No Rest for the G20
Have policymakers exhausted the margins of maneuver that differentiated 2009 from 1929?
- Winning a battle is not winning the war, in particular when the casualties are high (surging debts and deficits) — and the enemy is unscathed (bailed out banks and flourishing bonuses).
- Will this cooperative mood survive with a delayed impact of the crisis on unemployment in the most socially protective countries, and a jobless recovery in some of the others?
- If we don't want to give into international economic solidarity for our neighbors, we should at least do it in solidarity with our children.
- Today's leaders' success has been made possible by previous generations of leaders who could agree on the architecture and basic principles of multilateral cooperation.
- Vision and leadership for international economic cooperation is badly needed. The crisis has amplified global imbalances, and hence the need for global solutions.
The year 2009 started with the world on the edge of a depression, and ended on a more optimistic note. The G20 countries "agreed to do everything necessary to ensure recovery" — and "it worked" (Pittsburgh G20 Leaders' Statement). But did it really work?
It seems premature to ascertain the sustainability of the recovery. Moreover, even if it did "work," a sense of normalcy should not lead to complacency among the world leaders. Winning a battle is not winning the war, in particular when the casualties are high (surging debts and deficits) — and the enemy is unscathed (bailed out banks and flourishing bonuses).
More recent, less glorious battles, in Geneva on the Doha round of multilateral trade negotiations, and in Copenhagen on climate change, also revealed serious cracks in the multilateral alliance. Huge challenges lie ahead the G20 — and 2010 will be just as decisive as 2009 for claiming final victory against the crisis.
Concerns about the world’s economic prospects could be summarized in one single question: How far did we stretch the economic policy rubber band? Douglas Irwin explained the recent G20 success by the use of economic policy flexibilities that were not available in the 1930s when budget orthodoxy and the gold standard prevailed.
G20 countries therefore did not need to (ab)use the beggar-thy-neighbor type of policies that created the spiral of depression in the 1930s. They just stretched the economic policy elastic band by increasing budget deficits, national debt levels and letting exchange rates fluctuate.
As of today, however, the very real question is whether policymakers have exhausted those margins of maneuver that made success possible and that differentiated 2009 from 1929. How much further could we stretch the elastic band if we were confronted with a W-curve type of crisis, as many experts predict?
The pessimist's view is that we have exhausted most margins of maneuver — and the next shock could be fatal to the world economy. For some observers, a double dip is inevitable, because no remedies have been found to the real causes of the crisis, particularly in the financial sector. Have we "hidden the explosive under the carpet," to quote Benoit Mandelbrot?
For the World Economic Forum, we might even have planted the seeds of the next crisis by stretching the elastic band too far and slipping into over-indebtedness which, according to Irving Fisher, was a predominant factor leading to the 1930s Great Depression.
The optimist's believe that the rubber band can stretch further, for not all margins of maneuver have been exhausted — and the recovery will give some strength to it.
The G20 and others have stressed the need to monitor domestic economic policies to avoid pushing one's luck too far. Will this cooperative mood survive with a delayed impact of the crisis on unemployment in the most socially protective countries, and a jobless recovery in some of the others?
Will the fear of stimulus money leakage increase with budget deficits and debts? For sure, the stress on international cooperation will remain, even in the most optimistic scenario.
Another lesson of the crisis has been the importance of international rules in the containment of beggar-thy-neighbor-type policies and the avoidance of the 1930s scenario.
In most cases, the G20 countries have stretched the economic policy rubber band within the margins allowed by multilateral and regional agreements, using built-in safety valves such as antidumping actions that have been on the rise in the trade field.
Protectionism has mainly appeared in grey areas of the multilateral trading system, or where no multilateral or regional rules existed. In other words, today's leaders' success has been made possible by previous generations of leaders who could agree on the architecture and basic principles of multilateral cooperation.
However, the fathers of the Bretton Woods system sought remedies to the 20th century's problems, and could not anticipate the 21st century's needs: In areas such as financial sector regulation or the environment, the emperor has no clothes.
From this perspective, the Pittsburgh G20 celebration has been followed by worrying signals. The successive failures to find ambitious conclusions to the Doha round of multilateral trade negotiations or to the Copenhagen conference on climate change have questioned the ability of today's leaders to "think multilaterally" and lay the foundation of a solid 21st century global economic architecture.
That deplorable state of affairs calls for an urgent revival of international cooperation and solidarity. In Pittsburgh, the world leaders designated the G20 to be the premier forum for international economic cooperation. This mandate is very ambitious, and it has to be seen whether the G20 can deliver where other international bodies have failed.
In fact, the G20 — at least for now — seems to be ill-equipped to fulfill such a mandate. Some have suggested establishing a secretariat, but bureaucratic inflation is rarely the driver of more efficient action. Also, the IMF, the World Bank and other organizations have the resources and mandate to deliver the necessary background information and research.
The G20 should remain a political body. There is, however, a need to challenge the G20 leaders with ideas that would be at the same time provocative and deeply rooted in real politics.
A high-level commission, made up of former leading policymakers known for their action and boldness, would have the authority to make precise policy and language recommendations to the G20 leaders. This commission would be the guardian of the multilateral spirit and the missing organic link between the G20 sherpas.
The recommendations of the commission would help consensus-building, and hence decision-making, on topics such as macro-economic coordination or crisis exit strategies. Provided with clear policy options, the G20 leaders would have to face up to their responsibilities, and the political cost of inaction would increase.
With this regard, the level of ambition of Canada and South Korea that will host the next G20 meetings will be crucial to the future of international economic cooperation and the establishment of the foundation for strong, sustainable and balanced growth.
In the coming months, the G20 countries will need to resist the temptation of looking inward, as unemployment will continue to grow. The risk of a double-dip crisis and the question of how much further we can stretch the economic policy rubber band remain.
One should not neglect that recent bailouts have had significant spill-over effects abroad (e.g., the AIG bankruptcy would have affected many non-U.S. banks). Who will save the next Dubai?
The crisis has amplified global imbalances, and hence the need for global solutions. Do we have to learn it the hard way like the 1930s generation, or could we resuscitate the Bretton Woods spirit in time?
Vision and leadership for international economic cooperation is badly needed. The recent surge in public debt levels is already a burden for the next generation.
The least today's G20 leaders could do is to provide this generation with the tools that will enable it to successfully deal with the 21st century challenges and the next crisis. To be cynical, if we don't want to give into international economic solidarity for our neighbors, we should at least do it in solidarity with our children.