Opinion

The Great Debate

An unstable global economic system that is being ignored

Today, the International Monetary Fund announced yet another a reduction in its global growth projections for 2014, with its estimate of U.S. growth also reduced (citing reduced government spending, but not the present U.S. government shutdown — or the heretofore unthinkable notion of the U.S. government defaulting on its obligations). Despite the seeming urgency of global economic slowdown, when world leaders attended their annual fall confabulation at the United Nations in New York last month, they focused on the diplomacy of physical security (Syria, Iran, etc.). Thus another year has passed in which global economic security issues were on no one’s reported agenda.

Policy makers continue to fail to appreciate that the most formidable economic challenge today lies in the area outside the borders of any one nation or region — and that multilateral action to address this challenge is arguably more important than efforts at increasingly less-effective internal stimulus.

Present-day economic imbalances — particularly those stemming from the rapid emergence of the post-socialist nations over the past 15 years, with their associated supply of excess labor, productive capacity and global capital, relative to demand — have hamstrung the economies of the advanced nations. Such economic dislocation can no longer be resolved by any one power, or even by two or three. Indeed, there is enormous risk today of unilateral or bilateral actions being viewed by players left out of such actions as economically threatening or even hostile, leading to economic countermeasures. The issue is compounded by the complexity of the relationships among and between developed nations on the one hand and emerging ones on the other. It is hard to imagine moving beyond a global economy that is just getting by, and therefore at material risk of new and deeper crisis, without a more open dialogue among the Group of 20 (G20) nations and proactive steps toward mutual accommodation.

Yet, since the central banks of the developed world have managed to more-or-less stabilize their economies — however tenuously — discussion of a global grand bargain focused on rebalancing international trade and finance has been all but absent. This is unfortunate, as it makes it unlikely that the advanced nations will be able to return to their potential growth trajectories for some time to come.

There is, nevertheless, enormous common interest if nations can find the right way to open a dialogue with one another. Both surplus and debtor nations have so far understood that it is to no one’s benefit to attempt to aggressively advance their singular interests at the expense of their trading partners. We’re all in this together, our interests are intertwined in a flat world, and we’re dealing with more economic interdependence than ever before. And thus far, at least, we have mostly avoided the “beggar thy neighbor” strategies that went awry in previous slumps, either out of wisdom or good fortune of their ineffectiveness. That said, we are a long way from a harmonious, cooperative global trading environment.

Forging ahead with free trade

The recent focus on what divides world leaders, from Syria to the euro zone, has obscured the significant agreements reached at the Group of 20 meeting in St. Petersburg earlier this month. One of the most important was support for free trade and opposition to protectionism.

We can now build on this momentum, as well as other trade liberalization efforts, to achieve meaningful progress at the World Trade Organization ministerial meeting in Bali in December.

Though critics describe the G20 as ineffective, it has been key in fostering economic cooperation among the world’s largest countries and helping to stave off the worst economic catastrophe since the Great Depression. With the economic stresses of the past five years potentially triggering protectionism, it’s noteworthy that G20 members have steadfastly supported free trade.

Common ground for Obama and Putin is offshore

Low expectations surround the G20 meeting in St. Petersburg on September 5-6.

President Barack Obama’s decision to cancel the pre-G20 summit with Russian President Vladimir Putin means the big photo op will likely be the two leaders awkwardly trying to avoid each other. The other headline-making issues in U.S.-Russian relations — Syria, nuclear weapons reduction, missile defense — also appear off the table now. There is one timely matter, however, that resonates with Washington, Moscow, and the entire G20 — the continuing fight against offshore tax havens.

The Cyprus financial collapse in March focused world attention on the outsized role played by offshore banking zones in international tax avoidance and money laundering. Though Russian depositors were the primary victims here, Moscow appeared indifferent to this unprecedented expropriation by Cyprus of the assets of Russian citizens. Putin proved unwilling to help those he viewed as tax-evading oligarchs and corrupt bureaucrats — as well as a few legitimate businesses.

Putin has made the fight against offshore tax havens a key plank of his foreign policy. Other world leaders — including British Prime Minister David Cameron and French President Francoise Hollande — have also issued strong statements criticizing sophisticated legal strategies that allow companies to skirt the domestic treasury, depriving the state of critical revenues in this time of economic recession.

