Wednesday, September 23, 2009

Stage is set, but don't expect much from G-20

Business Times - 23 Sep 2009

Stage is set, but don't expect much from G-20


AFTER attending the United Nations (UN) General Assembly meeting in New York, the leaders of the world's 19 largest economies and the European Union (EU) will be travelling to Pittsburgh, Pennsylvania, to take part in the third economic summit since the start of the current global recession.

In the last two G-20 summits, the assembled leaders had embraced fiscal and monetary stimulus policies that were supposed to help their economies get out of the greatest economic recession since the Great Depression of the 1930s.

The main goal of US President Barack Obama, the host of the G-20 summit, and the rest of the leaders who will be convening in Pittsburgh this week will be to examine policies that could allow them to start bringing an end to those costly monetary and fiscal policies - the so-called 'exit strategy' - without hurting the prospects for an economic recovery.

Mr Obama's appearance as host of the summit in Pittsburgh will come after this month's healthcare address to a joint session of the US Congress and his speech before the UN General Assembly. While Mr Obama remains a popular figure at home and abroad, political and economic realities, including the US twin deficits and an over-stretched military, have restricted his ability to advance his ambitious domestic and global agenda.

In that context, the financial meltdown and the collapse of some of Wall Street's leading institutions, coupled with the devastation inflicted on the housing market, have exposed major weaknesses in the American economic model, ignited protectionist pressures in Washington, and eroded US leadership position in the global economy.

But notwithstanding long-term structural problems facing the American economy, the rise of China, India, Brazil and other economies, Mr Obama is presiding over what is still the world's largest economy and is probably the most popular figure on the world stage.

Hence the pressure on Mr Obama to project US leadership in a summit that is taking place on his home turf. And for two days, Mr Obama, joined by other presidents, prime ministers and kings, will be trying to assure nervous publics that the global economy has stepped away from the abyss and is on the way towards a solid, albeit slow, recovery.

And in many ways, Pittsburgh - a city that had been in steep decline for decades after losing its manufacturing base, including it legendary coal, iron and steel industries as those jobs moved offshore, and that has successfully re-invented itself as a hub of the New Economy - is probably an ideal setting for a gathering that is expected to mark the start of an economic recovery and to create a sense of optimism.

Indeed, Pittsburgh's economy is based today on an advanced services sector, including an expanding financial industry, robotics, technology, healthcare and education, and has been attracting many young educated professionals who have been transforming Pittsburgh into the San Francisco of the East Coast. 'In a place known as the city of bridges,' Mr Obama said of Pittsburgh, 'we can come together to advance our common interest in a global recovery, while turning the page to a truly 21st-century economy'.

No one doubts that the skilled stagecraft of the American hosts and Mr Obama's performance will help produce a sense of public confidence about an economic recovery. But there are fewer expectations about the likelihood that the G-20 meeting will produce tangible results in the form of major new policies.

The president and his aides are going to propose that the G-20 adopt a 'framework' for global economic growth that, among other things, will help resolve the fundamental imbalance in the financial relationship between the US and China that is characterised by US over-consumption and Chinese over-production, by calling on the US to cut its budget deficit and on China (as well as Germany and Japan) to rely less on exports for economic growth.

But no one really expects that the leaders gathered in Pittsburgh would come up with specific policies to help implement the goals of the 'framework' or, for that matter, to devise and execute a coherent 'exit strategy' under which governments withdraw the monetary and fiscal stimulus.

At the end of the day, any real step to reduce American deficits or to change the patterns of Chinese economic growth or to manage current fiscal and monetary policy would have to be made by national governments (and Brussels, in the case of the EU) based on their respective economic interests and the political pressures operating on their leaders. The G-20 group simply does not have the kind of enforcement mechanisms that allows the EU, for instance, to discipline its members.

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