The Honest Version of the G-20 Communiqué

Here.

Via Clive Crook

G-20 Trouble

Remember back in 2009, when the G-20 surprised a lot of people by emerging as the pre-eminent global macro coordination body? Well, the next meeting is this week in Seoul, and as Felix Salmon notes things aren't looking so good:

The unity we saw at the London summit in 2009 is a distant memory: no one, now, can even agree on what internationally coordinated action should look like, let alone actually get their respective parliaments to implement it. Which in turn means that G20 national economic policies are increasingly likely to work against each other than constructively with each other. It might well take another full-blown crisis before Germany and the U.S. are on the same page again.

I think this was mostly inevitable, for reasons I'll go into in more depth soon. In any case, domestic politics has been in the headlines for the past year, at least in the States, but it looks like international politics is where the action is at moving forward.

The Decline

Consider the never-ending narrative of American decline. My historical knowledge isn't super-deep, but I know for certain that that drum has been kicked at least since Sputnik ('50s), continuing through the Vietnam War ('60s), the closing of the gold window and the oil embargo/stagflation ('70s), the rise of Japan ('80s), European integration ('90s), and now the rise of the BRICs, especially China. During this entire period critics of the U.S. have focused on its sclerotic political system and messy "laissez-faire" capitalism (ha!), which was clearly inferior to the svelte technocratic industrial policies of the USSR OPEC Japan NICs E.U. China. The U.S. is becoming more and more irrelevant, I keep hearing. The quick rebound of China, Brazil, and Germany is proof that the world is decoupling from the U.S. The world is becoming more multipolar, the U.S. needs to learn how to shift into obsolescence and be just another state among states.

And yet when the U.S. announces that it is going to reduce some of the maturity of its sovereign debt in order to boost domestic demand -- an equivalent action to normal monetary policy operations, except on 5-year T-bills rather than shorter maturities, at a time when markets expect deflation (see graph above) -- the world goes ballistic. Huh? If the U.S. was as vulnerable as folks make it out to be, and the rest as powerful and resilient, this shouldn't even register. Instead the Chinese complain about "currency manipulation" as if QE2 wasn't a demand-side domestic monetary policy. Brazil complains about capital inflows creating bubbles, and institutes capital controls to counteract them, as if protecting local capital owners and commodity exporters in one of the most inegalitarian countries on earth had nothing to do with it. Japan enacts its own QE, and South Korea is pushing for, er, something to deal with exchange rates at the upcoming G20 meeting it hosts. The entire industrialized world is concerned that a relatively small program in the U.S. is going to threaten their entire economies.

(Either that or they're using it as cover to justify policies that they wish to enact anyway. I actually think this is more likely, since they can always continue to devalue against the dollar without retribution if they wish, and anything that boosts American demand is good for Chinese, Japanese, Brazilian, and South Korean exporters. But I don't know that for certain; maybe these leaders really are freaked out.)

Of course all of this follows a financial crisis that originated in the U.S. but was not contained within it. Forgive me for thinking that at this point the importance of the U.S. to the global economy almost cannot be overstated. At this point I wouldn't be terribly surprised if the replacement of Bretton Woods II is a variant of Bretton Woods I. The U.S. needs to recognize its place in the world, and act like a hegemon should. There's not chance the G-20 is capable of doing it.

So far I think we've done a reasonably good job -- the trading system has remained intact, warnings of competitive currency depreciations have been all smoke and no fire, countercyclical lending has gotten to states (like Greece) that have needed it, international institutions have held together remarkably well -- but we can do even better. Now is the time to finish the Korea FTA and give fast-track negotiating authority to Obama. Doha isn't going anywhere right now, but in a few years time there could be a window for movement, and it would be good to have the tracks laid ahead of time. Now is the time to let other countries devalue against the dollar if they need to, while still pursuing policies that will boost domestic demand, including demand for imports. Yes that hurt employment in tradable sectors, but mostly in the sort of less-skilled manufacturing that will not yield new jobs anyway. In the meantime, it will boost employment in importing sectors, and provide low-cost goods for struggling households. I wish it were possible to push for immigration reform too, since it's the time for that as well, but I'm pretty sure the sort of immigration reform we'd be likely to see right now isn't the sort I'd support.

Now is emphatically not the time to "get tough" with other countries that also pursue policies in their domestic interest, even if they have some short-run negative consequences for the U.S. There is a lot of low-hanging positive-sum fruit hanging out there. There's no need to take an axe to the trunk.