Stubborn national politics drag down the global economy

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.

Does the G20 matter?

G20 finance ministers are gathering in Mexico City this weekend to prepare for the fourth G20 Leaders’ Summit since the Group of 20 declared itself the premier forum for international economic cooperation at its 2009 Pittsburgh summit. Birthed to coordinate a response to the global financial crisis, the informal body of the world’s richest countries has seen its agenda balloon over the past four years to encompass everything from green growth (Mexico’s pet initiative) to commodity price volatility (the agenda of the French, who hosted last year) to anti-corruption.

As workstreams proliferate, consuming an ever-increasing amount of communiqué paper and government staffers’ time, the question must be asked: Does the G20 matter? Or, more precisely, what should the G20’s role be on the global stage, and what reforms (if any) are required to allow the body to fulfill this role effectively?

The informal group was elevated from finance ministers to heads of state to quickly coordinate a decisive response in the face of the global economic crisis in 2008; and effective action required a forum that included China and other important emerging economies, as the former G7/8 club could no longer really call the shots. In its important initial mission the G20 mostly succeeded, forming the Financial Stability Board and taking other critical measures to stabilize the economy. Now the G20, at a leaders’ level, is de facto the premier forum for international dialogue and cooperation on a whole range of critical global issues that have been unable to find resolution in other contexts.

The G20 needs to embrace growth

This week’s Group of 20 meeting of finance ministers and central bankers in Mexico City needs to take concrete actions to support global growth and job creation, revive credit growth by the private financial sector, guard against a rise in trade protectionism and reduce financial market uncertainties.

The scope for long-overdue G20 actions on budget deficits and payments imbalances, including currency misalignments, is limited this year given presidential and legislative elections in France, South Korea, the U.S., and Mexico, and given the emergence of a new leadership team in China, a once-in-a-decade event. Politicians may well want to avoid taking unpopular measures right now, even if they’re necessary. However, there is still significant scope now for concrete G20 measures that strengthen the forces for growth and confidence-building in the short term.

Over the last two years, a euro sovereign crisis has been building in which many of the lessons that should have been learned from past debt crises in Latin America and Asia have been ignored. These include the risks of contagion, the dangers of delaying tough decisions, and the excessive focus on imposing austerity on debtor countries. The latter undermines debtor nations’ political leaders and their crucial task of building public support for tough reforms, ultimately creating the opportunity to grow their way out of their difficulties.

The perils of protectionism

By Gordon Brown
The views expressed are his own.

Next week’s 2011 G20 meeting has the power to write a new chapter in the response to the economic downturn. But every day, as nations announce currency controls, capital controls, new tariffs and other protectionist measures, the G2O’s room for maneuver is being significantly narrowed. Already the cumulative impact of a wave of mercantilist measures is threatening to turn decades of globalization into reverse, returning us to the economic history of the 1930s, and condemning at least the western parts of the world to a decade of low growth and high unemployment.

Three years ago when the financial crisis first hit, the G2O communiqués were explicit in warning of the dangers of a new protectionism. Led by the head of the World Trade Organization (WTO), Pascal Lamy, we embarked on a forlorn attempt to use the crisis to deliver a world trade deal — and were frustrated by an irresoluble dispute on agricultural imports between two countries, India and the USA. But now, in the absence of any co-ordinated global action, member countries have been retreating into their national silos — and the trickle of protectionist announcements threatens to become a flood. Switzerland led costly action to protect its overvalued currency and has been followed by currency interventions in Japan (with perhaps more to come), India, Indonesia, and South Korea. Brazil, which had itself warned of currency wars, then imposed direct tariffs on manufactured imports — a hefty car tax designed to protect its own native auto industry against emerging market imports. Other countries are now considering mimicking them. Capital controls are also now in vogue, and of course the U.S. Senate has just voted to label China a “currency manipulator.”

The 2011 WTO report, just published, warns of divergences in regulatory frameworks in preferential trade agreements. And in the next few days the WTO will release its submission to the G20.  It will note  a  rise in  trade-restrictive measures and describe the outlook ahead as “less restraint in the adoption of new trade-restrictive measures and less determination to dismantle existing ones.” Perhaps as worrying  is the growing resort to what I call “home country bias.” Today French banks are selling off their foreign assets and focusing their large portfolios on France itself. French banks have 8 trillion euros in total assets and if the plan is to run them down at 5 percent a year, then by 2014 we will see a 1.2 trillion-euro reduction in investments outside France. European bank liabilities are on the order of 32 trillion euros and when, as we can expect, the same mercantilist approaches to liquidating assets spreads to Germany, the Netherlands, and beyond, growth will be put at risk.

