Annie Lowrey ably summarizes the outcomes of spring meetings of the IMF and World Bank for the New York Times. Here are her first two paragraphs:
Meetings of finance ministers and central bankers here over the weekend started with a pledge by wealthy nations to significantly increase the lending capacity of the International Monetary Fund to defend against the possibility of worsening economic conditions in the debt-laden euro zone.
But they ended on Sunday without a consensus on just how to speed up the economic recovery, stamp out the European debt crisis or lower unemployment around the world, officials said.
Now, I would say how you interpret this outcome is an excellent indicator of your overall opinion of post-crisis global economic governance. On the one hand, if you're Alan Beattie, Edward Luce, Ian Bremmer, Charles Kupchan, or Ted Truman, well, this outcome is a sign of chronic dysfunction. If the world's great powers can't agree on what to do with the specter of a double-dip global recession looming over them, there's little reason to hope. The glass is half-empty.
On the other hand, if you're John Ikenberry, Robert Kagan, Bruce Jones, or Alan Alexandroff, the glass looks half-full. Boosting the IMF's reserves by more than $400 billion ain't nothing, and it's faintly absurd to believe that any global governance structure will ever be able to "speed up the economic recovery, stamp out the European debt crisis or lower unemployment around the world."
I'll be tipping my hand as to which way I'm leaning in the coming months, but for now, I'm curious about my readers. What do you think? Is global economic governance a mess or doing reasonably well in trying circumstances?
I'm in Shanghai to discuss how the G-20 has been doing as the world's "premier economic forum." As fate would have it, the G-20 actually opened its collective mouth in response to the market convulsions of this week:
The Group of 20 leading economies pledged a “strong and co-ordinated” effort to stabilise the global economy in an attempt to calm tumbling equities markets spooked by fears of recession in the eurozone and a gloomy economic outlook in the US.
Bowing to pressure from investors to take action, finance ministers from the G20 economies said in a communiqué issued late on Thursday that they would stop the European debt crisis from deluging banks and financial markets, and take the necessary steps to bolster the eurozone’s rescue fund and assist banks to boost capital reserves in line with new global regulations. The statement followed a day in which the equity markets suffered some of the biggest falls since the collapse of Lehman Brothers in 2008, as investors rushed to safety in a widespread sell-off.
“We commit to take all necessary actions to preserve the stability of banking systems and financial markets as required,” the group said in a statement. “We will ensure that banks are adequately capitalised and have sufficient access to funding to deal with current risks and that they fully implement Basel III along the agreed timelines.”
The G-20's near-total muteness in the face of European sovereign debt convulsions had begun to raise some eyebrows -- particularly as it was the G-7 economies rather than the G-20 that pledged to provide dollar liquidity to European financial institutions.
Unfortunately, if you read the actual communique, you discover... well.... let's describe the statement as very optimistic about what the G-20 countries have done to promote both growth and fiscal rectitude.
One of the takeaways from my conversations so far in Shanghai has been a sense of disappointment about what the next G-20 summit in Cannes will accomplish. The Financial Times' Chris Giles provides some background on the demise of the France's grand ambitious for that summit:
In mid-February, G20 finance ministers gathered in Paris for what turned out to be a harbinger of the challenges that have beset the French G20 presidency ever since. The meeting was supposed to be routine, with finance ministers agreeing a set of indicators that might be used to assess whether their economies and policies fostered balanced global economic growth.
Far from France undermining the meeting with excessive ambitions, countries struggled to agree even the most basic steps to a more stable world economy.
A country’s current account surplus or deficit is the accepted measure of balance in its relations with other countries, but the Chinese arrived in Paris in intransigent mood. Their negotiators refused to let the G20 use the current account as an indicator of balance. After an all-night session, the absurd compromise China accepted was that countries were allowed to assess every component part of a country’s current account, but the term “current account” was banned.
That ended the French presidency’s lofty plans. From then on, limited goals became the order of the day, a shift that has been reinforced as the year has progressed.
I'd quibble a bit with Giles -- any meeting that details indicative guidelines on macroeconomic imbalances is not gonna be a routine meeting. [Um...could you translate that last sentence out of bureaucratese, please?--ed.] Sorry, to rephrase -- any meeting in which the G-20 points out that China's trade surplus is part of the problem in the global economy is not going to be a smooth meeting.
Your humble blogger will be hitting the road early in the morrow to Shanghai. I'll be attending a conference co-sponsored by the Shanghai Institutes for International Studies, Stanley Foundation and the Munk School of Global Affairs University of Toronto on "Global and Collaborative Asian & Pacific Leadership for the G20."
Note to citizens of the PRC: I too will be toting my own luggage.
I'll certainly try to avoid catching Friedman's Disease during this China trip.* I'll also try to avoid a related management consulting syndrome, which is the belief that a few days in another country somehow endows me with "street cred" when discussing said country. This seems particularly prevalent with respect to China.
Since the topic is the state of the G-20, and I've made my feelings about that forum pretty plain on this blog, I hereby challenge readers to persuade my mind in the 48 hours before I present. The G-20 performed best when the sense of crisis seemed most acute. As the eurozone melts down, and the United States doesn't look much better, is the G-20 capable of jumpstarting a bout of policy coordination that looks more robust than, say, this totally anemic statement?
What do you think?
*If Gwyneth Paltrow is coughing anywhere near me, on the other hand, I'm... I'm.... probably going to be the Index Patient Plus One.
My post last week on the dubious legitimacy/effectiveness of the G-20 has prompted a few responses. Let's take them in order, shall we?
Colin Bradford responds by arguing that I'm judging the G-20 strictly by its summitry, which is unfair:
The G-20 is not just a summit meeting of leaders. The G-20 has a very active track, which has been in existence since the Asian financial crisis in the late 1990s, of at least biannual meetings of finance ministers and central bank presidents. In addition, G-20 deputies and G-20 sherpas often meet to advance the agenda for the leaders. More than that, as a result of the activities in the finance ministers/central bank presidents track, there is now a network of senior officials continuously active not only in preparation for G-20 meetings, but also in dealing with crises and unexpected challenges.
What this means is that the new, more inclusive configuration of major economies from every region of the world that constitutes the G-20 is a process -- communicating, consulting, and even, on good days, coordinating among 20 countries, not eight. The G-20, in other words, is not an event.
Lest this sound too pie-in-the-sky, it should be pointed out that even former Bush administration sherapas are echoing Bradford's point.
As someone who worked on both G-20 and G-7 policy coordinaion while at the Treasury, I've experienced Bradford's point about the value of process first-hand. The thing is, the value-added of said process does require the occasional concrete outcome -- and the last 18 months have been underwhelming on that score. Bradford makes a valid point in observing that the kinds of policy coordination under debate in the G-20 are much more intrusive than anything that was talked about in the old G-7. Still, at some point you want to see some outcomes, and based on what happened over the weekend, I'm fairly confident in my pessimism.
CIGI's The Munk School of Global Affairs' Alan Alexandroff thinks I'm being too pessimistic because I'm relying on the international press coverage:
I and others have pointed out... the persistently negative international financial press – read this as the WSJ, the NYT and the FT at least. Differences are always played up; and agreements are generally characterized as inadequate. And it is here that Dan and I differ.