After all, if the Federal Reserve can't get the U.S. economy moving, the Bank of Japan won't be able to either.

The U.S. should not set policy out of fear of decline.

Balancing Act

Just to piggy-back off of Dr. Oatley's post below. Geithner wants to cap current account surpluses or deficits at 4% of GDP. What effect would that have? Well, U.S. GDP is roughly $14tn. 4% of that is $560bn. In other words, a persistent 4% deficit in the current account is still quite large. Large enough that during most periods the U.S. was well within that boundary, though not during the mid-2000s. As the picture above shows, only in the last few years has the U.S.'s balance of payments been that sharply out of balance. (Note: that is nominal yearly data.)

What's interesting to me about the G20 kicking around these types of proposals are the distributional implications:

Representatives of the world’s largest economies, meeting in South Korea, reached tentative agreement early Saturday on the need to rein in trade imbalances, as part of an American-brokered compromise on calming exchange-rate tensions that have threatened to disrupt the uneven global recovery.

The Obama administration on Friday urged the other economic powers that make up the Group of 20 to agree to curb persistent surpluses and deficits that could contribute to the next financial crisis.

The proposal, which included a numerical limit, was backed by South Korea and quickly drew support from Britain, Canada and Australia. But it met with resistance from Germany and ambivalence from Japan, both major export countries. China, whose currency battle with the United States has threatened to derail the process of global economic cooperation, did not formally weigh in.

So after a marathon negotiating session that stretched into the predawn hours Saturday, the G-20 representatives agreed on the goal of “reducing excessive imbalances” — without a specified limit — and called on the International Monetary Fund to examine the causes of “persistently large imbalances.” The draft statement, to be ratified later Saturday, will also call on countries to “refrain from competitive devaluation” of their currencies, officials said. ...

Four countries have current-account surpluses exceeding 4 percent: Saudi Arabia (6.7 percent), Germany (6.1 percent), China (4.7 percent) and Russia (4.7 percent.) But under the American proposal, countries like Russia and Saudi Arabia that are “structurally large exporters of raw materials” would be exempt from the 4 percent limit, so the pressure would have fallen on China and Germany.

Two G-20 countries have current-account deficits larger than 4 percent: Turkey (5.2 percent) and South Africa (4.3 percent). The United States is next, at 3.2 percent.

A lot of stuff in here. First note that, once again, the expansion of the G7 to the G20 seems to have made it practically impossible to reach meaningful agreements with actionable language. How to reduce these imbalances? Umm... How much should they be reduced? No hard limit. What is the consequence of not reducing imbalances? None that I can see.

Of course the most important thing is who is reducing imbalances. As Dr. Oatley noted, it doesn't matter what countries like Turkey and South Africa do. Nor Russia or Saudi Arabia. It only matters what the U.S., China, and Germany do. The U.S. is under the proposed 4% limit, so is it any surprise that that is the level Geithner picked? It's the number that directly targets China and Germany, and to a lesser-extent Japan. The U.S. is trying to make China, Germany, and Japan pay for international macroeconomic adjustment. No wonder that those countries immediately rejected a firm requirement.

Meanwhile, Justin Fox notes that Keynes proposed something very similar during the Bretton Woods discussions:

Not impossible-to-enforce targets, but a system with incentives built in that would have made big trade imbalances unattractive to both sides. There’s that little matter of creating a new global currency and getting everybody to accept it, but this was at the tail end of World War II. If the U.S. had decreed that the International Clearing Union was a go, the International Clearing Union would have been a go. But at the time, the U.S. ran big trade surpluses and assumed it would do so forever. Its delegates at the Bretton Woods meetings were vehemently opposed. So the idea went nowhere.

Imagine that! Powerful governments decided not to pursue actions that went against their domestic interests. Who could have foreseen it?

The same dynamics are still at play even if some of the roles have reversed, so asking the IMF to investigate causes is a waste of time. China, Germany, and Japan have strong domestic political incentives to pursue policies that generate large current account surpluses. Their political survival depends on continued economic growth, and their economies are so structured that growth has to come largely from exports. The IMF will surely highlight the policies that lead to these outcomes, including exchange rate machinations, but it won't matter because they won't address the underlying political processes that generate the policies in the first place. Even if leaders wanted to bite the bullet and reverse these policies, their domestic constituents wouldn't allow it.

