The Job for the G-20
|Our Correspondent||Nov 14, 2008|
Developed country leaders talk a lot about the benefits of globalization but much of the time they seem to have hazy notions of the issues facing the developing parts of that globe. So it is hard to be confident that the November 15 meeting in Washington of the G-20 group of major developed and developing countries (including Indonesia) will do much to halt the global slide into recession.
As of now, the focus looks likely to be mainly on the issues most directing affecting the developed countries – cross-border financial market regulation, the role of the IMF and the overall global financial architecture in the post-Bretton Woods world. These are of course very important issues. However they are also very complex, very technical and are really more about the prevention of future crises than escaping from the consequences of the present one.
The real issue now is not how much more money must be thrown at failing financial institutions in the west. Most likely the threat of systemic collapse has been averted by the takeovers and guarantees that major developed countries have offered to stave off the contagion. The issue is to reverse the threat of collapse of real demand spreading from the west to the whole world. For that the sustenance of the developing world, or at least the better run parts of it, is absolutely vital. More than ever these countries have a key role to play in rescuing global demand, in the process helping the developed world by offering opportunities for trade, increased markets for their capital goods. Yet their collective voice, their ability to make the rich nations understand how they can help, not be a burden, remains weak.
Firstly the developed world must come to realize that their group of countries alone cannot resolve global demand issues. Several of their economies – notably the United States, the United Kingdom and Australia – actually needed a recession to get back to sustainable growth after years of excessive consumption and property speculation financed by borrowing from the developing world and by the creation of the exotic financial instruments which have now proved to be fool’s gold. They did not need the dramatic change in fortunes we have seen, but they did need to spend less and save more.
The major developed economies which did not fall into this consumer and debt trap, Japan and Germany, are in only slightly better condition to help their fellow rich nations. They have static and fast-aging populations with little inclination either to consume or to invest in new capacity.
On the other hand populous and tolerably well-run developing countries such as Indonesia, India, Brazil, South Africa, Thailand, etc have growing workforces and inbuilt ability to rapidly increase productivity through investments in skills and machines – the latter being mainly imported from the developed world.
Yet the developing countries are constrained from helping the world as a whole by a financial system which is not merely monstrously unfair but has become an impediment to growth. The rich nations are responding to the current crisis by issuing massive amounts of government debt. They are able to do this even though some of them (again the US, UK, Spain) had already been running huge current account deficits for years because their currencies (dollar, euro, yen, pound and Swiss franc) are regarded as currencies which can act as reserves.
As a result they do not need to worry unduly about the impact of fiscal policies on their currencies. Nor are they subject to the IMF-imposed policies which exacerbated the crisis in Indonesia and elsewhere in Asia a decade ago.
Meanwhile look at the problems being faced by Asian countries which have for years been accumulating large foreign exchange reserves, following tough fiscal and monetary policies and generally conducting very conservative economic policies. Now, just when they should be able to use fiscal expansion to offset declining exports and private investment, just when their reserves ought to enable them to face a few years of current account deficits they are constrained by fears of currency collapse whether driven by general global instability or by the ill-informed comments of the US ratings agencies – Standard & Poor’s, Fitch etc – the agencies whose mixture of greed and incompetence contributed so much to the financial collapses in the west.
Thus Indonesia can at one moment be praised for its years of good economic management, success in reducing government debt, building reserves, bravely cutting fuel subsidies. Then, just when it needs to think of expansionary policies it finds the rupiah in danger of falling off a cliff. Countries from Brazil to Malaysia, South Africa to Thailand face similar dilemmas.
At times the system seems racially biased as well as favoring the old rich. Thus Australia can, almost without comment from the rating agencies, run up net external debt of $500 billion and run current account deficits of 6 percent of gross domestic product even when commodity prices are high. But developed Korea finds itself in deep trouble despite a current account deficit which is both recent and half the Australian level and which has reserves six times larger.
In the longer run these issues can only be resolved by a reshaping of the global architecture. More immediately however they need to be addressed by:
Massive new funding for the IMF and the World Bank. The IMF needs money to help stabilize middle income countries hit, through no fault of their own, by capital outflows or sudden fall in export prices. An increase in IMF quotas is more than warranted for practical reasons and to offset the bias that reserve currency status gives to the old rich. The World Bank needs money to stimulate infrastructure investment, particularly in those countries like Indonesia with good records of fiscal management. China is the only developing country now in a strong position not merely to expand domestic demand to but also use its reserves to push the west to make better use of the IMF and World Bank.
Extension of swap arrangements. The US Federal Reserve has helped some countries – Mexico, Brazil, Korea – with swap arrangements which have helped stabilize their currencies. The European Central Bank and the Bank of Japan should be encouraged to do more of the same for deserving developing countries.
In Asia specifically, the nations with huge reserves, notably Japan and China, should massively step up their medium to long term lending to developing countries to ensure that investment does not now fall off a cliff. In addition to direct project lending they need to start buying domestic government debt. In the longer run this will likely prove a better investment than in low yielding US and European debt. At the same time, ability to borrow overseas in their own currencies rather than dollars will make Asian governments less worried about foreign borrowing.
In short the government interventions at national level must be extended to the international arena. That does not mean US-EU-Japan. It means all those countries significantly involved in international trade and investment and particularly those, mostly in Asia, with the greatest collective potential to pull the world out of recession.