The summit of finance ministers and central bankers from the Group of Twenty (G20) countries took place in the southern English town of Horsham on 13-14 March 2009. It was the last major gathering before the global economic summit in London on 2 April, concluded with a declamation that does not quite conceal the lack of substance within:The Group of Twenty (G20) was created in 1999 as a forum for finance ministers and central-bank governors in the advanced and developing countries to discuss global economic issues The current members are:
Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, and the United States.
The first meeting of the G20's heads of state and government was held in Washington on 14-15 November 2008. This was also attended - as will be the London meeting on 2 April 2009 - by the European Union (represented by the rotating presidency and the European Central Bank), the International Monetary Fund (IMF), and the World Bank.
The participating states together represent approximately 90% of global GNP, 80% of world trade, and 63% of the world's population
"We agreed further action to restore global growth and support lending, and reforms to strengthen the global financial system", the statement says. "We have taken decisive, coordinated and comprehensive action to boost demand and jobs, and are prepared to take whatever action is necessary until growth is restored. We commit to fight all forms of protectionism and maintain open trade and investment... We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions."
The meeting's agenda - which included such issues as clamping down on tax-havens, regulating hedge-funds and cutting bankers' bonuses - is all very well. But the sheer scale of the current recession makes them look more of a diversion than a strategy for restoring financial stability, improving global economic governance, and creating the conditions for revival.
There is not much time for world leaders to get their act together if the London summit is to be a success. In light of the finance ministers' meeting, the G20 heads of state and government must now focus on two things: how best to work together to prevent an even deeper global recession; and how to avoid future crises of such magnitude.
The political test
The first issue is as divisive as it is urgent. The United States is pushing for more fiscal spending, the Europeans are reluctant, and most emerging powers are keeping quiet. Many countries (Germany, for example) are loath to commit to more spending before they know whether and how their existing emergency packages are working.
The second issue is both longer-term and fiendishly complicated. An unwieldy group of around twenty-five leaders (since the attendees will include representatives of international institutions as well as governments, making the term "G20" a misnomer) cannot be expected to discuss - far less agree on - the minutiae of capital-adequacy ratios or cross-border supervision. But this also underlines the fact that the G20 (as used to be said of the search for peace in Ireland) is a process not an event, and that its summits are political exercises not technical ones.
In this light, what the 2 April meeting is really about is maintaining faith in multilateral solutions at a time when the temptation to embrace go-it-alone and self-defeatingly selfish policies is growing. If leaning on Liechtenstein or forcing disclosure onto hedge-funds helps this cause then so be it. But if the aims of collaborating to avoid a deeper recession and avoiding a repeat of such crises are to be met, two themes appear paramount: the role of the International Monetary Fund (IMF) and governments' commitment to avoid protectionism.
The emerging task
The IMF has since the near-meltdown of September 2008 lent over $50 billion to a range of countries from Pakistan to Ukraine. It is in desperate need of more cash. The United States and European Union member-states are supporting a doubling of the fund's resources to $500 billion; in the event the Horsham summit only agreed on the "urgent need to increase IMF resources very substantially". These countries have appeared less willing to redress their own over-representation in international financial institutions, though again the summit agreed to end the informal rule guaranteeing American and European leadership of (respectively) the World Bank and IMF.
This would be a precondition for emerging powers (such as China and other of the "Bric" countries [Brazil, Russia, India] to contribute significantly to an increase in IMF resources, and - perhaps even more importantly - accept its legitimacy at the heart of the global financial system (see Krzysztof Rybinski, "A new world order", 4 December 2008).
Katinka Barysch is deputy director of the Centre for European Reform (CER)
Also by Katinka Barysch in openDemocracy:
"Turkey and the European Union: don't despair" (27 November 2006)
"Europe's ‘reform treaty': ends and beginnings" (18 October 2007) - with Hugo Brady
"Turkey: the constitutional frontline" (15 April 2008)
"Europe and the Georgia-Russia conflict" (30 September 2008)
In this respect, the results of the Horsham meeting clearly reflect the pressures exerted on the established powers; the communiqué says that "(emerging) and developing economies, including the poorest, should have greater voice and representation and the next review of IMF quotas should be concluded by January 2011". Indeed, the IMF needs the enhanced legitimacy that would come from reform as well as more money in order to fulfil two other functions that will be equally essential for future financial stability.