If the U.S. wants to address this issue, it's going to take much more than a vaguely-worded G20 communique. It will have to build a large constituency of other large economies. It will have to find a way to appease Germany and Japan while isolating China. It will have to massively boost domestic savings. And it will have to push a binding agreement through the IMF or WTO. That's a very tall order right now, and I don't see how they can pull it off. As the NYT article linked above notes:

Desmond Lachman, a former I.M.F. official now at the American Enterprise Institute in Washington, praised Mr. Geithner’s message. “It’s a constructive and imaginative proposal and it broadens the discussion away from an exclusive focus on currency to the wider set of policies needed to bring balance about,” he said. “But if you don’t have the Germans and the Chinese, this isn’t going to go very far.”

He added: “They want the U.S. to reduce its deficits, but they don’t want to reduce their surpluses.”

And vice versa.

Rage Against the Machine

Remember when I wondered where the anti-globalization protesters went? Turns out they migrated to Canada. It's hard to find clear reporting on the numbers of protesters or their specific activities, but apparently about 180 have been arrested so far. Still nothing like the Battle in Seattle, but it's not nothing.

Am I Dreaming?

I never thought I'd see the day when Emmanuel was optimistic about either a G-20 meeting or the Doha round of WTO meetings. But today he is optimistic about both. First, the G-20:

Somewhat to my surprise, the finance ministers' get-together in the run-up to the 24-25 September G-20 meeting has yielded results to build on. ...

I hope these two themes of enhancing LDC participation in global economic governance and reducing unwarranted banker compensation are followed through. As the title says, it's promising and not fulfilled action.

I don't see how "reducing unwarranted banker compensation" will help improve stability, but I completely agree that increasing LDC participation in the IMF and other economic institutions is a good thing. I remain skeptical that the current power structures in those institutions will be overturned unless the rising LDCs force the issue themselves, but that may happen too.

Next, Doha:

It is thus with guarded optimism that I note discussions in Delhi have exceeded my modest expectations. Following from a recent post, India has been able to get services on the agenda.

Once again, I agree with Emmanuel that the opening of the services and agricultural sectors of the industrialized world should be on the agenda. And the LDCs have shown that they are capable of blocking Doha if they don't get enough concessions. But one of the links cited by Emmanuel has this ominous quote from USTR Kirk:

"We have missed so many deadlines," said U.S. Trade Representative Ron Kirk, Reuters reported. "Substance will drive this process, not setting deadlines and timelines."

So let's not get ahead ourselves (not that Emmanuel is); there are some signs for optimism, but there have been before as well.

Naming and Shaming

Direct from the G20 summit:

A commitment to "name and shame" countries that renege on free trade agreement.

If protectionism stems from domestic political pressure, will international "shame" only increase a politician's payoff to trade closure?  A leader (or legislature) gets a lot of political mileage out of protecting their constituency from the big, bad, greedy world.  But, that political capital skyrockets when that leader/legislature does so in the face of international pressure to do other wise.  

I predict lots of David vs. Goliath analogies in the months to come.  Just another reminder that audience costs cut both ways - they can constrain or embolden.

Radio Free-Riding Europe

Was I unnecessarily strident in my tone towards Europe in my last post? Loyal IPE@UNC reader Sensemania certainly thinks so, and she/he may have a point: my tone was probably more abrasive than it needed to be. Substantively, however, I'm unconvinced by Sensemania's rebuttals. I'll respond to Sensemania's bullets in kind:

1. "Europe (as a whole)" does not have the "second most impressive military in the world" because "Europe (as a whole)" does not have a military. If Sensemania means that all of the individual countries of Europe combined have the second most impressive military in the world, then the statement may be true but it is also meaningless. In all of the notable Western military interventions in the past two decades (that I can think of), Europe has been divided, with some prominent states favoring intervention and others opposing. Still, even if you take all EU military expenditures together, the US still spends more than twice as much, despite the fact that the EU has recently surpassed the US in gross GDP (i.e in percentage terms, the gap is even greater). Indeed, only two European countries -- France and the UK -- spend more than Japan, who is constitutionally forbidden from maintaining a standing army. What's the point of nit-picking? Only to point out that the lavish social spending programs in Europe have been possible in large part because America has borne a disproportional share of the security burden. This was probably more true in the second half of the 20th-century than it is today, but even still the disparity is stark.

2. I'm not talking about footing the bill for American adventurism in Vietnam (although France did start that one) or Iraq; I'm talking about the fact that Europe has been able to avoid costly security dilemmas with itself and the former Soviet bloc for decades because America has been willing to foot a large part of the bill. I think this point is pretty much inarguable. This is not to say that Europe does nothing, or that European intelligence, technology, and territory have not benefited the US. Of course they have. But if the question is who has benefited more from the other, there's only one answer.

