What exactly do the leaders of the world want for the global economy? The official communiqué released by the G20 Seoul Summit suggests that they have very little idea. The sense that document conveys is of complete confusion, not just in terms of contradictions across the positions held by governments of different countries, but contradictions within positions, in terms of stated goals and the means to achieve them.
There has been a lot of talk about the apparently “irreconcilable differences” between surplus and deficit countries, for example, or between countries that are trying to engineer lower values of their currencies through monetary policies and other measures, and other countries who are trying to prevent appreciation created by the inflows of hot money. There is no doubt that these issues have emerged as significant areas of friction between some major economies. There are growing fears of currency wars and trade wars, and these fears can at best be only partly alleviated by the platitudes coming out of summit documents.
But the obsession with imbalances obscures the lack of coherence on what should be the more significant question: what are to be the major drivers of growth for the world economy? It is remarkable that the countries that ought to be the most concerned about this within the developed world seem to be the most confused, particularly from a developing country perspective.
The United States government, for example, mooted the extraordinary idea of capping the external deficits or surpluses (as proportion of GDP) of major countries – as if such a thing could be done realistically, or indeed as if the global economy has ever really required such a false notion of balance. The idea clearly got no traction at the summit, but in any case simply trying to enforce balance is hardly likely to resolve the problem of revival of growth and employment. If anything, it will exacerbate them.
The German position is even more remarkable and self-contradictory. On the one hand, the Germans want the US to reduce their external imbalance, which they have decided is a cause of many problems. Yet when the US Federal Reserve announces a policy of buying long-term bonds in order to provide more liquidity in the market, they rail against this strategy of bringing down the external value of the dollar. But surely such depreciation is one of the routes to greater “competitiveness” and achieving the trade balance that the Germans supposedly value.
Similarly, the Germans want the US to get into fiscal consolidation quickly, on the (wrong) presumption that this will not affect growth prospects. But if the private sector has to continue to wind down its excessive debt, which it is already doing, then the slack has got be taken up by the government or exports. If this does not happen, then the US economy will not grow, and this will also affect demand for German exports. The same wrongheaded argument is also being applied by Germany on the peripheral European economies, without adequate consideration of the obvious negative implications for the German growth model.
It seems bizarre that global leaders have to be reminded that all countries cannot use net export growth as the route to expansion. But clearly this message has not yet struck home. How else can one explain the almost complete absence of any meaningful measures to enable sustained expansion of demand from low income countries, which is really the only sustainable and equitable way out of this global dilemma?
Consider what has come out of this summit for most developing countries. The much-delayed reform of the IMF is to proceed very gently along, and at most will enable a minor shift in voting power at that institution in the next 3 years. Since there was no clear mandate against imposing procyclical conditions on countries in distress, the IMF will continue to impose austerity upon economies that are already experiencing downswing, rising unemployment and falling wage incomes.
Meanwhile, the “Seoul Development Consensus for Shared Growth” is so general as to be mostly meaningless. It continues to valorise the role of the private sector despite all the unfortunate experience of the past three years, and continues to place importance on the need to “stimulate the flows of private capital for development” and “improving the investment climate”. The fact that most developing economies have been trying to do this for two decades without much benefit in terms of improved living standards for the bulk of their people is simply not noticed.
The list of important omissions in the Seoul G20 documents is long, but one of the more significant ones for developing countries relates to financial regulation. The focus is all on monitoring and regulating the problem of “SIFIs” or systemically important financial institutions that are too big to fail. This is doubtless important, but in the developing world the bigger problem today is that of financial activity in the futures markets for primary commodities, which is once again driving up prices of goods like oil and wheat. Here the discussion was anodyne at best, asking for more study of the problem rather than financial regulation to control speculative activity that has damaging effects on food security in the developing world.
Clearly, this latest G20 Summit displayed lack of cohesion among its members as well as lack of imagination. But what is more startling is the extent of which it displayed the paucity of ordinary economic sense among those who currently control the world’s destiny.
(A related article by the author ‘Spotlight G-20: Where’s the Growth Supposed To Come From?’)