Summit with no answers
looks at the clashing economic agendas among the Group of 20 industrial nations meeting in London this week.
THE GROUP of 20 meeting of leaders of the world's biggest economic powers is marked for failure even before it begins April 1.
Convened to come up with solutions to the biggest economic crisis since the 1930s, the G20 meeting was billed by its host, British Prime Minister Gordon Brown, as a vehicle for international coordination of economic recovery policies and major changes in financial regulation.
Yet little more than a day before the summit began, French President Nicolas Sarkozy--under mass pressure from strikes and demonstrations--threatened to walk out of the G20 if the meeting couldn't agree on regulations to reign in what he calls "Anglo-American capitalism." Meanwhile, most big European Union countries, led by Germany, are opposed to Obama's and Brown's calls for huge government spending to stimulate global growth. The Wall Street Journal explained:
As the U.S. and the UK pressed the case for greater government stimulus to lift the global economy, they have encountered stiff resistance from European leaders, forcing U.S. officials to downplay the targets. The 20 nations, while promoting free trade, also have had to face their own penchants for protectionism--with many recently moving to guard their own economies and companies from the downturn.
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CERTAINLY, THERE is a dire need for an international economic policy to counter the international downward spiral. According to the International Monetary Fund, the global economy will contract this year by between 0.5 and 1 percent--the first such decline since the aftermath of the Second World War. The Organization for Economic Cooperation and Development (OECD), the club of rich industrialized countries, predicts the world economy will shrink by 2.75 percent.
"The world economy is in the midst of its deepest and most synchronized recession in our lifetimes," wrote OECD chief economist Klaus Schmidt-Hebbel. The OECD also forecast that unemployment in 30 industrialized countries will near 10 percent, up from 6 percent last year.
The World Bank forecasts a milder contraction of 1.7 percent. But in a speech in London, World Bank President Robert Zoellick said that even this decline would have a devastating impact on the world's poorest countries. "These events could next become a human and a social crisis, with political implications," he said in a speech in London. "People in developing countries have much less cushion: no savings, no insurance, no unemployment benefits, and often no food."
The enormous resources of the G20 countries--they produce 80 percent of the world's economic output--could be harnessed to counteract that downward spiral. Instead, however, the meeting is turning out to be--as it was in its November meeting in New York--a talk shop.
Of course, the G20 will issue statements about the urgent need for countries to work together to combat the global slump and avoid protectionist measures like higher trade tariffs. There may also be an agreement on reform of the IMF to give China and other developing countries a greater role in the institution and to increase funding for loans.
Yet the reality is that each major economic power is taking steps to prop up its own economy--often at the expense of their rivals and of the poorer countries in the world.
For example, the World Trade Organization expects trade to decline by 9 percent this year--the worst drop in 80 years. Most of the decline is due to the overall impact of the recession, but mounting protectionist measures are taking a toll. "The World Bank estimates that 17 [of the] G20 countries have instigated 47 policies that have restricted trade since the November G20 summit in Washington," the Financial Times reported.
Other "beggar thy neighbor" policies have also been adopted, such as devaluing national currencies to make exports cheaper and imports more expensive. (Exhibit A of this strategy is the U.S. Federal Reserve Bank's recent move to electronically create $1.3 trillion in new money, which will tend to erode the value of the dollar in comparison with the euro and the Japanese yen).
But falling trade levels and protectionism are only two of the deepening cracks in the world economy. Another is collapse of foreign direct investment (FDI) in Eastern Europe and developing countries in Asia and Latin America. For example, Russia saw $130 billion flee the country last year, and another $170 billion could flow out again this year as Russian banks and other businesses struggle to repay debt. In China, long the world's biggest magnet for foreign investment, FDI has dropped five months in a row, including a 26.2 percent drop in just the first two months of 2009.
So while the G20 leaders will line up for photo ops and issue suitably solemn and resolute statements about international cooperation, their policymakers are working overtime to foist the costs of the slump on one another.
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FOR BARACK Obama and the U.S. govenrment, negotiating agreements among the G20 is complicated by a qualitative shift in the international economic balance of power.
A quarter century ago, the U.S. was able to contain rising economic competition from Europe--mainly, from then-West Germany--in part because Europe was locked into the U.S. camp during the Cold War between Washington and Moscow.
The U.S. could also use its political leverage over Japan to force the Japanese government to except "voluntary" restraints on exports to the U.S., as well as an increase in the value of the yen that made Japanese goods much more expensive in the U.S. market. This gave the U.S. economy the breathing space to restructure and emerge in the 1990s as more competitive against its these rivals.
Today, however, the picture has changed radically. The U.S. emerged a decade ago as the importer of last resort in the East Asian financial crisis, thanks to super-low interest rates implemented by then-Fed Chair Alan Greenspan. The low rates softened the blow of the dot-com stock market bust and the 2001 recession that followed. Plus, low interest rates led to the housing bubble that allowed U.S. consumers to go into debt to compensate for stagnating or falling wages until the recession began in December 2007.
But the economic expansion of 2001-2007 has helped redraw the economic map of the world. The U.S., having poured hundreds of billions of dollars in investments into China since the 1980s to counteract Japan's rise in East Asia, now confronts China as an industrializing rival and a major source of imports.
At the same time, China is the U.S.'s leading creditor, with an estimated $1 trillion of U.S. Treasury bonds and other government-backed bonds held by Chinese banks. This has allowed China room to maneuver economically against the U.S.--most recently, by proposing the replacement of the dollar as a means of payment in international transaction. While there's little prospect of such a development, it's a signal that if China is to continue to fund U.S. trade and budget deficits by buying government bonds, it will seek something in return.
Brazil, while not nearly as powerful economically as China, has been strong enough to block U.S. plans to extend the North American Free Trade Agreement throughout the Americas. Further, Brazil has overseen regional economic integration in Latin America that has often left the U.S. on the sidelines.
India, too, has become a key economic power, both because of its high-tech and software industries and the rise of companies like Arcelor Mittal to become a major player in the global steel industry. And the European Union, though fraught with internal problems, has a greater economic output than the U.S.
Plus, given that the U.S. economy is no longer capable of using debt-financed consumer spending to spur international growth, the entire global trading system is crumbling.
All this complicates Barack Obama's agenda as he calls on the G20 to endorse a U.S. program for a global recovery effort. Nevertheless, the U.S., despite its shattered financial system and discredited neoliberal economic doctrines, retains considerable economic clout, not least because the dollar remains the world's reserve currency.
The U.S. remains the overwhelmingly dominant military power in the world as well, which reinforces American economic power in countless ways. But given continued volatility in Iraq and the prospect of another endless war in Afghanistan, the economic crisis could constrict U.S. imperial power as well. That's why Obama is spending much of his European trip trying to shoring up NATO support for the occupation of Afghanistan.
All this means that the G20 and NATO meetings are at best stopgap efforts for a U.S. administration confronting multiple economic, political and military crises. The G20 will offer platitudes about international economic cooperation while they're really straining to prevent the fragmentation of the world economy into rival trade blocs. And while the U.S.'s NATO allies will dutifully proclaim their commitment to preventing the spread of "terror" and bringing "democracy" to Afghanistan, their commitments of troops and resources are likely to be far less than what Obama wants.
Obama's meetings with the G20 and NATO, intended to restore international public confidence in the U.S. as a global leader, will inevitably highlight the fact that the world capitalist system is in the midst of a profound and intractable crisis.