3. The context of my post was the G-20 meetings, and the meat of it was about economic, not military, free-riding. To be sure, the two are sometimes related (which is why I brought it up), but they are also distinct. In this case there are three main noises coming from Europe: Germany is saying "Go ahead and stimulate your economy so you can buy our exports, while we sit back, keep inflation low, keep debt low, and free-ride". France is saying "We must have coordination, but you guys screwed everything up and we did nothing wrong, so if you don't do exactly as we please then we're outta here. Oh yeah, and we're gonna free-ride on your stimulus also." The U.K. is saying "Okay, so our banking system is even more screwed than yours, and our real economy is tanking, but we can't get the money we want for stimulus, so please help us out". True, some EU states (esp. Germany) aren't interested in stimulus for historical/ideological reasons, but others (esp. UK & E. Europe) are very much interested but don't have the political clout to get the EU to play ball. So the EU is asking for the IMF to step in and bail out their own member countries, as well as others on the Continent, rather than engage in stimulus as the US is doing. Some kind of cooperation!

As to the question of who pays for the IMF, well that is answered easily enough: the U.S. pays the greatest share of any country, and it's not even close (yes, the aggregate share of the EU countries is greater, but the EU does not vote as a bloc in the IMF). As for temporary increases in funding, the new $100bn commitment from the EU is encouraging (I wasn't aware of it until Sensemania pointed it out), but all sorts of commitments are made at G-20 meetings that never materialize. And even if the EU matches the US contribution to the IMF kitty, they are still falling far behind in other types of action.

The long and short of it is that the US is trying to stimulate domestic consumption, much of which will be consumption of imports from Europe and Asia. This consumption boost may not actually increase much domestic employment if the benefits of the stimulus leak from the US to its trade partners. Instead, the net effect could be an expansion the trade deficit and US debt. Other countries (e.g. China, Brazil) pushed forward with their versions of fiscal stimulus, but Europe refuses (UK excepted). Instead, they are content to let the US foot the bill and rack up the debt. Meanwhile, demands from Europe include calls for a new reserve currency and a new financial regulatory structure, despite the fact that European banking regulations were often much laxer than those in the US and the fact that the dollar has held its value better than the Euro or pound sterling since the crisis began. Oh yeah, and then there's the creeping protectionism that has some talking about a "new Iron Curtain" splitting Europe back into West and East. So much for common markets.

Perhaps Europe's actions are rational, but they aren't cooperative. And as the US continues to see Europe reap greater rewards from defecting in this version of the Prisoner's Dilemma, they will become more and more likely to retaliate.

For more on free-riding, and the differences between how Europeans and Americans view the crisis, see this piece. One tidbit:

If the episode that haunts the U.S. is the Great Depression, in Europe, where the Germans have been dominant in shaping economic policy, the defining historical moment is the hyperinflation of Weimar Germany, when prices rose more than seventy-five billion per cent in just one year, 1923, and, in the words of Walter Benjamin, “trust, calm, and health” vanished. The legacy of that episode lives on not just in German policymakers’ inflation phobia but also in their sense that there is something fundamentally distasteful about debt. For Germany, fiscal rectitude even in the face of a crisis is not just economically sensible but morally correct.

Should Europe Do More?

McMegan restates the obvious:

But how sympathetic is the US taxpayer supposed to be? We pay for their military protection, we pay for the profits that develop the drugs and consumer goods they happily consume, and now we're supposed to pay for their economic bailout too. Europe could liberalize its markets, let in immigrants, develop a real military, instead of just critiquing the way we do it. We'll continue to let them free ride, because there's no way to stop it. But I'm starting to think we should rub it in a bit more.

The assumption in many quarters is that the rise of BRICs will come at the expense of the U.S., and recent rumblings from China and Russia that the days of the dollar as reserve currency are numbered are illustrative. But it will be a very long time before the BRICs surpass the political or economic clout of the United States. Europe, on the other hand, is well within reach. And the more that Europe aggravates the U.S. by complaining while free-riding, the more incentive the U.S. has to shift its focus away from Europe and towards Asia and the emerging Americas. Indeed, one reason why Europe has been able to afford such luxurious social programs is because the U.S. has effectively subsidized them through security guarantees and transfers of technology and intellectual property.

