Whether the forthcoming G-20 Summit of Heads of State in London on April 2 should be called “London Summit” (raising memories of the failed London Summit in 1933), G-20 Summit, or Bretton Woods II (with the pretense to re-structure global economic governance like its predecessor in 1944), whether it is Gordon Brown or Barack Obama who will save the world, all this is immaterial to the well-being of the world population. What they need is answers to the most severe global crisis since 80 years. Some of the dilemmata which the policymakers will face and where the global citizenry expects answers are the following.
1. Truly Global or Only G-20?
When Europeans prevailed on George Bush to call a crisis summit to Washington, D.C. on Nov. 15, 2008, they decided to invite not only the G-7/8 leading industrial countries (as had been usual), but rather the B-20 group, thus including large emerging countries like China, India, Brazil, Indonesia, South Africa, Turkey, Mexico and the European Commission. Still, the many poorest countries containing 1/3 of the world population and the most vulnerable to a crisis to which they had not contributed, were – and are – missing. Instead, the Netherlands and Spain weaselled their way into the group, reinforcing the European element. Estimates are that the crisis will throw up to 100 million persons into extreme poverty, still enfeebled by the food (price) crisis, environmental disasters and social turmoil. Some of their representatives should have been systematically included, if truly gobal solutions are to be found. The symbolic invitation of Ethiopia and African Development Bank President Kaberuka is not enough. Global governance needs global representation!.
2. Immediate Crisis Response or Medium-Term Sustainability?
Some argue that immediate crisis response to revive growth and employment is key, others maintain that this must be combined with building the foundations for the modern economies of the 21st century, by investing in material and immaterial infrastructure, both economic, environmental and social. The arguments are between primarily promoting private consumption (tax reductions, subsidies for mortgages, etc.) or public consumption in communication and transport infrastructure, renewable energy, social infrastructure (health care, unemployment insurance, poverty alleviation), education, research and development. In starker terms, it is a question of reviving the status quo ante or transforming and making our socio-economic systems fit for the future. As an aside: in developing and emerging countries, attempts to fuel private consumption will not work as long as citizens have to provide for their own existential risks: they will save and not spend!
To go back to debt-financed consumption in some Western countries, to go back to high leverage, to go back to leveraged mergers and acquisitions which create larger and larger firms at the expense of consumer satisfaction and worker incomes does not appear to be desirable to many.
3. Take Care Only of Financial Institutions or Restructure Them and Strengthen Regulation?
Financial institutions have developed from “utility banks” into trading monsters. Less and less of their business is financing enterprises and consumers, more and more is secondary market activities, trading and speculating. This has led to banks which are not only “too big to fail” (as the gigantic sums poured into them show), but also too big for the system of the “real” economy as a whole. When banks’ balance sheets become a multiple of the GDP of their host countries, any instability in them threatens the whole system. This has happened now. The battle is between those who basically are concerned with recapitalizing the banks (and insurance companies) and provide them with liquidity so they lend again (“as before”) to each other and the real economy, and those who want to restrict them to their utility function by regulating them more strictly. There is consensus now that the abolition of the Glass-Steagall Act in the US by President Clinton in 1998 which separated commercial from trading banks has contributed to the crisis. Many Europeans want strong, if possible global, regulation (at least commonly agreed principles), the U.S., to some extent the U.K. and a number of emerging countries are against emphasis on regulation.
4. Regulatory Reach
Whether financial market regulation should be national or global, there is some consensus that it needs to prevent regulatory arbitrage, where investors invest into instruments and institutions which are less strictly regulated or into such jurisdictions. The recent development with respect to “tax havens” shows that some movements occur in this direction. However, the proof of the pudding is in the eating: let us wait and see which actions are taken by powerful countries concerning tax havens which benefit their own institutions and citizens, let us wait and see whether financial centers will comply with international rules or prefer to unfairly attract capital from abroad. This is a classic “beggar-thy-neigbor” policy, in the same way as currency depreciation is for trade flows.
