Opinion

The Great Debate

Stubborn national politics drag down the global economy

By Gordon Brown
January 18, 2013

Four years ago world leaders, meeting in the G20 crisis session, agreed they would all work to move from recession to growth and prosperity.  They agreed to a global growth compact to be delivered by combining national growth targets with coordinated global interventions. It didn’t happen. After the $1 trillion stimulus of 2009, fiscal consolidation became the established order of the day, and so year after year millions have continued to endure unemployment and lower living standards.

Only now are there signs that the long-overdue shift in national macro-economic policies may be taking place. The new Japanese government is backing up a “minimum inflation target” with a multi-billion-dollar stimulus designed to create 600,000 jobs. In what some call the “reverse Volcker moment,” Ben Bernanke has become the first head of a central bank for decades to announce he will target a 6 percent level of unemployment alongside his inflation objective. And the new governor of the Bank of England, Mark Carney, has told us that “when policy rates are stuck at the zero lower bound, there could not be a more favorable case for Nominal GDP targeting.” Side by side with this shift in policy, in every area but the Euro, there is also policy progress in China. It may look from the outside as if November’s Communist Party Congress simply re-announced their all-too-familiar but undelivered wish to re-balance the economy from exports to domestic consumption, but this time the promise has been accompanied by a time-specific commitment: to double average domestic income per head by 2020.

The intellectual case for change is obvious. A chronic shortage of demand has developed for two reasons. First, as the IMF announced at the end of 2012, the adverse impact of fiscal consolidation on employment and demand has been greater than many people expected. Secondly, the effectiveness of quantitative easing has almost certainly started to wane. As former BBC chief Gavyn Davies has put it, “the supply potential of the economy is in danger of becoming dependent on, or ‘endogenous to,’ the weakness of domestic demand. …With demand constrained in this way for such a lengthy period of time, supply potential is beginning to downsize to fit the low level of demand.” It is a new equilibrium that can be reversed only by boosting demand.

But why is there so little optimism when the paradigm shift sought in 2009 is finally starting to materialize? Why do experts continue to downgrade their forecasts for 2013 and even 2014, while discussion so often drifts toward talk of a lost decade? It is, I suggest, because while countries are today adopting national growth strategies, they have missed out on the other part of the 2009 decision — the necessity of coordinated global intervention. And the big question is whether the momentum for growth can be sustained by national initiatives alone in the absence of global action or will instead melt away once again under the pressure of narrow, self-defeating national policies.

There is depressing testimony to stagnation produced by a lack of global demand. Olivier Blanchard, the IMF chief economist, has deployed devastating figures to demonstrate how fiscal consolidation has depressed the Western economy. Jonathan Portes of the National Institute of Economic and Social Research underlines the point: Austerity in one country reduces demand in the next and vice versa. ”The hit to output in Germany is now 2%. In the UK it is 5%; and in Greece 13%,” he wrote. Still more shocking is the impact on debt-to-GDP ratios. As Portes points out, fiscal consolidation was supposed to improve fiscal sustainability; instead, it makes matters worse. “This isn’t true just in extreme cases like Greece – fiscal consolidation across the EU has raised debt-to-GDP ratios in Germany and the UK as well. In both the UK and the euro area as a whole, the result of coordinated fiscal consolidation is a rise in the debt-GDP ratio of approximately five percentage points. For the UK, that means a debt-GDP ratio of close to 75% in 2013 instead of about 70%. We are not running to stand still; we are determinedly heading in the wrong direction.”

The negative impact of austerity on economic growth is not only greater than was originally assumed, concludes historian Robert Skidelsky, but quantitative easing quickly reached the limits of what it could achieve. “Most of the money of QE was largely retained within the banking system and never reached the real economy … the policy mix favored by practically all European governments has been hugely wrong.” And it is of course in Europe that the pessimism is greatest, the rethinking least and the response weakest. In 2011, the IMF predicted that the European economy of 2012 would grow by 2.1 percent; instead it shrunk by 0.2 percent, and the IMF now predicts that the European economy will be 7.8 percent smaller in 2015 than it thought just two years ago. But the only “rethinking” has been to accept the ECB as lender of last resort. Of course the bank is also free, in theory at least, to set the eurozone inflation target higher for two or three years, without any treaty violation. But there is resistance, and not just in Germany, with the result that Europe is indeed dragging the world down — locked in an austerity cycle, facing its own lost decade and lacking the confidence to adopt domestic measures to stop euro area unemployment rocketing above 11 percent, toward 20 million.