Now many E.U. leaders wish to "coordinate," by which they mean that they do little or nothing while the U.S. pays yet again. Yes, it's true that the Eurozone has less policy flexibility because of the common currency (and concomitant commitment to tight monetary policy), demographic realities, and already-deep public expenditures. But those problems are self-made, and whining about it, as Chancellor Merkel has done, accomplishes nothing.

Now Europe wants to bolster the IMF, primarily to bail out Eastern European countries that have been battered by the economic crisis. And where is the financing for that to come from? The largest chunk will come from the U.S., of course. Still, we'd probably be happy to contribute if Europe was willing to reciprocate with domestic stimulus, or help in other areas. But Europe is signaling over and over that they are only willing to coordinate on their terms, and if they don't get their way they'll take their ball and go home.

Eventually, the U.S. might call Europe's bluff, and look to the BRICs for future economic partnerships. Would this sting the U.S.? Of course it would. But the consequences would be far more dire for Europe.

G-20

The current G-20 summit, like most, is often big on headlines but short on substance. There are the requisite anti-everything protests, the expected French threat to pick up their ball and go home if they don't get their way, the typically vague but high-minded communique, the downgraded expectations, and the regret.

So what can come out of this? The major players will continue to verbally commit to coordination, as they have always done, but coordination requires compromise, and so far no world leader seems interested in giving up some autonomy in exchange for policy convergence. And President Obama is either uninterested in setting the course for the G-20 or is unable to do so. His response toward the crisis has so far been to take care of his own first, and deal with the systemic global problems later (if at all). Remember: not only did Obama not attend the recent World Economic Forum in Davos, but he didn't bother to send a single high-ranking official either. So far, his attitude towards European leaders has been reminiscent of FDR, and not in a good way.

The U.S., France, and U.K. have found some common ground already: they're going after off-shore tax havens. Unfortunately, this has next-to-nothing to do with the present crisis.

The November G-20 meeting produced basically one commitment: to uphold free trade and refuse to resort to protectionism. How did that work out? As Drezner notes:

Sounds great, except that two days after the summit, Moscow announced that increased tariffs on imported cars. A day after that, India slapped a 5 percent duty on several iron and steel products. A month later, Brazil approved the idea of raising common external tariffs among the countries under the Mercosur agreement on a number of goods, including textiles and wine. China increased export tax rebates on more than 3,700 goods. The U.S. Congress approved "Buy American" provisions in the February stimulus package that blocked government procurement from most developing countries, including the BRIC economies. The World Bank recently reported that 17 of the 20 countries had imposed a total of 47 trade-restrictive measures. Simply put, the first G20 summit produced little action but copious amounts of hypocrisy.

Even further, there are few focal points for reaching agreements. China and Russia desire an end to the dollar as the world's reserve currency, Brazil has argued that the costs of global stimulus should be borne by the countries that caused the crisis, the EU refuses to consider further fiscal stimulus, and everybody seems to want broad, sweeping changes to the regulatory structure; what those changes actually entail, however, is TBD.

I have little hope that anything productive will come out of the G-20 meeting; coordinated action is just too difficult when each country has different challenges and priorities. But now that the first burst of stimulus is past, I do hope that a real commitment to maintain an open trading system is within reach. Perhaps the crisis can even force the resumption of Doha (I'm not holding my breath). Yes, an open trading system means that some stimulus intended for domestic constituencies will spill out into other countries. That's inevitable and also acceptable, especially since a retreat into protectionism could have very perverse effects for already-reeling economies.

The priority of the G-20 meetings should be to shore up the economic activity that we still have to use as a foundation for recovery. Roll back the creeping protectionism of the past 6 months, make a strong commitment to maintaining an open system of trade. True, it's only a marginal victory, but at this point I think that's all the G-20 can realistically hope for. Unfortunately, even that much may be too tall an order.

G20 and Global Imbalances

It is nice when world governments act so quickly to illustrate the processes we discuss in class. Last Thursday we focused on macroeconomic policy coordination as a solution to global current account imbalances. The Group of 20 met this weekend in South Africa and agreed the following:

"We also agreed that an orderly unwinding of global imbalances, while sustaining global growth, is a shared responsibility involving: steps to boost national saving in the United States, including continued fiscal consolidation; further progress on growth-enhancing reforms in Europe; further structural reforms and fiscal consolidation in Japan; reforms to boost domestic demand in emerging Asia, together with greater exchange rate flexibility in a number of surplus countries; and increased spending consistent with absorptive capacity and macroeconomic stability in oil-producing countries."