Fair enough, but I will say that my astringent evaluation of the G-20's recent activities are not only informed by press coverage, but also by off-the-record conversations I've had with both developed and developing-country participants in the G-20 process. [Oh!! Snap! Boom!!--ed. Yeah, that's right, I'm going all insider-y sources on you!] I'll be happy to hear feedback from those sherpas who think the process is working better than my "dead forum walking" characterization.
Art Stein argues that these blog exchanges are missing the key point:
The core issue, then, is whether for the G8 or the G20 disagreement and divergence over policy options are preferable to agreement, coordination, and a concerted response. There is a small literature among economists about whether macroeconomic policy coordination makes things better or worse. Implicit in Bradford’s argument is that disagreement and its policy consequences are not so bad and, implicitly, to be preferred to agreement between a less diverse set of actors. Perhaps. But what is the evidence? Is that true for every policy?
This is an excellent point, and one I made in All Politics Is Global -- sometimes noncooperation is actually the most efficient outcome. On macroeconomic policy coordination in particular, sometimes successful cooperation has brought about underwhelming policy consequences (see: Maastricht criteria).
That said, one could argue that part of the reason for the Great Recession was the absence of any serious effort to rein in mcroeconomic imbalances five years ago. Furthermore, Bretton Woods II is still persisting in the global economy. So, yes, I do think coordination in this case would be a good thing, and for a variety of excellebnt domesticf political reasons in the United States, China and Europe, it ain't happening.
Am I missing anything?
Colin Bradford has written a lot of useful and interesting material on global economic governance. I say this because I'm not really sure that his latest FP contribution meets the high standard of his prior work.
In "Seven New Laws of the G-20 Era," Bradford seems to be arguing that even if there are disagreements within the G-20, it's still an effective public policy forum. Here's a sample "law":
1. Visible disagreements can have positive side effects
Some commentators have argued that, because the G-20 reveals differences and divisions, the group itself must be a failure. Yet gone are the days when we could categorize a summit as a success or a failure based on the outcome document. Dichotomous thinking doesn't really work anymore. So if G-20 meetings display more tension than consensus, that might actually be a good thing. In its discord, the G-20 merely reflects the landscape of this dynamic 21st century. There is order and disorder in our world today, competition and coordination, conflict and consensus -- all going on at the same time. The G-20 is flushing those issues up not only for leaders to deal with but for publics to deal with as well. Unlike the G-8, the G-20 is creating stronger linkages between leaders and publics, because -- not in spite of -- the fact that the conflicts are visible.
Hmmmm..... nope, not buying this spin. Bradford's basic argument is that the G-20 exposes the fundamental disagreements so that the global public sphere can better understand the fundamental faultlines of global economic governance. The publicist that resides inside my brain can appreciate the virtue of this spin, but it's just that.
It's true that governance structures can serve as arenas of contestation. The problem with this logic is threefiold, however.
First, as a general rule, mass publics don't pay too much attention to high-falutin' economic summits. The issues are too arcane and the remove from daily life seems to large. So the only thing the public will digest from G-20 deadlock is that leaders can't agree on something.
Which leads to the second point -- in the end, publics usually want to see outputs from governance structures. There can be virtues from policy deadlock, but I'm thinking that if an issue makes it to the G-20 agendas it's because a lot of people want concrete policy action rather than additioonal bloviation. Continued disagreement will lead to mounting public frustration.
Which leads to the third point -- many national governments can endure long-lasting policy deadlocks because their domestic legitimacy is unquesioned. In the United States, for example, despite mounting frustration with a sclerotic policy process, there's not a huge groundswell for amending the Constitution to make it easier to pass laws. That's because both the Constitution and the U.S. government have been around for a while.
The G-20 doesn't have this legitimacy "cushion" to fall back on. It's not a national government with a monopoly on authority within its bailiwick. It's not a treaty body like the WTO or IMF. Unlike even the G-8, it can't point to decades of existence as a justification for its continued relevance. The G-20 rises and falls with its perceived effectiveness. While the forum had a good 2008 and a decent 2009, last year was a friggin' disaster. If the trend of policy gridlock continues, it won't matter what Nicolas Sarkozy proposes, the G-20 will be a dead forum walking.
Unfortunately, Bradford's essay sounds like a marriage counselor telling a troubled couple to "own your problems... embrace the discord." Sorry, not buying it.
Am I missing anything?
Your humble blogger has been off the grid the past few days because he was
north of the Guatemalan border south of the Rio Grande the past few days as a (very happy) guest of the Mexican Foreign Ministry's Matias Romero Institute. I was there to talk about economic powers and the G-20.
A few random world politics and travel notes:
1) Let me add Mexico to the list of Civilized Countries Not Stupid Enough to Force Travelers to Remove Footwear Going Through Security. Hear that, TSA???!!!! This list is getting really friggin' long, and I don't see the United States anywhere on it!!!!
Sorry, I had to get that out of my system.
2) I'm a reasonably well-read guy, and tend to hang around with people who claim to be up on world politics. When I told these people that I was going to Mexico City, many gave me the long look and said something to the effect of "be very careful." Now, I understand that stories like this well lead to generalized concern about the entire country, but it really shouldn't. True, there are certainly neighborhoods that one should avoid in Mexico's capital. But this is also true of Washington, DC, and no one tells me to be careful going there.
In other words, I think the fears about Mexico City might be exaggerated in the US press.
3) I have now been in a real Mexico City traffic jam. I can safely say I don't want to be in another one.
4) Mexico will be hosting the G-20 leaders summit in 2012, which will be interesting timing, to say the least. I had the good fortune to meet with some of the officials who will be managing the process, and
I advised them to use the summit to announce their re-annexation of California let's just say there's some... uncertainty about how the G-20 will play out in the next few years.
5) It was pretty cool to discover that there are a robust number of zombie lovers in Mexzico.
More later when I catch up on the events of the day.
In an ironic twist of fate, I don't have the time to fully comment on the global political economy of the G-20 summit outcomes (except to say I told you so) because… er… I'm attending a global political economy conference.
So talk amongst yourselves about the
massive fail demonstrably non-cooperative outcome to answer the following query: Who wins and who loses in a world of non-cooperation? And if the G-20 countries can't agree on what they're supposed to negotiate, what will they talk about instead?
You know, as insults go, this one is pretty bush league:
China's credit-rating agency on Tuesday downgraded its rating for U.S. sovereign debt and warned of further cuts, in a pointed move ahead of this week's Group of 20 major economies meeting.
Dagong Global Credit Rating Co. Ltd., the only wholly Chinese-owned rating agency, cut its rating on U.S. debt to A from AA, citing the Federal Reserve's move last week to initiate another round of asset buying, worth $600 billion. It also placed the U.S. sovereign credit rating on negative watch.
"The new round of quantitative easing monetary policy adopted by the Federal Reserve has brought about an obvious trend of depreciation of the U.S. dollar and the continuation and deepening of credit crisis in the U.S.," Dagong said.
"Such a move entirely encroaches on the interests of the creditors, indicating the decline of the U.S. government's intention of debt repayment," the agency said.
