When they first met in November of 2008, the G20 leaders were right on target in admitting that inconsistent and insufficiently coordinated macroeconomic policies were among the chief causes of the horrendous crisis they were trying to contain. They were also right at their September 2009 Pittsburgh summit when they kept the global macroeconomic imbalances as their central concern, so much so that they launched a framework to “ensure that fiscal, monetary, trade and structural policies are collectively consistent.”
However, and this was the bad news from Pittsburgh, the G20 leaders agreed to implement the framework in a way that was condemned to be ineffectual. They adopted a sort of peer-review mechanism, giving the International Monetary Fund a mere advisory and secretariat role. That mechanism made it unlikely, if not impossible, that they would have robust policy recommendations ready for an executable agreement by the Seoul meeting, to which they committed in Pittsburgh. Regarding this objective, the Seoul summit was a failure. There is little in the G20 Seoul Action Plan reassuring the world that the tensions preceding the summit will not re-emerge and worsen anytime soon.
Given the G20’s failure to provide an effective mechanism for macroeconomic policy coordination, it’s not hard to envision that as deficit developed countries try to overcome their economies’ sluggishness while the surplus emerging economies stick to the export-led strategies that yielded them high growth and strong recovery, the global imbalances will widen again. Even worse, the imbalances may not widen again but for the wrong reason. What if each key player engages in a tit-for-tat strategy to undo strategies of its perceived competitors and in the end the imbalances don’t widen because economic growth and trade are destroyed?
There’s already evidence of the kind of contention that could lead to this worst-case scenario. For example, China is accused of being stubbornly attached to a weak renminbi policy to sustain its export-led growth model at the expense of other economies’ expansion and has become the chief target of punitive ideas. Bills in the US Congress to apply discriminatory import tariffs on China; imposition of capital-market restrictions to prevent China from purchasing US Treasury bills; countervailing currency interventions to upset China’s own intervention in foreign-exchange markets; and even outright suggestions to declare trade war with China – all are examples of ideas put forward by otherwise reasonable people. Frankly, these proposals are impractical, counterproductive or even silly.
The drums of a currency and trade war
Seen from the other side, China is pointing, with reason, to the need for correction of structural factors – chiefly too low savings rates – by deficit countries, in particular in the US, as a condition sine qua non to avoid a re-run of the huge macro imbalances. But China is wrong in denying its own share of the responsibility to fix the imbalances.
In the run-up to Seoul, global friction was all too evident. Actions, or at least talk, by a number of monetary authorities, including the US Federal Reserve’s new quantitative easing, all carried a clear unilateralist imprint. The drums of a currency and trade war were beating. It may remain just noise, but the dispute may well become a real and bloody battle, seemingly worth fighting from each country’s perspective. The problem is that increasingly the large surplus and deficit economies are, as in the classic dilemma, captive in the prison of mercantilism. As long as they are trapped in this edifice, each one’s unilateral actions might be effective to hurt competitors, but also will boomerang with great force and inflict damage on the originator.
The G20 did not provide a cooperative solution to the present dilemma because, again, they failed to deliver a practical strategy to honour the reasonable principle that all parties have a responsibility as well as a role to play, and all available policy instruments should be put to work. The G20 leaders failed because they did not empower seriously the IMF to carry out its surveillance responsibility. They failed because they shied away from stating clearly that for rebalancing to happen, on the one hand, deficit countries need both to save more and sell more to the rest of the world and on the other hand, surplus countries must spend more domestically and sell less to the world.
The G20 leaders failed because they did not empower the IMF to carry out its surveillance responsibility.
The G20 failed because they didn’t trash once and for all the absurd idea that the correction of imbalances is fundamentally a G2, or US-China, issue. Every significant economy – deficit or surplus – has not only a stake but also a responsibility for correcting the macroeconomic imbalances. This is clearly the case for Germany that has long incurred large current-account surpluses, not debated much before because they were disguised in the Eurozone’s nearly balanced current account. Germany must reduce its large surplus in a way that both helps correct the global imbalances and enhances the probability of recovery of its euro partner.
Japan is another large surplus country that must take an active part in the rebalancing, undertaking at last structural reforms that would make it less dependent on foreign demand to sustain its level of economic activity. And the same applies to those emerging countries with large surpluses, which would find it healthier to rebalance their growth towards domestic demand, attract more exports from deficit countries and, in the process, accept some current-account deterioration. They would find the latter more palatable and also helpful in mitigating their appetite for large accumulations of foreign-exchange reserves if the G20 had delivered a mechanism of enhanced multilateral insurance against international liquidity droughts, which it didn’t .
For very valid social reasons, China must seek to preserve its high rate of economic growth, which, by the way, is good not only for that country, but also for the world at large, and certainly for other developing countries. However, China must adapt its policies through a mix of structural reforms, more domestic investment ,and a more flexible renminbi – but certainly not to the extent that some pundits demand in Washington and in other capitals of rich countries. It’s worth insisting that China is in the fortunate situation of being capable of reducing its current-account surplus by raising investment, which in turn will raise its growth (see a discussion of global imbalances in Claessens et al. 2010 on this site).
Addressing the question of global macroeconomic imbalances is a litmus test for the international community
Undoubtedly, among the largest countries, the US has the most difficult balancing act to accomplish. It must, on the one hand, escape the low-growth-high unemployment equilibrium now trapping it and, on the other, must undertake a practically unprecedented effort to correct the rapid expansion of its national debt. The cooperation among surplus and deficit countries that was not achieved at Seoul – in part the fault of the US itself – will make it much harder for that country to rebalance its economy domestically and externally.
The G20 has made confrontation more likely not only by failing on macroeconomic policy coordination but also by not delivering in its commitment to conclude the Doha Round in 2010. Instead of getting the job done – referring to Seoul of 2011 as “a critical window of opportunity” – the G20 leaders might have actually closed the door for a successful conclusion of the round when most needed.
The Seoul outcome is truly worrisome. Addressing the question of global macroeconomic imbalances in a cooperative way is the litmus test of whether the international community is capable of managing other imbalances of greater complexity, as economic and geopolitical power continues to shift substantially in the years to come. So far the G20 is flunking that litmus test.
Claessens, Stijn, Simon J Evenett, and Bernard Hoekman (2010), “Rebalancing the Global economy: A Primer for Policymaking”, VoxEU.org, 23 June