs -- a 30% commitment rate per paragraph seems to amount to a good deal of promise. But does it? Beyond the argument over what was actually promised, the largest ommission--where are $300bn of the promised increased IMF lending capacity actually going to come from?--points to the potential that the crisis has in rewarding those nations that can claim a committed public support for their national policies. This places China in a vulnerable position compared to the USA, and points to the need everywhere for a deep democratisation of economic policy making.
There is always a paradox in commitment: either you announce an unsurprising course of action which no one seriously doubted, in which case who cares that you should present it as a commitment; or you assure your audience that you are bound to a course of action which is somewhat unnatural, in which case why does the act of commitment itself make you any more trustworthy in delivery? I had a long-running version of this argument with my wife as we debated whether to get married before the birth of our first daughter. The kitchen cupboards became increasingly covered in graphs and tree-diagrams as the date of birth approached. The graphs were meant to demonstrate the paradox of commitment and the ineffectuality of a statement like wedlock. We got married anyway--more later on why and whether commitment does work. But the problem for nations is even greater than the problem for couples: domestic weaknesses that undermine the credibility of international commitments are plain for all to discount.
One commitment every one and a half paragraphs
6. We are undertaking an unprecedented and concerted fiscal expansion, which will save or create millions of jobs which would otherwise have been destroyed, and that will, by the end of next year, amount to $5 trillion, raise output by 4 per cent, and accelerate the transition to a green economy. We are committed to deliver the scale of sustained fiscal effort necessary to restore growth.
8. Our actions to restore growth cannot be effective until we restore domestic lending and international capital flows. We have provided significant and comprehensive support to our banking systems to provide liquidity, recapitalise financial institutions, and address decisively the problem of impaired assets. We are committed to take all necessary actions to restore the normal flow of credit through the financial system and ensure the soundness of systemically important institutions, implementing our policies in line with the agreed G20 framework for restoring lending and repairing the financial sector.
10. Last month the IMF estimated that world growth in real terms would resume and rise to over 2 percent by the end of 2010. We are confident that the actions we have agreed today, and our unshakeable commitment to work together to restore growth and jobs, while preserving long-term fiscal sustainability, will accelerate the return to trend growth. We commit today to taking whatever action is necessary to secure that outcome, and we call on the IMF to assess regularly the actions taken and the global actions required.
* we commit to implementing the package of IMF quota and voice reforms agreed in April 2008 and call on the IMF to complete the next review of quotas by January 2011;
* we commit to implementing the World Bank reforms agreed in October 2008. We look forward to further recommendations, at the next meetings, on voice and representation reforms on an accelerated timescale, to be agreed by the 2010 Spring Meetings;
* we reaffirm the commitment made in Washington: to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports. In addition we will rectify promptly any such measures. We extend this pledge to the end of 2010;
23. We remain committed to reaching an ambitious and balanced conclusion to the Doha Development Round, which is urgently needed. This could boost the global economy by at least $150 billion per annum. To achieve this we are committed to building on the progress already made, including with regard to modalities.
* we reaffirm our historic commitment to meeting the Millennium Development Goals and to achieving our respective ODA pledges, including commitments on Aid for Trade, debt relief, and the Gleneagles commitments, especially to sub-Saharan Africa;
* we have committed, consistent with the new income model, that additional resources from agreed sales of IMF gold will be used, together with surplus income, to provide $6 billion additional concessional and flexible finance for the poorest countries over the next 2 to 3 years. We call on the IMF to come forward with concrete proposals at the Spring Meetings;
26. We recognise the human dimension to the crisis. We commit to support those affected by the crisis by creating employment opportunities and through income support measures. We will build a fair and family-friendly labour market for both women and men. We therefore welcome the reports of the London Jobs Conference and the Rome Social Summit and the key principles they proposed. We will support employment by stimulating growth, investing in education and training, and through active labour market policies, focusing on the most vulnerable. We call upon the ILO, working with other relevant organisations, to assess the actions taken and those required for the future.
28. We reaffirm our commitment to address the threat of irreversible climate change, based on the principle of common but differentiated responsibilities, and to reach agreement at the UN Climate Change conference in Copenhagen in December 2009.
Delivering our commitments
29. We have committed ourselves to work together with urgency and determination to translate these words into action. We agreed to meet again before the end of this year to review progress on our commitments.
The first commitment -- the report of $5 trillion committed to fiscal expansion -- is highly contested ought to be discounted. This commitment falls into the category of things that the G20 are doing anyway: it measures the excess of anticipated government borrowing over 2007 levels between now and end 2010. It is a forecast and not a commitment, and one clearly designed only as a number that ought to impress.
