The G20 Meeting: Was it a Success?

Introduction

Leaders of the Group of 20 met in London Thursday to discuss and, hopefully, move toward solving the world’s economic problems. The Group’s meeting-ending communiqué was optimistic. The summit was hailed as the day the world "fought back against the recession." 

Gordon Brown, UK prime minister and host of the meeting used glowing rhetoric in describing the meeting as marking the emergence of a "new world order." Brown described a package that would provide $1,100 billion worth of measures to tackle the global recession.

Markets around the world rallied sharply in response to the G20 announcement, in the hope that the world economy was beginning to stabilize. The Dow Jones industrial Average rose 216 points Thursday, a gain of 2.8 percent, while the S&P 500 gained almost 2.9 percent. (Part of the markets’ gain, however, could also be ascribed to the announcement that the Financial Accounting Standards Board would relax its fair value rules for banks - the so-called "mark-to-market" rules that have been raising havoc with banks’ capital requirements. Bank stocks were leaders in Thursday’s rally.)

Despite the enthusiasm generated in the markets, closer examination of the summit’s results reveals that little of what many observers had hoped for had been achieved (although the final communiqué did fall in line with expectations).

The Communique

Participants had gone into the G20 meeting with widely-varying agendas. The US delegation was looking for a commitment to a coordinated, expanded fiscal stimulus program, under which each nation would spend up to two percent of GDP to kick-start their economies. European nations, on the other hand, generally believed existing stimulus packages were sufficient; instead, they wanted enhanced international regulation of the financial system. Others (mostly outsiders) were hoping for a restructuring of the entire system, with the deficit countries becoming less deficit and the surplus countries reducing their surpluses. Most participants, supposedly, were hoping for new solutions that would deal with toxic assets on the books of the world’s banks. Most were also committed to the expansion of trade. On just about all of these points, practically everyone would be disappointed. Regarding the state of the global economy, the consensus seemed to be that recession was in the process of bottoming out. Tell that to the 5.1 million US workers that have lost their jobs since the recession began and are having trouble finding new jobs, or to the 25 million workers who will lose jobs in the advanced-economy nations before the recession finally ends.

In delivering the communiqué, Brown claimed the G20 had provided the largest fiscal stimulus -- $5,000 billion - "the world has ever seen". The final communiqué also trumpeted $1,100 billion in other measures designed to help the global economy. On closer examination, however, both these numbers proved to be exaggerations. There were no new stimulus measures announced during the conference. The $5,000 billion, it turns out, was the International Monetary Fund’s estimate of the sum total of the G20 countries’ cumulative deficit, as a share of national income, between 2007 and 2010, divided by 2010 GDP.

The $1,100 in new measures was also a chimera. It included $500 billion in new funding for the IMF. However, of this total, Japan had given $100 billion to the IMF last November. Europe had pledged another $101 billion in March. The remainder was made up in a generalized pledge for a new financing plan of $500 billion into which all existing commitments and new money would be placed. The group said, "We aim to make substantial progress by the spring meetings" of the IMF.

The IMF would also create $250 billion of new money in Special Drawing Rights, the IMF’s own currency, which would then be allocated to IMF members in line with their voting shares at the IMF. (The SDR, is a currency basket based on the US Dollar, Euro, Japanese Yen and British Pound.) 44 percent of the SDRs would go to the G7 largest economies. The increase would be the IMF’s version of quantitative easing on a global scale.

Another $250 billion would come in the form of increased trade finance. It has been estimated that 90 percent of world trade is facilitated by trade finance. Because of the global credit crunch, there is a current shortfall of $100 billion in existing trade finance. Global trade had been running about $14,000 billion a year. Based on that number, the G20 leaders believe that trade finance could be increased by some $250 billion over a two-year period. Only $25 billion in new finance commitments have been received, however.

The remaining $100 billion would come from lending by multi-lateral development banks. Some of this money is being brought forward from future budgets, but most will come from increased borrowing in international financial markets.

Since the leaders generally agreed that the recession was bottoming, there was little call for additional fiscal stimulus, especially among the Europeans. The G20 also made a vague commitment to work toward improved international regulation. Little also was said about toxic assets. Apparently, the leaders were content that the individual countries seemed to be moving in the right direction. Or, they still had no credible plans to deal with those assets.

Shortcomings

Two areas where the G20 meeting seems to have missed the boat were in the meeting’s failure to deal with the issues of protectionism and restructuring.

