Business Times - 29 Sep 2009
Changing the global economic leadership
G-20 will provide an important arena for US, China and others to coordinate their policies
By LEON HADAR
FOR close to 25 years, the United States and the other six largest economies, aka the G-7, were considered to be the board of directors of the global economy. In many instances, the governments of these seven industrialised powers were not able to agree on joint action; but when they could find a way to cooperate, their collective decision-making would send shock waves through stock markets worldwide and pull up or push down global exchange and interest rates.
This exclusive club of rich economies was formed in France in 1975 (with six members). Canada joined a year later. The group expanded to eight members when Russia was invited to join in 1997.
The decision to add the emerging economy of Russia to the grouping was driven mostly by geopolitical and not economic considerations, at a time when the US and the West were interested in providing support for the fledging democratic government in Moscow.
But then if Russia was joining the board of directors of the Global Economy Inc, why shouldn't economic giants such as China or India or South Korea or Brazil be part of the permanent council on global economic cooperation?
And indeed, as the third summit of the G-20 economies was opening in Pittsburgh, Pennsylvania last week, the White House, considered to be the head office of the CEO of the G-8, announced that the G-8 was passe, to be replaced with a new and larger economic club that would include not just the seven large industrialised economies, representing the wealthy and mature North plus Russia, but also the major developing countries that speak for the emerging South. In a larger context, including emerging markets such as China, India and Brazil in the global economic decision-making is a historic move that reflects the changing geostrategic and geoeconomic balance of power after the end of the Cold War and the integration of China, India and Russia into the global market economy.
Overall, the G-20 economies comprise about 85 per cent of global gross national product (GNP), 80 per cent of world trade and two-thirds of the world population. By comparison, the eight countries making up the G-8 represent about 60 per cent of the global GNP but only 14 per cent of the world population.
The commitment made in Pittsburgh to provide China and the other emerging-market economies more of a say at the International Monetary Fund (IMF) - where today several small Europeans countries have a larger vote than China - is clearly an important development that formalises the changes in the global economic balance of power.
It's not surprising therefore that Europeans resented that power in the IMF is shifting away from them. As US Treasury Secretary Tim Geithner put it at Pittsburgh: 'What we're trying to do is to bridge this difference between a number of nations in Europe that are going to, of course, have to adjust over time, and have that shift occur to those countries who have been for a substantial period of time among the most rapidly growing countries in the world.'
In that context, the fact that the G-20 leaders agreed in their meeting in Pittsburgh to increase the IMF's reserves from US$250 billion to about US$1 trillion should certainly come as good news to emerging markets that rely on the IMF as a sort of insurance mechanism.
But the evolution of G-20 into a central player in the global economy has more to do than just changes in the voting arrangements at the IMF. The fact that the move to raise the G-20 from a level of group of 20 finance ministers and central bank governors into a heads-of-government level has taken place in the midst of the global financial crisis - the first meeting took place in Washington in November 2008 and the second in London in April 2009, followed by the summit in Pittsburgh this month - is not a coincidence.
After years of lecturing the emerging economies about the need to embrace American-style free capitalism, the collapse of leading American financial institutions and ensuing shocks to the US economy have diminished the ability of Washington to call the shots when it comes to global economic policy. At the same time, China with a massive government stimulus programme seems to have been more successful in dealing with the economic downturn and moving towards recovery.
And on another level, the worst economic crisis since the Great Depression of the 1930s has also demonstrated imbalances between mature and emerging economies. Indeed, there is an agreement among economists that the global imbalance between China's purchases of US treasuries, making it America's largest creditor, and the easy-money policy pursued in the US, which fuelled America's spending, were among the main factors that helped produce the housing bubble and, in turn, created the conditions for the devastating financial meltdown.
Hence the recognition in Washington and elsewhere of the need for long-term cooperation between the North and the South and, in particular, between the American and Chinese economies, in order to readjust the global imbalances and prevent another financial crisis. The US cannot continue being the main engine of global economic growth by being the importer of last resort, while the Chinese need to spend more on developing an energetic domestic economy by empowering the Chinese consumer and creating more social safety programmes.
Or to put it in simple terms, the Americans spend too much and the Chinese save too much.
Much of these unsustainable imbalances reflect structural economic problems that will require dramatic changes in American and Chinese economic policies, and no one is seriously expecting that the Chinese - or for that matter the Japanese and Germans - are going to end their reliance on exports any time soon; and getting the Americans to start saving at a far higher rate is not going to be easy either.
But the G-20 system and in particular the new framework for 'mutual assessment' will provide an important arena in which the US and China, the developed economies and the emerging markets, working together with the IMF, will be able to monitor and discuss these issues and coordinate their policies.
Yes, it all sounds very vague. But it's a start.
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