Next comes the commitment to do all that is necessary to restore "the normal flow of credit". The weasely words here are the now familiar "all that is necessary". The problem is not that we believe our leaders do not want to restore economic normalcy, but that they do not know how to. Imagine a leader who announced: "we're in a mess, but we won't be doing all that turns out to be necessary to resolving it" ...That sounds like a disqualification from leadership.
The next commitment is one of the most interesting of the communique: "our unshakeable commitment to work together to restore growth and jobs, while preserving long-term fiscal sustainability, will accelerate the return to trend growth. We commit today to taking whatever action is necessary to secure that outcome.
Notice first the "unshakeability" of the promise to work together. Is that code that all the other commitments if it came to it, could be shaken? More importantly, the outcome that our leaders are committing to is to restore the economy in a fiscally sustainable way. Willem Buiter, sceptical and pessimistic, has argued here on openDemocracy and on Maverecon, that the US and the UK lack the ability to convince lenders that taxes will be raised to service debt levels. He believes the debt levels implied by stimulus are unsustainable because of the political polarisation of the UK and US.
Martin Wolf and Sam Brittan disagree. The Wolf and Brittan position is that there is no technical difficulty in restraining inflation once the economy is going again. All those assets that the central banks will have bought can be sold again to mop up excess liquidity. Buiter's worry is that voters and taxpayers will decide not to do this. Many will still have substantial debts left over--mainly mortgages--from the great exuberance; the economy will be recovering, and the sales of long term assets will raise interest rates just as things are feeling good again ...so what will self-interested voters do? Voters will be attracted to inflation, which distributes wealth from creditors to debtors and to low interest rates, which will keep the cost of debts down. The politics of economic policy making in the UK and the US, thinks Buiter, precludes the sort of commitment that Wolf and Brittan believe is an important but quasi-technocratic problem. Lenders will adjudicate between the two camps here: if the commitment to non-inflationary, "fiscally sustainable" repayment is in doubt, lenders will give up their savings to finance stimulus only in exchange for an inflation-insurance on top of the normal return. Interest rates would be driven up, the currency--even the dollar--would come under pressure. No wonder there is a firm purpose expressed in the communique.
Interestingly, the headline numbers--the $1.1 trillion--does not figure in the 19 uses of the word "commit". This would not come as a surprise to Dominic Lawson, who counts only $256bn of new commitments, not $1.1 trillion. So how were the numbers sexed up? Here is the tally of the degree of reality of the various commitments:
- $100bn of Multi-laterral dev bank lending is a stright increase
- $250bn of SDRs are new money base, with 44% going to rich countries. This is a real, tenfold increase in SDR allocations to all IMF members. Countries facing short term financing problems--Hungary and Ukraine, for example--will find this helpful and usable.
- Already announced and pledged
- $201bn of additional IMF lending capacity had already been pledged by Japan and EU
- Wishful thinking
- $300bn on top of this of new IMF capacity is hoped for - watch the IMF spring meeting at the end of April for progress
- Genuine, but disguising a big lie
- $6bn of Trade finance increase is real, but this was presented as a "$250bn" increase in Trade Finance, which appears to be complete marketing lies.
Paul Swartz (Council on Foreign Affairs) expresses the hope for a "reloaded" IMF in this telling graph: here is an institution that has been given another opportunity at relevance.
"At this point, $250 billion from the G20 to the IMF is essentially a done deal (and not worth holding a meeting for), $300-400 would be a limited victory, and $500 billion would be a triumph against the odds and for common sense, with most of the credit going to the American side and enhancing President Obama's prestige."He comes out of the summit writing that "the big news at the G20 was obviously about the IMF, with the Americans pulling out an impressive deal on funding". At minute 17 of this Channel 4 news clip, Simon Johnson expresses his hope for the $1.0 trillion IMF: an institution with such huge lending power that it can offer loans to countries with debt finance trouble before it becomes critical. This is part of turning the IMF into an institution that might help to relieve the fundamental trouble that the world economy has been in, with South Asian economies insuring themselves against sudden reversals of fortune by building up huge dollar reserves. This is the Martin Wolf thesis, described here and in his pre-G20 column that worried that the fundamental issue was beyond being addressed.
But it appears that the biggest tranche of new money--$300bn--is currently uncommitted, it is a funding target subject to further negotiation. So who is likely to come up with the extra funds, and why?
The obvious source of lending capacity is a country with huge reserves which wants a seat at the international finance table--China. In the run-up to the summit, Zhou Xiaochuan, the governor of the People's Bank of China, made a speech advocating the gradual development of a true international currency out of the IMF's Special Drawing Rights (SDR). He envisages the IMF being able to issue SDR bonds, making for a liquid market in this currency basket. China's big desire is to somehow find a way of transforming its risky-looking dollar assets into a broader based asset that will continue to allow China to run huge trade surpluses and build up huge reserves.
