Sent: 29-09-2009 11:07:01
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G20: Creating a New Global Institution
The G20, freshly empowered as the world's new economic manager, thinks it has the solution to last year's problems: give the same policymakers more power than ever.
The decisions taken at the Pittsburgh G20 meeting could be the most radical shift in economic policymaking since the adoption of Keynesian economics.
The move of the G20 to the centre of the economic policymaking stage is a logical evolution in a global economy. If the intent of the weekend participants is realized, national economic policies and independent central banks are going to become historical relics. Globalisation will rule.
The Pittsburgh agreement commits the participants to work together to assess how their policies fit together, to evaluate whether they are collectively consistent with more sustainable and balanced growth, and to act as necessary to meet their common objectives.
This was no generalized statement of intent to gather dust on the shelf. The leaders said that they had set themselves "strict and precise timetables".
The simultaneous failure of financial institutions and credit markets in many countries during 2008 was a huge shock to policymakers. They had become quietly confident, even over confident, that they could manage most eventualities. The Asian credit crisis, collapse of Long-Term Capital Management, the spiking of the internet bubble and the attack on New York's World Trade Center had all been challenges that had been met and dispatched.
There had been an unprecedented period of global output growth and inflation pressures had been easing.
There were, at the same time, huge imbalances overhanging the world economy about which there had been many warnings.
Higher energy prices, propped up by declining reserves of oil, had been sapping economic strength in the advanced economies and were set to do so indefinitely. Rising real estate prices had been fuelling a debt inspired consumption binge in many advanced economies. The International Monetary Fund, now invited to play a central role in the new world order, and others had been talking about this for a long time.
The U.S. deficit and its mirror image, the Chinese surplus, were widely discussed as threats to economic stability. Poverty was recognized as another important imbalance that threatened global equilibrium and, although other leadership summits had been making commitments to ease the pain, outcomes were falling well short.
Having fewer impediments to international trade was known to improve economic performance but, around the world, governments were unprepared to relinquish their special interests to offer any significant headway.
So, when the full force of the global economic crisis hit in 2008, policymakers were doubly challenged. They had to confront an immediate policy issue, namely, a potentially catastrophic global depression. This they did with an unprecedented series of fiscal and monetary stimulus packages.
However, they also had to confront the more subtle problem of their own past failure on all these fronts. This they have done by:
- identifying "reckless behavior and a lack of responsibility" as the root cause of the systemic failure which they are seeking to correct; and,
having distracted attention from their own failings in this way, grandly affirming their determination to oversee global policy through a new institution.
For most governments, many of the imbalances at the heart of the credit crisis and accompanying recession had been acceptable. In Australia, for example, no minister had dared to take action against rising house prices and the consumption growth they supported. No one in government decried the rise in commodity prices and the favourable impact on Australia's terms of trade from loose US monetary policies that supported a speculative surge in prices. No-one argued that Australians should be taxed more to prevent the consumption that created a permanent balance of payments deficit.
One man's imbalance is another man's source of wealth and it is almost inconceivable that those benefiting will give up the advantages that are conferred. To the extent that is true, the prospects for identifying and removing imbalances when they emerge is bleak.
How the new G20 arrangements will play out over succeeding years is too complex to discuss in detail here. However, there are two challenges which come to mind immediately.
One is the challenge of self discipline. Will prime minister Rudd, for example, identify the next cyclical upturn in commodity prices as an unsustainable economic imbalance? Will he, or his successors, consequently, commit Australia to forgoing the additional income and eschew the additional taxation revenue that will come with the cycle? There is, in fact, little doubt about the answer.
The other challenge will come when a G20 leader differs with a G20 policy consensus. What will happen if the Europeans, for example, opt for deficit reduction and raising interest rates while Australia's unemployment is rising (or vice versa)? Will an Australian government go to an electorate saying that everyone must take the consequences of the commitment that has been made to the foreign governments comprising the G20, no matter how dire? I do not think so.
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