Sounds very, very serious, until we get to this part of the story:
The downgrade of the U.S. rating by Dagong comes just over a month after the U.S. Securities and Exchange Commission denied the firm's application to officially rate bonds in the U.S.
At that time, Dagong called the SEC's move discriminatory and said it was considering legal action.
The SEC said in denying the application that "it does not appear possible at this time for Dagong to comply with the record keeping, production and examination requirements of the federal securities laws."
Indeed, even the New York Times' now-thrice-weekly story about rising Sino-American tensions observes:
In the rest of the world, the United States is still the strongest of credit risks, and the Chinese downgrade is not expected to have much real impact....
[T]hose critics, mostly countries that fear that recent American policy will devalue the dollar and undercut their competitiveness, do not appear poised to offer an alternative to an economic order that has been led by the United States since the end of World War II, or to the role the dollar has played for decades as the de facto world gold standard.
The Chinese, who have protested that the Federal Reserve is trying to unilaterally manipulate the dollar for the purpose of creating jobs at home, have been accused of doing exactly that for years - the root of many of the world's economic tensions today, in the eyes of Mr. Obama and his economic aides.
Look, clearly China is suffering from... an insult gap. Americans have been leading the world in trash-talking for decades now. China is trying hard to catch up, but I think the authorities in Beijing need some assistance in their game of catch-up.
I hereby call on all readers to offer, in the comments, ways that Chinese authorities can really sharpen their rhetorical jabs at the United States. In the spirit of kicking off the conversation, here are a few suggestions:
"Chinese Halitosis Institute Downgrades American Fresh Breath Index to BB: 'Seriously, What's The Deal With All The BBQ,' Asks Agency Head"
"Chinese Election Monitors Accuse Obama Administration of Rampant Ballot Fraud During Midterm Elections: 'It's No Myanmar, I'll Say That' According to Chief Monitor"
"Chinese Dietary Institute says American Food Leaves Them Hungry After Only 12 Hours"
Go to it.
The unholy trinity in open economy macroeconomics is pretty simple. It's impossible for a country to do the following three things at the same time:
1) Maintain a fixed exchange rate
2) Maintain an open capital market
3) Run an independent monetary policy
One of the issues with macroeconomic policy coordination right now is that different countries have chosen different options to sacrifice. China, for example, has never opened its capital account. The United States, in pursuing quantitative easing, has basically chucked fixed exchange rates under the bus, no matter how many times Tim Geithner utters the "strong dollar" mantra
in his sleep to reporters.
These policies are generating a fair amount of blowback from the rest of the world, forcing President Barack Obama to defend the Fed's actions. And it appears that the developing countries are mostly following China's path towards regulating their capital account to prevent exchange rate appreciation and the inward rush of hot money.
How does this end? I think it's gonna end with a lot more capital controls for a few reasons:
1) It's the political path of least resistance;
2) Capital controls are seen as strengthening the state;
3) The high-growth areas of the world don't need a lot of capital inflows to fuel their continued growth.
What intrigues me is how the financial sector responds to a situation in which their freedom of action in emerging markets becomes more and more constrained. It's possible that they could pressure the Fed to change its position in the future. It's also possible, however, that big firms could see these controls as a useful barrier to entry for new firms.
My money is on the former response, however.
According to Bloomberg, Brazilian Finance Minister Guido Mantega would like the real to stop appreciating and for the rest of the world to cooperate on currency matters:
Brazil's real dropped the most in two weeks after Finance Minister Guido Mantega raised taxes on foreign inflows for the second time this month to prevent appreciation and protect exports from what he called a global "currency war."
Brazil, Latin America’s largest economy, raised the so- called IOF tax on foreigners' investments in fixed-income securities to 6 percent from 4 percent. It also boosted the levy on money brought into the country to make margin deposits for transactions in the futures market to 6 percent from 0.38 percent…
"This currency war needs to be deactivated," Mantega told reporters. "We have to reach some kind of currency agreement.” …
Mantega cited the Plaza Accord of 1985, when governments agreed to intervene to devalue the U.S. dollar against the yen and the German deutsche mark, as the kind of agreement that might be required. International policy makers failed to narrow their differences on intervention in currency markets during the International Monetary Fund’s annual meeting this month.
Hey, you know, I bet the G-20 would be a decent forum for Mantega to foster this kind of cooperation. It's a good thing that there's a G-20 Finance Ministers meeting this weekend in Seoul.
Brazilian Finance Minister Guido Mantega will not attend a meeting of Group of 20 member-country finance officials in South Korea this week, a Finance Ministry spokesman said Monday.
The spokesman said Mantega would remain in Brazil while the government studies possible introduction of foreign exchange policy measures to curb the strengthening of the country's currency, the real.
Brazil's government will be represented at the meeting by Finance Ministry International Affairs Secretary Marcos Galvao and Central Bank International Affairs Director Luiz Pereira.
Is this rank hypocrisy by Mantega? Not entirely. It's something worse -- a judgment by Brazil's policy principals that more will be accomplished by staying in Brasilia to stem the tide of inward capital flows than to go to Seoul to seek a multilateral solution to the current lack of macroeconomic policy coordination.
There's plenty of blame to go around on this, but if Brazil thinks the G-20 is not going to accomplish much… then the G-20 is a dead forum walking.
The past week has seen an escalating series of news stories about a looming "currency war," as country after country tries to drive their currency downward, the United States blames China as the source of original sin on this, and China
pisses off yet another country responds by digging in its heels, and the IMF wrings its hands.
If you need to read one article on why things are going down the way they are, it's Alan Beattie's excellent survey in the Financial Times of how countries as responding to this situation:
Washington is looking for allies -- particularly among the emerging economies, who complain about their own competitiveness and volatility problems -- in its campaign for exchange rate flexibility. Trying to take on Beijing single-handed makes the US vulnerable to the charge that it is a lone complainant blaming its own profligate shortcomings on the country that is kind enough to lend it money, holding the best part of $1,000bn in U.S. Treasury bonds…
Yet despite U.S. claims of broad support, backing appears sporadic…
[S]ome U.S. policymakers privately complain that European backing is patchy and tends to go up and down with the euro. In the first half of the year the euro was pushed lower by the gathering Greek crisis, by early summer falling 17 per cent below its January level. Focused on local difficulties, and with the German export machine powering ahead, European officials saw little need to take on Beijing over currencies and had little energy to do so…
Across the emerging economies, the plan of attack seems to be to keep quiet and pass the ammunition. Despite widespread recognition of the distortions China’s exchange rate policy appear to be causing, governments have generally preferred unilateral intervention to a public slanging match.
True, in April the governors of the Reserve Bank of India and the Central Bank of Brazil complained that Beijing was hurting their exporters.
But recently Celso Amorim, Brazil’s foreign minister, told Reuters: "I believe that this idea of putting pressure on a country is not the right way for finding solutions." Significantly, he added: "We have good co-ordination with China and we’ve been talking to them. We can’t forget that China is currently our main customer…"
With the prospect of diplomatic progress limited, currency policy in the U.S. and Europe may end up being conducted through domestic monetary policy. If, as seems possible, the U.S. Federal Reserve, the Bank of Japan and the European Central Bank return to quantitative easing in order to boost growth, their currencies are likely to weaken -- as the yen briefly did after the Bank of Japan’s announcement of looser monetary policy this week.