But why is China doing this? After all, as Brad Setser argues, most creditors are content with simply lending in their own currency. China is in a bad negotiating spot with the pile of dollar assets it has accumulated: it has created a strong incentive for the US to inflate or devalue away the debt. So why try now to lend in some multilaterally managed basket like the SDR? China is rightly worried that its dollar assets will dwindle in value (for the sorts of reasons that Buiter has emphasised). So why not lend its reserves in its own currency, the Remimbi (RMB)? That means that a dollar devaluation makes it more expensive for the US to repay China, so protecting the value of Chinese assets ...China is looking for an alternative to US holdings of its savings. But why not just make those RMB holdings, placed in the hands of its citizens?
To understand what comes next in the global financial architecture, we must understand why China built up its huge surpluses over the last 10 years. Martin Wolf offers one answer: insurance against an "Asian crisis" style of sudden reversal of investor sentiment. If insurance from fickle international investors was the goal, then China should press for stability enhancing policy changes, the most obvious of which is to create a liquid world-wide market in RMB denominated borrowing and lending. This is not the direction that China seems to be going in.
There is an alternative account of the past 8 years of reserve accumulation: that it was more about political control than about insurance. The Chinese dollar surpluses have come from the savings of the corporate--often state-owned--sector, not from households that seem to be keen to spend their incomes at the sorts of rates one would expect from a rapidly modernising economy. Business dollar surpluses were transformed more or less directly into US Treasury Treasury Bills without disturbing the Chinese society beyond its frantic export-oriented modernisation. Indeed, the maintenance of an undervalued exchange rate benefited the outward-oriented portions of the Chinese economy compared to the domestic economy in a typical mercantilist "dash for growth".
The alternative to this policy of "sterilisation" would have been the creation of a market for Chinese assets and debts accessible to foreign capital and a floating exchange rate. It would have been a China in which the households where the wealth ended up spending much more than they have done, exacerbating social tension. So this alternative cedes control to an uncomfortable degree: earnings get distributed; urban-rural income differences grow; the pressures of economic growth are exacerbated. The concerns of the Chinese centre that the periphery might generate uncontrollable levels of unrest (see, for example, Li Datong's account of the early 2008 riots). This account of the Chinese surplus is that the constraint reached was a political one: even a modest further opening of capital and foreign exchange markets was a social stability risk too far.
The "social constraint" account of the Chinese surplus makes more sense of China's current IMF-focused strategy: the SDR becomes a substitute to the dollar, and one over which China has some political degree of control. It allows China to continue to maintain control over the process of domestic economic modernisation. China needs a strengthened IMF as an alternative to ceding economic power domestically; it is therefore in no position to dictate terms, despite being the single biggest likely source of funds for the US fiscal deficit of 2009 and 2010. This is the essence of a recent comment piece by Paul Krugman which concludes:
Yet the day after his new-reserve-currency speech, Mr. Zhou gave another speech in which he seemed to assert that China's extremely high savings rate is immutable, a result of Confucianism, which values 'anti-extravagance.' Meanwhile, 'it is not the right time' for the United States to save more. In other words, let's go on as we were.
That's also not going to happen.
The bottom line is that China hasn't yet faced up to the wrenching changes that will be needed to deal with this global crisis.
Wherever economic policy is made internationally to paper over domestic weakness, expect to pay a high price. This is the story that we have seen everywhere with fine words over protectionism: so-called commitments crumble when faced with governments who are incapable of making a reasoned case to voters for free trade. Similarly with the Euro's credibility as a reserve currency: the lack of European-wide taxation to back Euro-denominated public debt makes it a bad substitute to the dollar as a reserve currency. Similarly with global environmental deals--remember Clinton's cynical support of Kyoto in the face of a Senate that everyone knew would not accept the obligations the treaty imposed. Economic policy needs to have reasoned public support behind it if the international commitments made are to have any value. And that means abandoning the view of economic policy as an area, like the death penalty and other human rights, that citizens cannot be trusted with.
Countries that do not legitimise economic policy through participative processes will not be able to make credible international commitments. The commitment of Paragraph 29 of the communique is tellingly tortured on this point:
We have committed ourselves to work together with urgency and determination to translate these words into action.Read this as: we are committed to being committed to our commitments. This, after all, is what it means to "translate these words into actions". If the G20 really are committed to becoming committed, that is a big promise.
This takes us back to the graphs on the kitchen cupboards: when and why does commitment actually work? You resolve the dilemma of commitment by making sure that your promises demand something that is currently unnatural, but that you transform yourself into making natural. Just as marriage works by changing the person, so international economic policy commitments should work by transforming countries to the point where their domestic political interests coincide with their international promises. A wise, participative citizenship needs to become responsible for economic policy before this can happen. And until it does happen, expect the most democratic countries the most able to negotiate in crisis.