And thus four years on, instead of regeneration, a self-fulfilling pessimism has been gaining ground. It is the view that because of a debt overhang we are doomed to high unemployment and low growth and that there is nothing, either through fiscal expansion or monetary innovation, to be gained by attempting to counter it. I don’t agree. We are not doomed to miserably low growth. The reason the world is not moving fast enough out of recession is that we have failed to understand what a fast-changing global economy needs to do to sustain higher growth. And we will continue to perform badly if we stick to a model of the global economy where we rely on nations doing their own thing, attempting ”solutions in one country” devoid of any attempt at real global cooperation. That course doesn’t take us forward — only into a cul-de-sac of nativism and protectionism.

Here is the great and grievous disconnect of our times: that even as our economics have gone global, our politics have remained viscerally local. If “all politics is local,” as U.S. House Speaker Tip O’Neill famously proclaimed, will there be too small an audience for global coordination, and nothing to be gained domestically by advocating it? If so, even as the global challenge grows larger, the agendas of international summits will be smaller, their ineffectiveness, in turn, reinforcing the view that they will never be anything other than talking shop.

Yet the case for a global deal is today stronger than ever. Put simply, 10 years ago America could drive a world recovery. Perhaps 10 years from now Asian consumer spending from its rising middle class will fill this void. But today, for the first time in decades, no single economy can drive the global economy forward on its own. Without an agreement between the major economic powers, the world economy will therefore consistently deliver sub-optimal results. For 150 years until 2010, the West (America and Europe) dominated output, manufacturing, trade, investment and consumption. Now we are in a transition stage with the rest of the world out-producing, out-manufacturing, out-trading and out-investing Europe and America – but, significantly, not yet out-consuming them.

Only gradually will patterns of consumer spending – and then the global distribution of income and wealth – start to reflect the balance of population across the world. The imbalance is such that while the emerging markets produce the majority of goods and services, they depend upon selling to Western consumers. Until that changes, no continent can succeed without the other. Indeed, in the absence of global coordination the world is stuck in a rut of its own making, acting out our own global version of the “Prisoners’ Dilemma.” It is a world where no major economy can succeed on its own and yet none trusts any other enough to try a cooperative effort through coordination.

Ironically, this interdependence was understood very well in the 2009 G20 initiative. The IMF agreed to prepare an exercise called the Mutual Assured Assessment Program that would display the benefits of a coordinated push on growth not just for output but also for employment and the reduction of poverty. Yet by 2010 a global growth objective was a dead letter. Strident voices, always opposed to being precise about a growth objective, resisted the detailed policies and quickly turned instead to advocate fiscal consolidation. The familiar arguments about exchange rates re-emerged amid bitter allegations about Chinese currency “manipulation.’” Prior to the G20 in the autumn of 2010, the Korean government, to its great credit, floated a compromise way forward. They proposed that each major economy set limits for its current account surpluses or deficits (China and, for example, Germany a surplus of no more than 4 percent; America a deficit of no more than 4 percent). Privately, China indicated its willingness to engage. U.S. Treasury Secretary Tim Geithner signaled public support for the plan. But after an unfortunate series of misunderstandings the Korean plan was stillborn.

It is the resulting failure to deliver any global growth pact that is helping depress the global growth rate. National growth targets may be a necessary way forward but they are not a sufficient response. Even the boldest of national initiatives may fail not because targeting growth is the wrong thing to do, but because there is no way to sustain the level of growth we need without better global coordination. Thus any change in economic policy that is purely national, such as employment targeting, will have limited benefits (and may discredit the pursuit of an employment goal even in that country) because it will fail in the absence of a favorable global context.

Thus the policy void today lies less in the weaknesses of national central bank leadership than in the reluctance of national governments to contemplate global leadership. Some might argue that all we are seeing is dysfunctional political decision-making at a national level replicated at a global level. But there is a more compelling reason why global cooperation is in retreat: No one will take on the pervasive protectionism that has spread through the world. It is as common to Europe, where anti-immigrant parties are thriving and where the richest countries of the European Union balk at helping the poorest, as it is in America, where hostility to China and to the talk of global treaties or deals is widespread. Ramping up currency wars is seen as a better tactic to reflect domestic attitudes than talk of global coordination.