First, the world needs better surveillance of national macroeconomic and exchange-rate policies to address the kind of global imbalances that have contributed to the current crisis. The IMF already has such mechanisms in place but they need to be strengthened. Second, the fund needs to expand its new, conditionality-light lending facility (with $100 billion available in the short term) for emerging markets that are well run. It could also encourage the healthier recipients of such loans to pool their foreign-exchange reserves to make them available for emergency lending.
If emerging markets do not have easy access to available emergency finance, they will conclude that the best insurance against future pain is to accumulate more reserves. They will do this by keeping the value of their currencies low and running big external surpluses. This kind of policy, as practiced by China, has already caused lots of friction. In an environment where global trade is shrinking, its continuation would fuel a nasty protectionist backlash in the west. That is why the G20 summit needs to produce a firm commitment to increasing the IMF's role and resources, while setting in train a thorough reform of its governance structures.
The bigger think
Among openDemocracy's articles on the financial crisis and the search for solutions:
Robert Wade, "The financial crisis: burst bubble, frayed model" (1 October 2007)
David Held, "Global challenges: accountability and effectiveness" (17 January 2008)
Ann Pettifor, "The week that changed everything" (22 September 2008)
Godfrey Hodgson, "The week that democracy won" (29 September 2008)
Tony Curzon Price, "Unprincipled madness" (1 October 2008)
Will Hutton, "Wanted: a fairer capitalism" (6 October 2008)
Avinash Persaud, "Europe's financial crisis: the integration lesson" (7 October 2008)
Paul Rogers, "A world in flux: crisis to agency" (16 October 2008)
Larry Elliott, "From G8 to G20: the end of exclusion" (16 November 2008)
Krzysztof Rybinski, "A new world order" (4 December 2008)
Anand Menon, "Europe's eastern crisis: the reality-test" (5 March 2009)
Krzysztof Bobinski, "Europe between past and future" (6 March 2009)
There are already some signs that protectionism is rising. World Bank economists have counted forty-seven new trade restrictions since late 2008 alone. More than a third have been put in place by the G20 countries that pledged to such measures at the inaugural summit of heads of state and government in Washington on 14-15 November 2008.
The real risk, however, is less a return to a 1930s-style tariff war but what two analysts from the Centre for Economic Policy Research (CEPR) call "murky protectionism": industrial subsidies, requests that banks lend to only local companies, or the use of environmental arguments to discriminate against foreign goods and services (see Richard Baldwin & Simon J Evenett, "The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20", VoxEU, 5 March 2009).
There are many current examples, from the "buy American" provisions in the US stimulus programme to Nicolas Sarkozy's idea that French motor companies should make cars only in France. These instances provoked a degree of international outrage, and the governments in question backtracked. But the dangers remain high.
The best response would be for the G20 leaders to broaden the "no protectionism" pledge agreed in Washington to cover non-tariff measures. They could also task international organisations such as the Organisation for Economic Cooperation and Development (OECD) and the World Trade Organisation (WTO) with alerting the world to national measures that could be harmful for that country's trading partners.
The finance-ministers' meeting has revealed how much remains to be done. There is still time for the G20 to think big and agree to implement measures that will make a real difference in addressing this huge, complex crisis.
Comments
"First, the world needs better surveillance of national macroeconomic
and exchange-rate policies to address the kind of global imbalances
that have contributed to the current crisis."
It seems that there is much talk these days about creating or strengthening institutions that serve as regulators or watchdogs at the international level in order to try to prophylax against future crisis of this sort. However, it is not at all clear to me from what need this talk is arising and what purpose it will serve. While the scale and progression of the current crisis is certainly evidence of the high level of interdependence of the global economy, I've not heard any convincing arguments as to why international oversight would be effective as preventing future events. On the contrary, it appears that the policies responsible for the crisis are primarily ones that are best handled at the national level. Certainly cooperation, discussion, and international agreements to foster certain kinds of policies are appropriate, but I'm not at all sure of the utility or relevance of the kinds of international oversight the author seems to think are necessary.
