A chance for real change at the G20

September 21, 2009

For years, policy makers were able to cut and paste statements on global imbalances from one communique to the next. The words were never backed by action. This G20 meeting could very well be different.

Most commentators are not expecting much. Such cynicism is easy to understand. When the IMF tried to bang heads together in 2006 the result was a series of empty pledges. It now makes for comic reading.

The United States swore to eliminate the federal deficit by 2012 and contain spending growth. China agreed to allow further exchange rate liberalization. The euro area said it would reform labor markets. We all know what happened to these promises.

But self-interest is providing a strong tailwind behind the current talks.

One background motivator at the G20 may be the mounting suspicion that imbalances were a leading culprit of the 2008 financial crisis. The tide of savings flowing from China into the U.S. bond market certainly helped fuel the asset price bubble by lowering borrowing costs.

The influential governor of the Bank of England, Mervyn King, recently warned that unless the situation is resolved the world was “doomed to repetitions” of the meltdown and the “substantial recessions” that accompanied it.

This theory is unlikely to be the driving force, however. Imbalances may after all have only played a walk-on part in the crisis. The deluge of money from China did not oblige U.S. regulators to tolerate a surge of bank leverage and a slide in lending standards.

Moreover, it was always assumed that an off-kilter global economy was dangerous. For years economists fretted that it would lead to a calamitous fall in the U.S. dollar, soaring interest rates and a global slump.

Instead the main motivator at the G20 and beyond is likely to be the fears of the world export giants. A mercantilist approach to economics works only when you have free-spending consumers. And they are becoming a globally scarce commodity.

In the United States, debt relative to disposable income — though down slightly — is still close to double its peak after the 1980s boom. It could take three to five years of high saving just for Americans to reduce their debt burden to a more manageable 100 percent of disposable income. With unemployment edging toward 10 percent they will not soon return to their profligate ways.

For China, where the United States accounts for close to a quarter of exports, this is a sobering message.

Even Germany — which relies on the United States for less than 8 percent of overseas sales — can have no reason for complacency.

Nearly 15 percent of Germany’s exports before the crisis headed for Eastern Europe. Many of these states may now take years to fully recover from the hangover of the financial crisis. The fast-growing fringe economies such as Spain also accounted for much growth. They too are in the doldrums.

Nor do the BRIC economies offer quite the outlet for exporters that some have assumed. Consumer spending in Brazil, Russia, India and China combined still came to only $2.5 trillion last year, according to calculations by Rachel Ziemba at Roubini Global Economics. This is little more than a quarter of consumption in America.

Figures like these should start to focus minds of leaders in the world’s export titans — China, Japan and Germany. Boosting consumption as a share of the economy will take years for these nations, so the sooner they start the better.

But sooner or later slack world demand will achieve what dozens of communiques and conferences failed to do — a more symmetric world economy.


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