The imbalances that could sink the G20
Obama's interevention into the G20 warm-up process last night carried an unmistakeable message. The twin goals of the summit are to be bank regulation reform and fiscal stimulus. This, diplomatically, is both a sop to the European obsession with reining-in Wall Street and a frank re-assertion of his central strategy: Obama wants to reflate the world economy with borrowing, public spending and tax cuts. In this he has support from China, the IMF's bosses and some of the newly powerful middle-income countries. But the Europeans are lukewarm on fiscal stimulus.
[Before I go on let's define fiscal stimulus: you add demand to the economy by boosting public spending and/or cutting taxes, at the price of increased government borrowing.]
Countries have committed $2.75 trillion so far, with the biggest spenders being the "G2" - the USA and China - closely followed by Japan (500bn) and Brazil (283bn). On top of that the IMF has committed $65bn to Pakistan, Latvia, Iceland, Hungary and Ukraine - a figure which though small represents a staggering 20% of these countries combined GDP. In Europe meanwhile the stimuli announced are small: neither Britain, Germany, Italy or France will spend much more than 1.5% of GDP.
The problem is in this crisis: all measures that are not taken multilaterally end up shifting the problem somewhere else. The suit jackets of the politicians may be going shiny with breast beating against protectionism, but a unilateral fiscal stimulus is a kind of protectionism - even if you do not overtly tie the spending into your own country (and Hu, Obama and Sarkozy have already done so). This is why Obama is just as correct to call for a global fiscal stimulus as Gordon Brown is to call for a global framework for bank regulation.
However calling for global action is one thing, delivering it another. And the reason for this goes beyond venality and nationalism. There is an unaddressed problem at the very heart of globalisation. In a trenchant editorial the Daily Telegraph spells it out:
"We are in this mess because enormous global trading imbalances were allowed to build, by governments and regulators who were asleep at the wheel."
In his book, Fixing Global Finance, the FT commentator Martin Wolf outlines a sophisticated critique of the global imbalances, which I will summarise (as always risking the charge of over-simplification): China produces, the west consumes; Asian people save, Anglo-Saxon people borrow and spend; Western governments are in debt, while Asia, Russia and the oil producing countries have run up surpluses; finally (and shockingly) the flow of investment from the west to the east is dwarfed by the flow of investment from developing countries to rich countries, with the added problem that Western investment in the East is highly profitable, but not the other way around.
Before this crisis developed economists and politicians used to sit around pontificating about how these imbalances would be redressed. Now we know: through a cataclysm. The question is, will it be a primarily objective process, in which the individual actions of states in pursuit of their economic interest leads, eventually, to a new economic order - or will the most powerful governments in the world keep a handle on the process.
Here again I must point you to today's Telegraph: its economics editor Edmund Conway thinks not:
" It is going too far to say this is one of the final opportunities to save the world economy from sliding over the brink. The descent in the Thirties was far more gradual and intangible. But at some point the politicians must do something to arrest the economic collapse, or cave in to its inevitability. Instead what we will get is another summit full of sound and fury; another no-business meeting."
There is a conclusion lurking behind the re-emergence of the global imbalances into the G20 debate that not many people are prepared to draw. I will spell it out: globalisation has not really been globalisation at all.
Far from the emergence of a harmonised and increasingly unified world economy it has produced a lopsided and malformed structure that is now falling apart. The low paid worker in Detroit cannot buy his new pair of trainers unless the low paid worker in Shenzhen a) makes them, b) deposits four out of ten yuan he earns in the factory into a global finance system that then c) lends the money to the Detroit trainer-buyer at virtually zero interest.
And when I say falling apart I do not mean primarily protectionism - though there is protectionism. I mean that the cheap-money finance system was the glue that held globalisation together: it was made possible by the high savings of Asian farmers, workers and salariat - savings, by the way, that attract unsustainably low rates of return. The debt driven finance system, together with much of the rest of the economic model of the last 20 years, is what has fallen apart.
Those who study the imbalances are pretty much agreed on what the technical solution is: China and India must become modern consumer-driven economies and the value of the dollar must fall. Instead of saving, Chinese and Japanese consumers have to spend. This solution is often explained as if countries were - as they are in Sid Meier's Civilisation - represented by a single player, an all powerful government advised by wise economic men. But it is otherwise in the real world. Countries are made up of classes. And the rebalancing solution actually means a major redistribution of wealth in China, India and much of the global south away from the rich and towards the workforce.
The question is, does anybody have the vision and capacity to deliver an orderly rebalancing of the world economy? It is easy in the run up to the G20, with many western politicians drained of credibility, to predict they will not, and that the summit will be a talking shop. However history does provide us with examples of summitry that worked: Bretton Woods worked; the Versailles Peace Conference - though it came up with a disastrous solution in the form of unpayable German reparations - actually worked as a summit. There was haggling, reasoning, all the great minds were there, compromise was reached, synthesis achieved and then imposed.
And it's clear why: both summits took place directly after global conflicts. It was absolutely clear in 1944 and 1919 what the power pecking order was - and to the effect that certain nations did not understand this (eg France in 1919) they got royally carved up. Likewise at both conferences you had superpowers that were globally engaged, above all America. And you had leaders with vision: men (it was mainly men) who had actually led masses of people through difficult situations and who used eminent economists such as JM Keynes for advice but then took their own decisions (in the case of 1919 ignoring the advice).
Today the global pecking order is disrupted. America is still the tops but China has a growing confidence (Chinese submarines tweaked the nose of the Pentagon last weekend in a "Hunt for Red October" style standoff with a US navy ship off the Paracel Islands).
Crucially the prestige of America's global ideology and economic model has been dented. Finally there are very few global leaders who talk in terms of an over-arching vision: China's politicians do not have a "global" strategy yet, in the same way that pre-1916 US presidents also shrank from global ambition. The one politician with momentum - Barack Obama - does not even have a fully formed administration.
So the question of the G20 summit is not whether the communiqué is waffle or contains concrete commitments: the last one in November contained a concrete commitment, nay instruction:
"We shall strive to reach agreement this year on modalities that leads to a successful conclusion to the WTO's Doha Development Agenda with an ambitious and balanced outcome. We instruct our Trade Ministers to achieve this objective and stand ready to assist directly, as necessary."
Suffice to say there is no Doha deal.
No, the question for the G20 summit is whether anybody actually outlines a vision for a rebalanced global economy and path to achieving it. Well Stephen Roach, Morgan Stanley's MD in Asia, is one of those closest to the question and has been one of the most perceptive commentators. I will leave the last word to him, (courtesy of yesterday's FT):
"A crisis-torn world is in no mood for the heavy lifting of global rebalancing. Policies are being framed with an aim towards recreating the boom. Washington wants to get credit flowing again to indebted US consumers. And exporters - especially in Asia - would like nothing better than a renewal of demand led by the world's biggest consumer. It is a recipe for disaster."