So, to sum up:
1) Every country is free-riding/buckpassing on this issue, hoping that the United States can dislodge China on its own.
2) The international regimes designed to prevent free-riding like this -- namely the G-20 and the IMF -- are not up to this task. [What about the WTO? -- ed. Fuggedaboutit.]
3) The source of China's rising power is not its hard currency reserves or its command over scarce rare earths, but its burgeoning domestic market.
4) Ironically, the United States and other countries want China to accelerate the growth of its domestic market, which would in turn give it more power. Even more ironically, China doesn't want to do this right now.
5) The sum effect of all of this will be a series of uncoordinated interventions into currency markets that will increase market volatility, political posturing, and eventually lead to the erection of capital and/or trade controls.
Developing… in a very disturbing manner.
MANDEL NGAN/AFP/Getty Images
The People's Bank of China had a busy weekend.
In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility....
The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.
In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.
This is central bankese for, "yes, we're going to allow the RMB to float, get off our backs now."
This sounds great, except that 24 hours later the PboC issued a second, Chinese-only statement, according to the New York Times' Keith Bradsher:
The central bank, the People’s Bank of China, said on Sunday that it was determined to “keep the renminbi exchange rate at a reasonable and balanced level of basic stability.”....
The issue has become a tricky one internally for the Chinese government. While China still muzzles its media through censorship, public opinion expressed on the Internet has become an increasingly influential force.
Even though some Chinese economists and most Western economists say that a stronger renminbi is clearly in China’s best economic interests — because it would help China fight inflation by making imports cheaper — many Chinese see the issue mainly in terms of a rivalry with the United States.....
The central bank’s statement on Sunday was issued only in Chinese and was clearly intended for domestic consumption. In contrast, its announcement on Saturday was issued almost simultaneously in Chinese and English.
Today, the PBoC also left the midpoint trading for the RMB unchanged, indicating that there would be no initial appreciation of the currency, unlike what transpired in 2005. That said, the RMB appreciated by 0.42% today, its largest appreciaton in five years.
The PBoC also released an English-language Q&A that elaborates its thinking. This part is intriguing:
As its economy becomes more opened, China´s major trading partners now include a long and diversified list. During the period of January-May this year, trading volume with top 5 trading partners (EU, the U.S., ASEAN, Japan and China´s Hong Kong SAR) accounted for 16.3 percent, 12.9 percent, 10.1 percent, 9.4 percent and 7.5 percent respectively in China´s total trade. Meanwhile, capital and financial account transactions have also diversified across various regions in the world. RMB´s floating with reference to any single currency can neither meet the diversified demand currencies in trade and investment with different partners, nor reflect its effective level. A basket of currencies can meet such demand and reflect the effective RMB level more accurately. Therefore, it is necessary for the managed floating exchange rate regime to be based on market supply and demand with reference to a basket of currencies, and thus make the RMB exchange rate more adaptive to market behaviors. As China´s trading and investment partners become more and more diversified, it would be more appropriate for enterprises and households in China to switch their attention from just RMB-to-dollar exchange rate to the RMB´s value in terms of a basket of currencies.
So, has anything of significance happened?
The Economist is doubtful. The FT editorial team -- and Geoff Dyer in particular -- think the Chinese are being politically deft. I have to concur. China's aim is to do just enough to placate the G-20 without enraging its domestic producers and online nationalists. By switching to a basket -- one in which the euro seems headed downward -- China has greater flexibility to do whatever the hell it wants with respect to the exchange rate.
Going forward, I'm curious about the extent to which Chinese authorities will play up their domestic constraints. It's very chic to point out the ways in which China's government does have to deal with nationalist pressures -- but the government also has an incentive to play those up as part of a two-level game. One of the great unknowns is the extent to which Beijing can turn that nationalist sentiment up and down like a volume control. I don't know the answer, and I'm not convinced that China-watchers know either.
LIU JIN/AFP/Getty Images
Continuing on the grand strategy theme from yesterday, I see that China is blowing off the G-20:
China tried to pre-empt a potential showdown at the upcoming G20 summit on Thursday when it warned the other large economies not to use the Toronto meeting as a platform to criticise its currency policy.
Fearing that the policy of pegging its currency to the dollar will come under attack, Chinese officials said the June 26-27 summit was not the correct place to discuss the level of the renminbi and cautioned against an outbreak of “finger-pointing”, which they said would be damaging to the world economy.
The comments will reinforce firming sentiment in Beijing that China is not readying a last minute anouncement on the currency ahead of the summit, despite the recent recovery in Chinese exports and rising anger in the US Congress....
A senior Chinese government official said that the G20 summit should be about co-ordinating policy, not criticizing individual countries.
“If we allow the G20 to turn into a process of finger-pointing, then it will certainly send out a very confusing and misleading signal to the markets,” he said. “This will certainly lead to very serious consequences in the global economy.”
Qin Gang, a Chinese foreign ministry spokesman, delivered a similar message. “We believe it would be inappropriate to discuss the renminbi exchange rate issue in the context of the G20 meeting,” he said.
In addition to the US, Brazil and India have also recently voiced criticisms of China’s currency policy. According to Reuters, a senior Canadian official said a stronger Chinese currency would benefit both China and the rest of the G20, although he added the G20 had to be careful not to put too much direct pressure on China.
A few thoughts. First, as near as I can figure, here is the list of topics that Beijing feels would be "appropriate" to discuss at the G-20 meeting:
1. Debating the role of the developed world in triggering the global financial crisis
2. Sorting out the redistribution of power in the IMF and World Bank towards rising developing countries
3. Reaching agreement on cool G-20 uniforms for the next summit.
4. Reaffirming the global consensus that chocolate is awesome
5. Hugging puppies. Puppies!!
Second, China's strategy here is of a piece with their behavior over the past nine months or so, which, intentionally or not, could be characterized as "Pissing Off as Many Countries As Possible."
Seriously, it's a distinguished list. The Europeans are furious at China because of how the country acted at Copenhagen. The Japanese and South Koreans are furious at China because of how Beijing has handled the Cheonan incident. India is unhappy with China's naval aspirations, nuclear aid to Pakistan, trade imbalances, and an unsettled border. A fair number of ASEAN nations are upset with China's currency policies and its reassertion of territorial claims and spheres of influence in the South China Sea. And then there's the United States, where despite some understanding between Obama and Hu, the People's Liberation Army and the Ministry of Commerce seem bound and determined to derail any warming trend between the two countries.
This is a long and distinguished list of countries to alienate. It certainly signals a shift, intended or not, from the "peaceful rising" approach of the past decade or so. It also appears to be bad strategy -- simultaneously angering the countries that could form a balancing coalition is not an exercise in smart power. And as I've said before, China has badly overestimated how it can translate its financial capabilities into foreign policy leverage.