How Europe can stave off a crisis

By Gordon Brown
The views expressed are his own.

It was said of European monarchs of a century ago that they learned nothing and forgot nothing.  For three years, as a Greek debt problem has morphed into a full blown euro area crisis, European leaders  have been behind the curve, consistently repeating the same mistake of doing too little too late. But when they meet on Sunday, the time for small measures is over. As the G20 found when it met in London at the height of the  2009 crisis, only a demonstration of policy intent that shows irresistible force will persuade the markets that leaders will do what it takes. An announcement on a new Greek package will not be enough. Nor will it be sufficient to recapitalize the banks. European leaders will have to announce a comprehensive — around 2 trillion euro — finance facility; set out a plan to fundamentally reform the euro; and work with the G20 to agree on a coordinated plan for growth.

For three years it has suited leaders across Europe to disguise Europe’s banking problems and, citing the blatant profligacy of Greece, they have defined the European problem as simply a public sector debt problem. And it has suited Europe’s leaders to call for austerity (and if that fails, more austerity) and forget how the inflexibility of the euro is itself dampening prospects for growth, keeping unemployment unacceptably high and weakening Europe’s competitive position in the world today. Indeed, Europe’s share of world output has now fallen to just 18 percent.  And it is a measure of how it is losing out in the growth markets of the future that just 7.5 percent of Europe’s exports go to the emerging markets that are responsible for 70 percent of the world’s growth.

When I attended the first ever meeting of the euro group of leaders in October 2008 there was astonishment when I reported that Europe’s banks had bought half America’s subprime mortgages and there was incredulity when I said that European banks were far more at risk than U.S. banks because they were far more highly leveraged. Since 2008, as American banks have tackled their toxic assets, they have written off 4 percent of their loans and raised the equivalent of another 4 percent in new equity.  But euro area banks have written off just 1 percent of their loans, and have raised their capital base by only 0.7 percent, leaving them highly vulnerable even before their exposure to sovereign debt has become a central issue.  Their vulnerability is increased because they have always been far more dependent for their funding on the short term and confidence-dependent wholesale markets, and  countries within the euro zone are able to do far less in the face of capital flight than, say, Britain.

The great global rebalancing and its implications

Manoj Pradhan

Alan M. TaylorManoj Pradhan, left, a global EM economist, is an executive director at Morgan Stanley. Alan M. Taylor, right, a senior advisor at Morgan Stanley, is a professor of economics at the University of California, Davis. The opinions expressed are their own.

Policymakers have fretted about global imbalances for nearly a decade, but little consensus or clarity has emerged. Some saw problems created by surplus countries, others deficit countries. Many feared a fiscal-cum-balance of payments crisis in the U.S., but the crisis we got reflected private/financial failures. G20 proposals for collective action remain a work in progress. Uncoordinated policy actions triggered talk of currency wars.

As these debates drone on, there may be less cause for concern about global imbalances. Emerging market-developed market (EM-DM) relationships may revert to a more typical historical pattern. We highlight key areas of global adjustment in this scenario: shifts in capital flows, exchange rates and real interest rates.

G20 recipe for deflation, protectionism

It may be folly or it may be prudence, but the move to fiscal austerity and restraint will be deflationary, will be bad for risky asset prices and will raise further the threat of protectionism.

The weekend’s meeting of the Group of 20 wealthy nations in Korea ended in a muddle of policies, with the final communique appearing to praise fiscal retrenching, expansionary policy, tighter regulation and slower implementation of that tighter regulation all at the same time, and all in the same impenetrable thicket of euphemism, buzzwords and consultant-speak.

To wit:

“The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability, differentiated for and tailored to national circumstances. Those countries with serious fiscal challenges need to accelerate the pace of consolidation. We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions. Within their capacity, countries will expand domestic sources of growth, while maintaining macroeconomic stability,” the communique issued at the conclusion of the meeting read.

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