Why Pittsburgh was a start
Einstein once defined insanity as trying the same thing over and over again and expecting different results. Skeptics are already arguing that leading nations are doing precisely this on global imbalances.
They have a point. The quest to rebalance world growth embraced by the G20 in Pittsburgh looks worryingly familiar.
The new Framework for Strong Sustainable and Balanced Growth, based on the draft communique, is hard to distinguish from the failed IMF Multilateral Consultation on Global Imbalances that was launched in 2006. After much fanfare and a year of negotiations the IMF produced nothing more than a series of hollow pledges.
According to this analysis the G20 has done nothing more than create another ugly acronym. But the doubters may yet be confounded. A more balanced global economy will now be easier to achieve. The failure of previous efforts was not a result of the poor design of the negotiating framework. The IMF process was actually very well crafted. Like the new G20 plan, it aimed to harness the magic power of peer pressure.
By bringing together just a select group of lopsided trading nations the IMF process was set up to foster a collegial atmosphere and “frank” discussion. The Fund itself was meant to serve as an independent referee and keep track of progress.
A few tweaks might help make the process more effective. There is merit to the idea of adding “triggers.” If current account deficits or surpluses rise over a certain level there would be automatic negotiations to bring delinquent countries back into line.
This could help to counteract the innate timidity of the IMF, which is understandably reluctant to chastise major shareholders.
Even so, the real problem with the IMF process was the lack of incentives. Major nations were aware of the dangers of imbalanced growth but did not feel sufficiently threatened to do much about it.
Two-thirds of Germany’s economy growth came from net exports between 2000 and 2008. China and Japan were also benefiting. Meanwhile, the United States felt no pressing need to rein in its exuberant consumers.
The status quo was working well for everyone. The fact that this is no longer the case offers the main hope for change.
Enlightened self-interest alone should make the giant exporters more receptive negotiating partners. Even without international pressure, current account surplus countries have a strong incentive to refocus growth.
Despite the reviving global economy, Germany, Japan and China may all find it much harder to find customers for their exports. Many of the world’s highest-spending consumers will be convalescing for some time.
At current rates of saving it will still take U.S. consumers more than five years to bring debt levels down to a more acceptable 100 percent of disposable income. Unemployment may still be close to 10 percent a year from now.
Other major sources of consumer demand in the run up to the crisis — such as Eastern Europe — are likely to take years to recover fully.
The weakness of demand confronts exporting nations with a stark choice — boost domestic demand or put up with slow growth. This will offer a more powerful spur than any amount of peer pressure.