All that said, the question is whether poor strategy matters all that much. Even if China's property bubble bursts, the country possesses formidable advantages, and the trend lines in terms of economic and military do seem favorable to Beijing. China is now the largest manufacturing power in the world, and its economy is imbricated in global production chains. Its military is only growing stronger. Robert Kaplan argues that it's geographically well-placed. It might be the case that enough countries in the list above -- plus Russia, Brazil, Africa and the Middle East -- decide that Beijing's bellicosity is a price worth paying to stay in China's good graces. Indeed, the underlying assumption behind China's policies is that nothing succeeds like success.
A lot of commentators notice these material advantages, and then mistakenly infer that China has pursued a brilliant grand strategy. At this point, however, China's continued rise seems to be occurring in spite of strategic miscalculations, not because of them. That's the thing about grand strategies, however -- they matter less when the margin for error is greater. Which is why greater attention needs to be paid to U.S.. grand strategy now than before.
Over the weekend, Paul Krugman trotted out his "let's pressure China" argument but expanded it to Germany. This prompted some quality IPE snark from Kindred Winecoff, followed up by the same points written in less snarky fashion.
Ordinarily, I would be eager to enter this debate full of vim and vigor. Unfortunately, I spent the weekend
at my college reunion at an important networking conference in which I drank a lot and caught up with old friends a lot of retrospective analysis and discussion took place over cocktails and I'm still exhausted from pretending to be a 21 year old for a few days still processing the exciting intellectual synergies that took place during the free-flowing dance party breakout sessions.
Fortunately, I really don't have to add too much. I'll just link to my old post about this debate and note that the questions I raised in that post have yet to be answered.
Well, I'll say one more thing. Between then and now, I've had the opportunity to enjoy a conversation with Krugman over dinner on these questions, and I think I can say where, exactly, we disagree. He believes that, as the deficit country, the U.S. has vast reservoirs of economic power that can be exercised over China. I would argue that the U.S. position is such that America can deter China but can't unilaterally compel the country to alter its own policies.
More importantly, Krugman -- and most economists engaged in this debate -- are seriously underestimating the extent to which nationalism will affect China's response to any unilateral move by the United States. Even if China's response to an increase in U.S. trade barriers would be counterproductive to their own economic interests, it might serve the regime's political interests. In an ordinary world economy, China wouldn't want to do anything to upset its expoert engine. In a world where the leading open economy basically says "f**k it," well, they're going to reassess. Riding the nationalist tiger will look politically appealing in a slow-growth world.
Two nights ago I recorded a podcast with the American Chamber of Commerce in China, which you can listen to if you
have no outside life whatsoever are so interested.
In the podcast, I repeated my mantra about mounting multilateral pressure on China to revalue the yuan. This week, in the run-up to the G-20 finance ministers meeting this week, Bloomberg reports that the other BRIC economies are now starting to vent on the issue,
Central bank governors in India and Brazil backed a stronger Chinese yuan, siding with U.S. President Barack Obama before a meeting of the Group of 20 nations this week.
Exports from China to India have grown faster than Indian shipments to its northern neighbor “and that obviously is a reflection of differences in the exchange-rate management,” Reserve Bank of India’s Duvvuri Subbarao told reporters in Mumbai yesterday. Brazil’s Henrique Meirelles told a senate hearing yesterday in Brasilia it was “absolutely critical” that China should let its currency appreciate.
Obama, who considers the yuan “undervalued,” is seeking to gain broader support from finance officials of the G20, who will discuss outlook for the global economy in Washington for three days starting April 22. Speculation that China may scrap the yuan’s peg to the dollar intensified this month after Treasury Secretary Timothy F. Geithner delayed a report that could brand the nation a currency manipulator.
“This meeting will be the first test by the U.S. to use a multilateral forum to press China into action on its currency,” Philip Wee, a Singapore-based senior currency economist at DBS Group Holdings Ltd. wrote in a research note yesterday.
The discussions will include a range of topics including currencies and a communiqué will be released on April 23, a U.S. Treasury Department official, who declined to be identified, said yesterday.
The Financial Times' Geoff Dyer follows up:
China is facing growing pressure from other developing countries to begin appreciating its currency, providing unexpected allies for the US in the diplomatic tussle over Beijing’s exchange rate policy....
Lee Hsien Loong, prime minister of Singapore, added his country’s voice to the debate last week, saying it was “in China’s own interests” with the financial crisis over to have a more flexible exchange rate.
Some in China have fended off US pressure for a stronger currency, describing it as a distraction from the real causes of the financial crisis. However, criticism from developing countries is not so easy to bat away. “If the rich and emerging economies are united in asking China to revalue, it would be harder to dismiss the request as an example of superpower arrogance,” said Sebastian Mallaby at the Council on Foreign Relations.
Mallaby's argument sure sounds familiar.
There's been a spate of stories over the past few days suggesting that China is about to shift its policy on the yuan, allowing the currency to appreciate against the dollar. Keith Bradsher's latest in the New York Times has the most detail, so let's look at his story:
The Chinese government is set to announce a revision of its currency policy in the coming days that will allow greater variation in the value of its currency combined with a small but immediate jump in its value against the dollar, people with knowledge of the consensus emerging in Beijing said Thursday....
The model for the upcoming shift in currency policy is China’s move in 2005, when the leadership allowed the renminbi to jump 2 percent overnight against the dollar and then trade in a wider daily range, but with a trend toward further strengthening against the dollar. For the upcoming announcement, however, China is likely to emphasize that the value of the renminbi can fall as well as rise on any given day, so as to discourage a flood of speculative investment into China betting on rapid further appreciation, they said.
The emerging consensus within the Chinese leadership comes as Treasury Secretary Timothy F. Geithner held meetings on Thursday with senior Hong Kong officials and prepared to fly on Thursday evening to Beijing for a meeting with Vice Premier Wang Qishan.
Now, given the degree of hostility between China and the United States as late as last month, we have to ask the question: what caused the shift in China's policy? Bradsher provides multiple answers:
China’s commerce ministry, which is very close to the country’s exporters, has strenuously and publicly opposed a rise in the value of China’s currency over the past month. But it appears to have lost the struggle in Beijing as other interest groups have argued that China is too dependent on the dollar, that a more flexible currency would make it easier to manage the Chinese economy and that China is becoming increasingly isolated on the world stage because of its steadfast opposition to any appreciation of the renminbi since July, 2008....
People with knowledge of the policy deliberations in Beijing said that Chinese officials had made the decision to shift the country’s currency policy mainly in response to an assessment of economic conditions in China, and less in response to growing pressure from the United States and, less publicly, from the European Union and from developing countries.
So, what's going on? First, it's possible that the policy shift will just be a token move. I'm confident that China won't appreciate as much as, say, Chuck Schumer wants. That said, this doesn't sound like a token-y move.
If China's shift is a real one, there appear to be three possible sources of change:
1) Domestic factors and actors convinced China's leadership that diminishing marginal returns for keeping the yuan fixed and masively undervalued had kicked in;
3) China responded to threats of unilateral U.S. action, such as being named as a currency manipulator, and/or calls for a trade war;
These are not mutually exclusive arguments, and we might never know exactly what caused China's . But for the record, I think (1) and (2) maqttered a hell of a lot more than (3). That said, I can't rule out the possiblity that their antics helped scare China into action.
Am I missing anything?
