G20 London 2009

Global Imbalances have Consequences
April 2, 2009, 9:33 am
Filed under: Analysis | Tags: , , , , , ,

Ruth Davis  Junior Research Fellow, International Economics, Chatham House

boutros-ghaliThe Chatham House panel discussion held on the eve of the London Summit promised “Multiple Perspectives on the G20” and it delivered just that. This event marked the launch of the Chatham House-Atlantic Council report “New Ideas for the London Summit”; there is broad support for this summit and a will for the G20 to succeed in delivering the “ambitious, but manageable and focused agenda” which the report deems necessary.

However, there are dissenting voices or at least notes of caution too – quite apart from the much publicised intransigence shown by certain EU leaders. Dr Boutros-Ghali, the Egyptian finance minister and Chair of the IMFC, will be attending the summit although Egypt is not in the G20. He reminded the audience that these “twenty countries represent themselves. They don’t represent the rest of the world even if they work for it.” Though he acknowledged it was a strong word, he noted that the G20 is technically “illegitimate” as it is not part of an international treaty backed system. Acting as a conduit for the voices of the 172 countries not in the G20, he spoke of the crowding out taking place in the world debt market, which means that US and EU borrowing requirements are pushing out countries like Indonesia and Mexico where the human consequences of financing shortfalls will inevitably be more grave than in developed countries with established welfare systems.

Dr Boutros-Ghali also talked about the IMF: the adult meant to be supervising the global economy but who was “out of the room” when the crisis happened. He noted the problems surrounding the provision of extra funds for the IMF; although this new money is necessary to prevent the collapse of vulnerable emerging economies, refinancing by means of bilateral borrowing rather than by expanding IMF aggregate quotas negates the need for immediate governance reform and a rebalancing of country representation within the organisation.

Stephen Roach, Chairman of Morgan Stanley Asia, also drew out what he saw as contradictions in the G20’s approach to crisis resolution and sequencing of policy actions. While Lord Malloch-Brown and others feel that the global fiscal stimulus measures are a necessary and imperative short term response to substitute for the collapse in global demand, Roach challenged this view and asserted that policymakers are misreading Keynes. For Roach, “this is our time to deal with the heavy lifting” and “shame on us if we fail to do it at this summit.” This means tackling the global imbalances head on (essentially, raising consumption in the Chinese domestic economy and encouraging saving in the US) and addressing the interplay between asset bubbles and global imbalances – a complicated task that he is not convinced politicians are up to. For the sake of countries both inside and out of the G20, let’s hope he is wrong.

Disclaimer: This blog is solely intended to spur discussion, while the opinions expressed are those of the author(s) and do not necessarily reflect the views of CIGI, Chatham House or their respective Boards of Directors.