The result is that any politician who stands on a platform that does anything other than propose inward-looking, highly domestic-focused and often protectionist economic initiatives is at a disadvantage. Not only are there no votes in thinking and acting globally, but votes are actually lost unless you do the opposite of pursuing a global vision: You have, instead, to re-nationalize each economic problem and make it look as if you are dealing with a purely domestic failure. That is why, across Europe and America, debt and deficits – which should of course be the subject of long-term fiscal plans – are viewed as virtually the sole cause of economic stagnation and are almost the entire subject of economic debates at the expense of a sensible debate also about growth employment and trade liberalization. Put crudely, it is more politically salient for a national opposition politician to tell voters that his country’s problems are caused by domestic profligacy, that economic difficulties are self-induced (and thus soluble locally), rather than part of a complex international crisis that is more difficult to address. Indeed most voters would be excused for concluding that the global financial crisis was caused by a few spendthrift national governments who racked up debt and deficits when the history books will tell us the truth of how it started as a global banking collapse.

Yet, ironically, even as protectionist sentiment frustrates cooperation, there is a global growth deal waiting to be done. It starts from the recognition that there are large surplus savings and much unused capacity waiting to be mobilized and that the rising middle class of Asia holds the key to expansion. Yet China, which is perfectly capable of expanding consumer demand and taking in imports from the West, will continue to feel it cannot afford to raise middle-class demand while it is in fear of losing some of its Western export markets. India’s government wants to open up its economy to Western imports but, sadly, its fears of over-exposure to global volatility are not being addressed as they might be by greater understanding and support from the rest of the world. Only a coordinated policy response covering all the G20 economies can break this vicious cycle of low confidence and low trade growth. But if China could be confident that its export markets will not falter, then it could expand domestic consumer demand and take in Western goods. And if America were confident it could sell in Asia, Western consumer confidence would also rise.

In past decades, global economic coordination could be viewed as an optional extra, something to work toward but never to be given priority. Now economic coordination at a global level is no longer a luxury, but a necessity. Of course, if a coordinated approach is to work (including, in my view, a major global infrastructure initiative using unused savings to meet unmet needs), the G20 and IMF will need to commission far more in-depth assessments of the potential for growth, and work through them with the World Bank and regional development banks as well as all countries. In time the G20 will surely need something akin to an executive of its own. As Skidelsky, drawing on his studies of Keynes, has brilliantly shown, this new wave of economic weakness is not the inevitable aftermath of a banking collapse: it reflects a crisis of global political leadership that is man-made.

In 2013 we must amend Tip O’Neill’s dictum: “All politics must be global too.”

PHOTO: An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8, 2013. REUTERS/Kai Pfaffenbach

Comments
15 comments so far | RSS Comments RSS

Inwards looking is the only way to avoid the wholly sinking of the globe. As I said, common grounding is replacing the globalization happened for the last decades. now, the change is here, no matter you like it or not. With the new era comes in, people are more looking inside and search for the true value, not only are people doing so, the nations looking for value, not simple vanity as before, are also looking inwards. Life regains iits value inwards. Politicians smartly adapte this inwards looking strategy, as they find this is the only way to continue and enhance their political life. Industrilists and entrepreneurs also follow the trend to compound the inwards lookings and make huge profits. Everyone shall look inside and listen what God is telling.

Posted by gee.la | Report as abusive
 

God is telling live a longer, healthier and happier life. God is not telling to pollute this planet as a globalist, to waste money and resources on transporting cargoes mindlessly from one port of ocean to another port of another ocean. God is not telling to squeeze this planet for a few persons’ stupid vanity or for the so-called global growth to destroy the nature, which helps human to be human, either. God is not telling we shall be destroyed by a few globalists and stupid and stubborn politicians, either. But God indeed is telling we shall cherish our bodies, as the most important personal value. Look inwards, don’t waste too much your precious time and life on outside vanity.

Posted by gee.la | Report as abusive
 

Is this the bit where you remind us that you ‘saved the world’, Brown?