Treasury Secretary Timothy Geithner makes it pretty clear how he thinks the next few months will unfold with respect to China's exchange rate policy:
I have decided to delay publication of the report to Congress on the international economic and exchange rate policies of our major trading partners due on April 15. There are a series of very important high-level meetings over the next three months that will be critical to bringing about policies that will help create a stronger, more sustainable, and more balanced global economy. Those meetings include a G-20 Finance Ministers and Central Bank Governors meeting in Washington later this month, the Strategic and Economic Dialogue (S&ED) with China in May, and the G-20 Finance Ministers and Leaders meetings in June. I believe these meetings are the best avenue for advancing U.S. interests at this time....
China's inflexible exchange rate has made it difficult for other emerging market economies to let their currencies appreciate. A move by China to a more market-oriented exchange rate will make an essential contribution to global rebalancing.
Our objective is to use the opportunity presented by the G-20 and S&ED meetings with China to make material progress in the coming months.
In layman's terms, the Obama administration has decided that it will rely on multilateral pressure to get China to change its policy rather than take the unilateral route -- for now. In blog terms, the administration rejected the Krugman/Bergsten/Schumer approach to pressuring China in return for... well... my preferred approach.
Which automatically makes me nervous, of course, because I could easily be wrong. Still, there have been signs that other members of the G-20 feel the same way as the United States. And it's also true that the hour-long conversation between President Obama and President Hu seems to smoothed over a lot of recent contretemps. Indeed, Nicholas Lardy told the New York Times that on Iran and North Kotrea the U.S. was getting a fair amount in return for deferring the report.
A few Chinese central bankers and think-tankers are now making noise about movements on exchange rates. Making this shift via G-20 and bilateral channels -- rather than in response to a Treasury finding of currency manipulation or Congressional threats of protectionism -- gives China a more politically palatable justification for policy change. Beijing will likely move in the right direction, albeit more slowly than anyone else would like.
And, if nothing happens from these meetings, China can be named in the fall. Indeed, the paradox of two-level games is that there needs to a rising but manageable possibility of protectionist action by the United States to give China an incentive to alter their policy.
In many ways, this is put-up-or-shut-up time for the G-20. If the U.S. has no option but to name China, it starkly demonstrates the limits of the G-20 process at forcing policy coordination. If, on the other hand, China pursues a more accomodationist approach, then that augments the G-20's prestige as a useful forum.
UPDATE: Simon Lester has a round-up of reactions.
Two weeks ago the New York Times' Keith Bradsher noted that China was not fully complying with information provision obligations at the G-20.
Now the Financial Times' Chris Giles and Alan Beattie suggest that a growing number of G-20 players are venting their frustrations at China:
Five prominent members of the Group of 20 leading economies, including the US and UK, sent a coded rebuke to China on Tuesday against backsliding on economic agreements.
In a letter to the rest of the G20 that shows frustration at slow progress this year, the leaders warned: “Without co-operative action to make the necessary adjustments to achieve [strong and sustainable growth], the risk of future crises and low growth remain.”
G20 officials said the letter – signed by Stephen Harper and Lee Myung-bak, the Canadian and South Korean leaders who will chair the group’s two summits this year, Barack Obama, US president, Gordon Brown, UK prime minister, and Nicolas Sarkozy, French president – was an attempt to restore flagging momentum to the international process.
Ottawa and Seoul are concerned that the G20 summits they will host, in June and November respectively, might fail to live up to expectations.
In a move that will irritate China, the five leaders specifically raised the issue of exchange rates in relation to reducing trade imbalances, a topic the G20 avoided in 2009 to help secure agreement at the London and Pittsburgh summits.
“We need to design co-operative strategies and work together to ensure that our fiscal, monetary, foreign exchange, trade and structural policies are collectively consistent with strong, sustainable and balanced growth,” the letter said....
As well as refusing to budge on its currency, China has been obstructing the G20 process this year. It has hampered efforts by the International Monetary Fund to issue a report which Dominique Strauss-Kahn, managing director, told the Financial Times in January would conclude that national strategies for growth around the world “will not add up”.
The leaders’ letter makes reference to the slow progress of this process, urging all G20 members to “move quickly” to “report robustly on what each of us can do to contribute to strong sustainable and balanced global growth”.
It's becoming increasingly difficult to figure out China's strategy here. Lying low isn't going to work for much longer. Ian Bremmer suggests that China has decided it doesn't need the United States anymore. I'm not sure that's accurate, but even if it is, I'm pretty sure Beijing does need at least a few other countries in the G-20.
Of course, maybe they think letters like this will lead to nothing. They might be right. Distrubingly, this same letter urges a completion to the Doha round. Not that there's anything wrong with that. At this point, however, pledges to complete the Doha round are kinda like my pledges to lose weight -- they're mostly ritualistic and have disturbingly little effect on actual behavior.
If the exhortation to redress macroeconomic imbalances falls into the same category, the G-20 will quickly acquire the perception of other dysfunctional multilateral structures.
Question to readers: will China find itself isolated at the G-20 if it continues its noncompliance?
So I see Paul Krugman has thrown his lot in with the neoconservatives who disdain multilateral institutions and prefer bellicose unilateralism when they confront a frustrating international situation.
His op-ed today is about China's currency manipulation. ... again. After explaining that China has less leverage than is commonly understood on the foreign economic policy front (gee, where have I heard that before), he closes with the following:
In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.
Whoa there, big fella!! That's a nice but very selective reading of international economic history you have there.
It's certainly true that the dollar was overvalued back in 1971. What Krugman forgets to mention -- and see if this sounds familiar -- is that the Johnson and Nixon administrations contributed to this problem via a guns-and-butter fiscal policy. They pursued the Vietnam War, approved massive increases in social spending, and refused to raise taxes to pay for it. This macroeconomic policy created inflationary expectations and a "dollar glut." Foreign exchange markets to expect the dollar to depreciate over time. Other countries intervened to maintain the dollar's value -- not because they wanted to, but because they were complying with the Bretton Woods system of fixed exchange rates. Nixon only went off the dollar after the British Treasury came to the U.S. and wanted to convert all their dollar holdings into gold.
In other words, the United States was the rogue economic actor in 1971 -- not Japan or Germany.
So, how about acting multilaterally first before engaging in unilateral action that alienates America's friends and allies alike?
To be fair to Krugman, many of the multilateral processes appear to be stymied, as Keith Bradsher explains in this NYT front-pager:
Beijing has worked to suppress a series of I.M.F. reports since 2007 documenting how the country has substantially undervalued its currency, the renminbi, said three people with detailed knowledge of China’s actions....
Last September, Presidennt Obama, President Hu Jintao of China and other leaders of the Group of 20 industrialized and developing countries agreed in Pittsburgh that all the G-20 countries would begin sharing their economic plans by November. The goal was to coordinate their exits from stimulus programs and prevent the world from lurching from recession straight into inflation.
The G-20 leaders agreed that the I.M.F. would act as intermediary.
But two people familiar with China’s response said that the Chinese government missed the November deadline and then submitted a vague document containing mostly historical data. These people said that China feared giving ammunition to critics of its currency policies at the monetary fund and beyond. Both people asked for anonymity because of China’s attitudes about its economic policies.