Katinka Barysch neatly summarises the conventional view of how to retrieve the situation. She could have managed an even neater summary by simply writing "more of the same - but with a little closer regulation". That, effectively, is the spartan recipe that Gordon Brown and many, if not all, economic soothsayers are trying to thrust down the gullet of a bewildered public both in the West and elsewhere. What has to be avoided they tell us - in dutiful obedience to received opinion - is a new round of protectionism, like the "disastrous" one of the 1930s. Nicolas Sarkozy has come in for special criticism for attempting to "tie" financial support for French car-makers to the employment of French workers.
In the new world order of global capitalism, governments can't be allowed to use national funds to protect national economies. International treaties on free trade and globalization oblige them to ignore the problems and, indeed, the wishes, of their own electorates if these conflict with the prevailing orthodoxy. Unfortunately, it is hard to see how this constraint is anything other than fundamentally undemocratic.
Such is the dilemma that Sarkozy is confronting in France where a highly politicized citizenry expects the President to be first in line to protect them in times of economic difficulty. Assertions that they will be better off losing their jobs now so that " in the long run" they can earn a little more later cut no ice with the French. Nor should they with any other electorate. Do we have to keep reminding ourselves of Keynes's warning about what the long run means?
Anti-protectionist rhetoric is misleading in many respects - too many for the compass of a short note such as this. I will briefly touch on just two that seem to me of particular importance.
First, if the free-traders are to be believed, we have been living - at least up to the onset of the crisis - in a world of largely free and unfettered commercial exchange. Nothing, however, could be further from the truth. All western countries routinely provide a variety of overt and covert types of support for nationally-based industries, examples of which are export marketing assistance, investment incentives, tax holidays, infrastructural projects related to plant location, special utility rates, farm subsidies, manipulation of exchange rates and so on. In the United States, a great deal of assistance to US corporations is provided at state and municipal levels, or through regional agencies such as the Tennessee Valley Authority Economic Development Division, and it passes below the visible horizon of foreign onlookers. In fact, the range of protectionist devices is limited only by the ingenuity of the economists and bureaucrats who are paid to invent them. While most political leaders in the West pay lip service to free trade, many governments beaver away behind the scenes to evade its implications - as the French President appears to be doing; and so too the President of the United States. Where the working population is in trouble is if they find themselves governed by leaders who really believe in the free trade nostrum - like Gordon Brown and Peter Mandelson.
Here we come to our second point. The vast sums being ploughed into economic recovery by western governments is to be paid for by - you guessed it - western taxpayers. So what an obsessive adherence to open commercial borders may mean is that a goodly proportion of the £300bn and rising that Gordon Brown and co. are putting into circulation could be going straight into productive activities in some other part of the world, leaving the UK's unemployed scarcely better off than if the sums had not been spent at all; worse off, in fact, when the increased indebtedness is taken into account. The question that Obama and Sarkozy are trying to tackle, but that no UK politician or commentator appears to acknowledge is this: why should national taxpayers foot the bill for an economic stimulus package that is not aimed primarily and fundamentally at employment creation in their own country? Put more simply, why should I pay for someone in Slovenia to make cars? Or someone in China to make t-shirts? Are the Slovenian cars and the Chinese t-shirts truly cheaper? In an era of full employment, they might be; but in conditions of unemployment, their prices rise exponentially. They rise first because I am financing their production, and second because I am financing my own unemployment. In this light, free trade, in the version foisted on the world by the West, is fundamentally unstable. It works most efficiently for countries with full employment; but. as unemployment increases, its efficiency decreases. For developing countries with high unemployment it is plainly nonsensical. And it is not the way any of the developed countries achieved their privileged status, as Cambridge University 's Ha-Joon Chang convincingly demonstrates.
As I write this, the UK car industry is reportedly fighting for survival. Trade theory has it that industries that falter should be left to die, while their workers should retrain for some other - unspecified - activity in which the country enjoys an equally unspecified comparative advantage. In reality, it is not lack of competitiveness that is hitting the UK car industry, but the severity of the recession. It is also hitting the industry in many other countries. Car manufacturing plants that survive will not be the most competitive but the ones receiving enough state aid to nurse them back to health.
In the current conditions of crisis, competition is not taking place between semi-comatose companies, but between politicians. The smartest (Obama and Sarkozy among them) will ensure one way or another that their key industries live to fight another day; those who are wedded to extremes of free trade ideology can be assured of one thing: they will lose the next election.
Note: This has also been posted on the Globalization Forum.
jf
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