5. Tackling Global Imbalances or Not?
At the root of the current crisis lie the large and increasing medium-term global balances between countries with current account deficits and surpluses, as e.g. exemplified by the U.S. and China. The enormous foreign currency reserves built up by surplus countries which were invested to a large extent in deficit countries led to a savings glut, cheapened credit and led to a debt-fuelled culture in the deficit countries. This system has come to a resounding crash. During the boom times it led to enormous net financial cross-border flows, both into rich and poor countries; as a result of the crisis these flows have dried out for the developing countries. Estimates show that net cross-border flows to developing countries will fall from 1 trillion $ in 2007 to 160 bill $ in 2009. For capital-scarce countries this is a financial disaster.
While Keynes in Bretton Woods I attempted to set up a global economic system where both deficit and surplus countries were responsible for adjustments, the recent system has tended to see surpluses as “virtuous” and deficits as “vicious”, putting adjustment pressure only on the latter – with the exception of the U.S. whose currency became to “world currency” in which the US could accumulate debt without exchange rate risks. The victims were the currencies of emerging and developing countries whose recent depreciations have thrown many of these countries into near-bankruptcy.
Export-enhancing policies led to compression of wages, in the name of competitiveness, thus worsening income distributions, falling wage shares, less purchasing power and higher indebtedness. Such a system has proven to be inherently unstable. Further wage compression and poverty will lead to violence and aggression, threatening social cohesion.
6. Re-Engineering Global Economic Governance or Not?
There have been talks of establishing the G-20 as some new global governance forum. Alternatively, the UN group led by Joe Stiglitz has proposed to more inclusive UN Economic Security Council (without veto rights by the large powers). This corresponds to my own proposal of a “G-20 plus” where some of the European members would be replaced by 3-5 representatives from the poorest small countries, maybe one from each continent, or by representatives from regional economic associations, like African Union, Mercosur, or ASEAN.
From the substance it is necessary to establish new macroeconomic stabilization governance, including exchange rate mechanisms; a lender of last resort (e.g. an enhanced IMF with different voting rights and the larger intervention volume discussed by the G-20 and supported by the recent European Spring Council); new fair trade agreements with more emphasis on the rights of poor countries; prudential supervision, and others. Many strong and large countries are loath to such an idea, most of the smaller, more vulnerable countries not able to defend their stability in globalized times would benefit from such structures.
7. Integration of Economic, Environmental and Social Governance Issues
The present crisis is not only a financial and recessionary crisis, but also one of environmental disasters caused by climate change and social upheaval. The increasing migration flows from poor and environmentally vulnerable countries to richer countries are visible proof of that. Gordon Brown has repeatedly made calls for stronger environmental commitments at this meeting, but in recent discussions this element seems to have put on a back burner. Poor and developing countries are frequently hit several times over: their currencies depreciate, their exports slump, climate change dries up their water supplies and leads to catastrophes which again increase the danger of internal or external strife, often caused by fights over economic or environmental resources. The previous high-growth period, the catching-up of emerging countries, both in East, West, North and South has frequently come at the expense of the natural environment, including the climate. Mitigation, adaptation and a strong push towards environmentally friendly production and consumption patterns are a matter of survival and need finances, technology and technical advice.
Expectations into this summit are very high, possibly too high. Industrial countries have poured previously unheard-of sums into their financial systems and their economies, a sign that policy makers compensate their lack of know-how about this double crisis with money; some reserve-rich emerging countries have done similar. Poor emerging and developing countries do not have the budgetary resources, the national bank resources, the refinancing possibilities to do likewise. The whole global economy has become destabilized – a profligate system has found its limits. It will be hard to forge consensus on where to go from here: the G-20 have arrogated themselves a global leadership role; their leaders will have to deliver credible steps towards a crisis response and towards a more sustainable socio-economic system.