Between 1990 and 2006, world trade volumes grew at a rate of more than 6 percent a year. The growth of global trade was a major contributor, in fact, probably the major contributor to global economic growth over that period. World GDP during that period averaged growth of three percent a year.

With the global economy heading toward recession, trade volume is falling at an even faster pace. The World Trade Organization (WTO) estimates that the volume of global merchandise trade will decline by 9 percent in 2009. According to the World Bank, 37 of 45 countries for which they have records saw exports decline by more than a quarter in January from a year earlier. The main reason for this decline has been the collapse of global demand. The world needs a trade recovery to grow out of its current malaise. It also needs a recovery in demand to fuel the trade recovery.

In 1930, at the outset of the Great Depression, in an attempt to protect US companies, the US Congress passed the Smoot-Hawley Act, raising tariffs on over 900 items. The passage of the Act triggered a tariff war as countries around the world retaliated against the US. The resulting destruction of trade was widely believed to have been one of the main reasons for the length and depth of the Depression (and, probably, one of the causes of the Second World War).

Policy makers are aware of the significance of Smoot-Hawley and a repeat of that Act is improbable. In addition, the nature of trade has changed. While the rules of the WTO do allow some tariff increases, their magnitude is generally restricted.

Nevertheless there are numerous other forms of protectionism that are being used by a large number of countries today: tariff increases, tighter licensing requirements, import bans, anti-dumping provisions, and discriminatory procurement provisions.

One reason for concern is the fact that the nature of international trade has been changed by globalization. In the 1930s, trade was confined to the import and export of finished goods. Today international trade is characterized by vertical specialization, the development of global supply chains. Components of manufactured goods may cross international borders several times before they make their final trip as finished goods. Consequently, the effect of any act of protectionism is multiplied many times over.

Secondly, because of vertical specialization, when protectionism remains below a certain threshold, trade volumes expand rapidly. But crossing that threshold can quickly choke off trade.

In November, at the last G20 meeting, the leaders pledged not to raise new barriers to either investment or trade. They also agreed to complete the Doha round of trade talks by the end of 2009. The Doha agreement, when agreed to, would reduce the present level of tariff ceilings, making it even harder for countries to raise tariffs; it would ban export subsidies in agriculture, and it would foster a general commitment to open trade. The Doha talks have been stalled since last summer. The pledges made in November appear to have been quickly forgotten.

The World Bank estimates that, since last November, 17 G20 countries have instigated 47 policies that were restrictive to trade. Two-thirds of the non-tariff restrictive measures are from developing countries. Indonesia, for example, restricts imports of certain categories of goods (clothes, shoes, toys) to five ports. (This was a tactic also used by France in the 1980s against Japanese electronic imports.) Argentina has imposed discretionary licensing requirements (licensing used to be automatic) on car parts, textiles, televisions, toys, shoes and leather goods. A number of countries have instituted outright bans on various goods due to safety considerations. And anti-dumping complaints have increased by 31 percent (India is the biggest instigator).

The richer countries prefer explicit subsidies to troubled industries (car manufacturers, for example). The US, Argentina, Australia, Brazil, Britain, Canada China, France, Germany, Italy and Sweden have provided either direct or indirect subsidies to their car manufacturers. 

The World Bank estimates that subsidies to the car industry total $48 billion, 90 percent of which are in developed countries.

Finally, to ensure that their fiscal stimulus packages don’t seep abroad and benefit foreign firms, countries have inserted discriminatory conditions into their packages. The prime example of this, of course, is the "Buy American" provision inserted into the US stimulus program.

While the world does not face the threat of a repeat of the Smoot-Hawley fiasco, the present trends toward protectionism could certainly prolong any recovery from the current recession.

The second area in which this week’s G20 meeting may have failed is in the need to restructure the current international balance of payments structure. We have pointed out several times that a number of respected economists have called for rebalancing between the current-account deficit countries and those that that maintain current account surpluses. The surplus countries are heavily dependent on exports, the greatest majority of which go to the deficit countries, especially the United States. Surplus countries need to stimulate domestic demand. Deficit countries need to save more and reduce their current account deficits. The economists believe that, by failing to address this situation today, the leaders are only setting themselves up for a greater economic failure.

The leaders, however, seem to be only concerned with restoring the status quo. Angela Merkel, the German chancellor, for example, has said that "The German economy is very reliant on exports, and this is not something you can change in two years." Moreover, "It is not something we even want to change."

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