I presume you are the same Brown who sold off a large portion of the UK’s gold reserves, wrecked pensions ,wrecked industry, surrendered to the EUSSR…and have the gall to whine “and so year after year millions have continued to endure unemployment and lower living standards” so Brown please excuse me if I don’t fall at your feet in abject admiration…as far as the UK is concerned you are nothing less than a traitor!

Posted by randburg100 | Report as abusive
 

Why take advice of Mr Brown?

The person who sold half our gold reserves at precisely the bottom point in the market?

The one who borrowed 3% of gdp a year at the top of the economic cycle, therefore leaving us with an even bigger borrowing problem when the bubble burst?

Posted by JeffJONES | Report as abusive
 

Gordon Brown – what a cretin!

The only man on earth who makes Tony Blair look good!!

Posted by HappyExpat88 | Report as abusive
 

Isn’t it a job description of national governments – to defend lives, freedom and prosperity of their citizens first and think ’bout rest of the world later?

Also current political/economical system is not actually fair, so number of countries simply see no reason to support it at their own expense. And track record of IMF… well, popular joke since late ’90s is “Want to do your country good? Read IMF advice, do the opposite”.

Posted by chyron | Report as abusive
 

I am vvery surprised that Reuters would pay or give space to this communist drivel penned bya chancellor who destroyeed UK.

Posted by Cynicalsam | Report as abusive
 

Some rather unacceptable commentary here – libellous really. Conclusion must be that Brown has made some very telling marks, and some people just don’t like it. Like those who can’t pun back they just groan and vituperate their inferiority and inadequacy.

In particular, to for the ‘bankers’ who bankrupted the country(ies) to blame the deregulator for their abuse of the freedom granted(on demand) is like turkeys who sat in their cages with the doors open in December.

Posted by ReprievedSoul | Report as abusive
 

Didn’t deregulation of the financial system begin in the 1980s?
Deregulation being an important part of the ideology of the political right wing in US & UK.
Now protests from the right, in hindsight, having instigated & supported deregulation.
These party political ambiguities are not as important as current policy & required global cooperation for remedies that need to provide social cohesion, social justice and greater equality alongside environmental sustainability. Then competition & market economics can operate on an agreed upon, effectively policed, stable platform.
PS. Does Cynicalsam think that communism encompasses any non laissez faire suggestion?

Posted by davidf2 | Report as abusive
 

This man spent his political career running the UK economy into the ground and now behaves as if he is an economic guru.

“No more boom and bust” eh Gordon ?

Get lost, you are nothing more than a waste of space.

Posted by bob-uk | Report as abusive
 

The EU consists of many small nations which means most of them cannot produce most of what they consume therefore trade is great portion of GDP. Low wage policies would make any one of them more competitive in trade, but reduce local demand. Therefore each tires that. A single Europe wide elected economic government and laws would eliminate that.

In any case free trade also causes that. Each nation must sell (export) as much as it buys (imports) or go into debt. Therefore, they must able to build export industries (such actions what ever forms they take can be called export subsistence). The free trade rules of the WTO should be replaced by equal export and import goals for each nation. Nations are unequal in wages and all other things so there will be losers and winners in trade. Free trade gives incentives for low wage policies which only reduce total demand in a region.

Posted by Samrch | Report as abusive
 

I think Mr. Brown has a very good grasp of the global economy and pretty much spot on. His point is made by the commenters above as they are all stuck in the national viewpoint. It will be another 50 years before the older generations die off and the younger ones take over. Remember, we live longer these days. It will be a great world for our descendants once they have reached global unity.

Posted by tmc | Report as abusive
 

This man is a financial illiterate. He destroyed the UK economy. Why are you giving him airspace

Posted by Harnser | Report as abusive
 

Brown splaffing on about economics is a bit like the emperor Nero lecturing on fire prevention or the Titanic captain telling us how to avoid icebergs.

What on earth do Reuters think they are doing ? Who commissioned this rubbish ? They have lost a lot of credibility in my eyes. I will look at Reuters differently from now on.

Posted by Medved | Report as abusive
 

Great article. Welcome back. For all the little Britain comments below great to see a well reasoned assessment of a global issue that dominates above all others.

Posted by Deauville | Report as abusive
 

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