That last part oabout the G-20 process is particularly disturbing, given that this was supposed to be the venue through which macroeconomic imbalances were supposed to be addressed. So maybe Krugman is right and unilateral is the way to go?
I don't think so. The big difference between the end of the Bretton Woods era and the current Bretton Woods II situation is the distribution of interests. In 1971, everyone was opposed to a continuation of U.S. policies. This time around, there appears to be a growing consensus that China is the rogue economic actor.
If Krugman gets to repeat himself, then so do I:
[T]he United States is not the country that's hurt the most by this tactic. It's the rest of the world -- particularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy. These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means their products are less competitive in the U.S. market compared to domestic production and Chinese exports.
So why should the U.S. act unilaterally? Why not activate an international regime that does not include China but does include a lot of other actors hurt by China's currency policy?
Am I missing anything?
MIKE CLARKE/AFP/Getty Images
The Financial Times' Ben Hall reports that French president Nicolas Sarkozy is going to take advantage of France’s presidency of the G8 and G20 to do something serious in 2011:
Nicolas Sarkozy on Thursday stepped up his attack on global exchange rate imbalances saying “monetary disorder” had become “unacceptable”
The French president said he would make exchange rate policy an important theme of France’s presidency of the G8 and G20 forums of advanced and developing economies in 2011....
With a large trade deficit and with exports that are more price-sensitive than Germany’s, France feels more susceptible to exchange-rate movements than its neighbour across the Rhine.
“We can’t increase the competitiveness of our businesses in Europe and have the dollar lose 50 per cent of its value against the euro,” Mr Sarkozy said. “When we produce in the eurozone and sell in the dollar zone, are we supposed to just give up selling?”
“You know how close I feel to the US. But this is not possible. The world has become multipolar. We must have a multi-monetary system.”
In the wake of the failure of the Copenhagen climate conference to set ambitious, binding targets for reductions in carbon dioxide emissions, the French president also reiterated his demand for a carbon tax on imports to the EU from countries that sign up to “no environmental rules”.
However, he gave little indication how France could push forward with the idea, given opposition in Germany and elsewhere in the EU, and France’s recent diplomatic efforts to improve ties with Beijing (emphasis added)
That last paragraph ably sums up Sarkozy's problem, which is that he makes grandiloquent pronouncements but has almost no ability to follow through on them.
Sarkozy's ability to influence currency politics in particular is limited at best -- not to mention contradictory. Any diversification away from the dollar as the world's reserve currency will mean an appreciating euro, not a depreciating one, as more public and private actors try to get their hands on the currency. This appreciation could be prevented if the European Central Bank decided to pursue an looser monetary policy. Which I'm sure they will do.... right after cheese-eating surrender monkeys come flying out of Sarkozy's derriere. Oh, and there's also the small matter of ECB president Jean-Claude Trichet wanting nothing to do with a globalized euro.
I suspect none of this will silence Sarkozy -- but his words aren't going to change anything either.
The Carnegie Endowment for International Peace's Uri Dadush and Bennett Stacil have released The G20 in 2050, in which you learn the following:
China will become the world’s largest economy in 2032, and grow to be 20 percent larger than the United States by 2050. Over the next forty years, nearly 60 percent of G20 economic growth will come from Brazil, China, India, Russia, and Mexico alone. However, these emerging markets will not rise among the world’s richest countries in per capita terms: their average income in 2050 will still be 40 percent below that of the G7 states today. The end of the decades-old correlation between economic size and per capita income will have profound effects on global economic governance.
Hmmm.... yes, this sounds familiar:
The Carnegie report does have some nicer visuals, however. Give it a look.
Studies by Goldman Sachs and Deutsche Bank on growth trends for big developing economies contains some startling predictions. By 2010, the annual growth in aggregate demand from Brazil, Russia, India, and China will be greater than the combined growth of the United States, Japan, Germany, Italy, and Great Britain. By 2020, China and India are projected to have the second and third largest economies. By 2025, the annual growth in aggregate demand from the four leading developing economies will be twice that of the G-7. By 2030, the combined purchasing power of China's and India's consumers is projected to be five times that of today's United States. While simple extrapolations from the recent past can be misleading, economic and demographic trends suggest that growth of India and China will shift what is currently a bipolar economic distribution of power into a more multipolar world.
As the number of actors increases, the likelihood of creating a concert of common preferences among them necessarily declines. This holds with particular force if these countries achieve great power market size while still having low per capital incomes. In addition to the current tension between the American and European varieties of capitalism, another source of preference divergence could emerge among the great powers: the tension between rich countries willing to trade off economic growth for quality of life issues, and still-developing countries that are more reluctant to sacrifice growth.
Over at the Financial Times, Gideon Rachman looks back at the G-20 Pittsburgh summit and thinks that Europe will take over the G-20 process:
The realisation that the G20 is Europe’s Trojan horse struck me at the G20’s last summit in Pittsburgh a couple of weeks ago. The surroundings and atmosphere were strangely familiar. And then I understood; I was back in Brussels, and this was just a global version of a European Union summit.
It was the same drill and format. The leaders’ dinner the night before the summit; a day spent negotiating an impenetrable, jargon-stuffed communiqué; the setting-up of obscure working groups; the national briefing rooms for the post-summit press conferences.
All of these procedures are deeply familiar to European leaders – but rather new to the Asian and American leaders whom the Europeans are carefully entangling in this new structure. Watching an Indonesian delegate wandering, apparently carefree, through the conference centre in Pittsburgh, I felt a stab of pity. “You don’t know what you are getting into,” I thought. “You are going to waste the rest of your life talking about fish quotas.” (Or, this being the G20, carbon-emission quotas.)
The Europeans did not just set the tone at the G20 – they also dominate proceedings, since they are grossly over-represented. Huge countries such as Brazil, China, India and the US are represented by one leader each. The Europeans managed to secure eight slots around the conference table for Britain, France, Germany, Italy, Spain, the Netherlands, the president of the European Commission and the president of the European Council. Most of the key international civil servants present were also Europeans: Dominique Strauss-Kahn, head of the International Monetary Fund; Pascal Lamy of the World Trade Organisation; Mario Draghi of the Financial Stability Board.
As a result, the Europeans seemed much more tuned into what was going on than some of the other delegations. Puzzling over the new powers given to the IMF to monitor national economic policies in the Pittsburgh conclusions, I was interrupted by an old friend from the European Commission, who recognised the language immediately. “Ah yes,” she said, “the open method of co-ordination.”
Hmmm..... no, I'm not buying this. Or, to put it another way, if the G-20 is a European plot, then it would be the worst plot since.... insert your least favorite M. Night Shyalaman film here.
Sure, the Europeans are overrepresented at the G-20. But compare that to the G-8, where (when you factor in the EU), they occupied more than half of the chairs around the table. The G-20 doesn't augment the power of Europe -- it dilutes it.
This interpretation fits with what I heard from some of the G-20 participants as well. There was a surprising degree of common cause between the BRIC economies and the United States in the run-up to Pittsburgh. Given the outcome, there is an obvious explanation for the BRIC economies' behavior.
Why did the U.S. go along? Washington maintains stronger bilateral ties with each of the other G-20 members than most do with each other. If one thinks of the United States as the central node in a more networked governance arrangement, then one can see how the reforms made to date do not weaken American influence. The primary loser, then, is Europe.
Maybe Gideon will be proven correct -- it's certainly true that the Europeans might have a comparative advantage in this kind of diplomatic death-by-detail approach. On the other hand, the Americans and Russians aren't exactly newbies at this. The Chinese and Indians have been moving down the learning curve pretty fast. And the Brazilians already have a reputation for being diplomats who punch above their weight.
As previously noted, the G-20 has done a much better job than I would have thought possible a year ago. It now looks like the Obama administration is close to earning consensus on a framework arrangement on macroeconomic policy coordination. The devil's in the implementation, of course, but the fact that they're close to consensus on such a framework is truly surprising.
Naturally, the French like to focus on peripheral issues that they are convinced contributed to last year's financial meltdown. Last April it was tax havens; this time France's pet peeve is placing a cap on bank bonuses (admittedly less peripheral than the tax havens).
It now looks like there will be agreement on that issue -- in part because the caps will not include specific monetary caps.
I raise all of this because Nicolas Sarkozy's "bonus tsar", Michel Camdessus, gave an interview to the Financial Times in which he was refreshingly candid about the issue:
France’s bonus tsar on Thursday said that traders’ bonuses were a largely symbolic issue for G20 leaders, and that in terms of money they were the “least important” item on the agenda.
Michel Camdessus, the former head of the International Monetary Fund, said: “If you look at this issue of remuneration in the global agenda of the G20, it is certainly – in terms of cash, money – the least important of all issues on the table.”Mr Camdessus, charged by Nicolas Sarkozy, the French president, last month with monitoring bonuses of traders at state-aided banks, added: “But if you look at the symbolic value of the issue, it is one of the most important.”
Fine -- it's symbolically important. But if a symbolic agreement can allow the G-20 to keep their eyes on the macroeconomic prize, then three cheers for symbolic gestures.
To put it gently, international macroeconomic policy coordination has not had a glorious history over the past century. Usually, the domestic political and economic costs were large enough to impede most efforts to coordinate. Sham coordination was far more common than genuine coordination.
Most successes in global policy coordination occurred when two of the following three conditions held. First, when there was a state powerful enough to go it alone, coordination was usually a matter of the hegemon unilaterally providing the necessary public goods to facilitate coordination (see: Marshall Plan, Dodge Line). Second, when countries were being asked to take actions that boosted their domestic economies, they were willing to coordinate policy. Contractionary fiscal or monetary policies have proven to be far more difficult to coordinate than expansionary actions. Third, policymakers needed to be right on the economics. Agreements to coordinate on an unsustainable set of policy prescriptions - such as the interwar gold exchange standard, Bretton Woods, or the Growth and Stability Pact - had a short half-life.
Now, to give the G-20 some credit, this current crisis has led to greater levels of coordination than in the past -- and more than I expected. This might be a function of policy learning from the debacles of the interwar period. But it could also the fact that, to date, governments have been asked to pursue expansionary policies. Each country was going to do something like what they are doing anyway -- the G-20 just acted as a useful focal point to cajole some of the more reluctant countries.
What happens when it's time to clamp down? Australian PM Kevin Rudd and South Korean President Lee Myung-bak proffer some recommendations in the Financial Times for the hard part of macroeconomic policy coordination:
At Pittsburgh, G20 leaders should agree to a three-stage process. First, national governments should develop their own national strategies for recovery. Second, they should agree to deliver these strategies to the International Monetary Fund before the end of the year and ask the IMF to report back on their consistency with balanced and sustained global growth. Third, G20 leaders should meet again in 2010 (when South Korea is the chair of the G20) to agree their responsibilities and actions to achieve this goal within the framework of post-crisis global economic management.
Steps one and two make a great deal of sense, and even have a good chance of being implemented. The wording of step three is a bit vague, for it to mean anything it boils down to, "make everyone scales back on priming the pump in a coordinated manner."
If that actually happens, well, tip your cap to the G-20, because the G-7 -- a much more homogenous group of countries -- never succeeded at that task.
Question to readers: does the G-20 have a chance in hell of succeeding in their next task?
Back in the 1970's, Henry Kissinger used to joke that, "When I want to call Europe, I cannot find a phone number."
In a cruel irony, the roles appear to be temporarily reversed, according to the Financial Times:
The US-European differences are casting a shadow over next month’s summit in London of leaders from the G20 group of advanced and emerging economies, an event to be attended by Barack Obama on his first visit to Europe as US president.
It also emerged that Gordon Brown, UK prime minister, was struggling to organise the summit. Britain’s most senior civil servant claimed it was hard to find anyone to speak to at the US Treasury. Sir Gus O’Donnell, cabinet secretary, blamed the “absolute madness” of the US system where a new administration had to hire new officials from scratch, leaving a decision-making vacuum.
“There is nobody there. You cannot believe how difficult it is,” he told a conference of civil servants.
This sounds like a familiar complaint. Oh, wait....
What I was looking for were three things: (i) coordination on fiscal stimulus; (ii) a commitment to provide more liquidity support, as needed, to prevent a further spread of the crisis to emerging nations; and (iii) a clear commitment not to engage in trade protection, with a monitoring mechanism to ensure the pledge is being observed. How does the statement do in these regards? So-so. There is no coordination in the fiscal arena, the promises made to emerging markets are vague, and even though there is a clear statement on protection and export subsidization, there is no monitoring or enforcement mechanism.My take is slightly different. The expectations of this G-20 meeting had to be pretty low, given that the focal point actor has a lane duck president. What I found interesting, rather, was some laying of the groundwork for actual reform of global governance structures:
We are committed to advancing the reform of the Bretton Woods Institutions so that they can more adequately reflect changing economic weights in the world economy in order to increase their legitimacy and effectiveness. In this respect, emerging and developing economies, including the poorest countries, should have greater voice and representation. The Financial Stability Forum (FSF) must expand urgently to a broader membership of emerging economies, and other major standard setting bodies should promptly review their membership. The IMF, in collaboration with the expanded FSF and other bodies, should work to better identify vulnerabilities, anticipate potential stresses, and act swiftly to play a key role in crisis response.What's interesting about this is the above paragraph mirrors the below paragraph put out a few weeks ago by the BRIC Finance Ministers:
We called for the reform of multilateral institutions in order that they reflect the structural changes in the world economy and the increasingly central role that emerging markets now play. We agreed that international bodies should review their structures, rules and instruments in respect of aspects like representation, legitimacy and effectiveness and also to strengthen their capacity in addressing global issues. Reform of the International Monetary Fund and of the World Bank Group should move forward and be guided towards more equitable voice and participation balance between advanced and developing countries. The Financial Stability Forum must immediately broaden its membership to include a significant representation of emerging economies.This kind of structural reform is not going to happen overnight. But the fact that this got into the final communique suggests that there is at least some recognition by the G-7 that the rules of the game are about to change for good.
Daniel W. Drezner is professor of international politics at the Fletcher School of Law and Diplomacy at Tufts University.