By Walden Bello*
As the self appointed economic guardians of the world and thousands of protesters converge on Pittsburgh for the third summit of the Group of 20, expectations are low that a breakthrough in the form of some coordinated action to come to grips with the global economic crisis will issue from the meeting.
Despite President Nicolas Sarkozy’s threat to walk out of the summit if leaders do not agree to put a cap on executive pay and bonuses, which are seen as key causes of the financial implosion, consensus on this issue is likely to be more in rhetoric than in substance owing to Washington’s continuing preference for voluntary compliance on the part of bankers. As some observers have pointed out, this is akin to asking alcoholics to abstain from alcohol.
Financial Regulation: a Mirage?
There will also be agreement in principle over the need for higher reserve requirements on the part of financial institutions, which government leaders hope would curb reckless investment. But the devil is in the detail, and here the Europeans want higher reserve requirements than Washington is willing to support. The stated reason for Washington’s hesitation: it does not want impose rules that might impede the “efficiency” of the financial system. The real reason: the banks continue to constitute a formidable lobby that enjoys the sympathy of US Treasury Secretary Tim Geithner, who, as head of the New York Federal Reserve, participated in some of the momentous decisions that led to the 2007-2008 financial debacle. The stark reality is that over two years after the subprime crisis broke in the summer of 200, no new broad financial regulations have been issued to curb the propensity of Wall Street’s overleveraged institutions to play with an estimated $600 trillion worth of unregulated derivatives. Indeed, new speculative instruments are being invented, such as derivatives that would allow investors to make money on the sale of life insurance plans by old people who can no longer afford them.
The Debate over Stimulus Spending
The summit declaration will probably exhort countries to keep up their stimulus spending to sustain demand and counteract economic contraction, but the reality is that under pressure from fiscal conservatives, there is little appetite in the US for more stimulus spending, despite the continuing contraction of the economy. Thus, Federal Reserve Chairman Ben Bernanke and other officials have been hyping the idea that the light is visible at the end of the tunnel and the global recession is likely to end soon, implying that there might be less need now for stimulus spending. As a White House memo to European governments revealed by reporter Greg Palast put it, each nation should be allowed to “unwind” anti-recession efforts “at a pace appropriate to the circumstances of each economy.” This memo was in response to fears in Europe that the US might turn off the spending tap prematurely, creating problems for Europe and everyone else owing to the centrality of the US economy. Underscoring the difference, a note from a European Union official quoted by Palast asserts: “‘It is essential that the Heads of State and Government, at this summit, continue to implement the economic policy measures they have adopted,’ and not act unilaterally. ’Exit strategies [must] be implemented in a coordinated manner.’”
Despite these important differences that could result in divergent policies, there will be an effort to paper over points of dissonance and, as former US Trade Representative Susan Schwab predicted at a recent forum, “They will come out and say it was a great success.”
Asia’s Dependent Export Economies
The stimulus plans on the part of the United States and the European countries will be of special concern to the Asian participants. Sustained recovery in Asia is a long way off, but some countries have blunted the worst effects of the recession and even grown a bit in the last few months, thanks to aggressive stimulus spending. In China, for instance, the economy grew by 7.9 per cent in the second quarter, a phenomenon driven mainly by the stimulus of $585 billion the government injected into the economy earlier this year. But for the export driven economies of China and other East Asian countries, a sustained recovery will depend on the resumption of robust consumer demand in the US and Europe. Many analysts say, however, that even if the Washington continued to prop up the economy with more stimulus dollars, it would be a long while before American consumers, many of whom are now severely in debt, again became the engine of the global economy. Meaning, global stagnation will be a long term phenomenon.
After three summits from which all that have emerged are broad policy statements of a voluntary nature, there are many who doubt the relevance of the G 20 as a policy-making body to address the global economic crisis. There certainly is little in the way of political will to make the hard decisions that will turn around the downturn or mitigate its impact, whether in the form of massive aid to poor countries, bigger amounts and greater coordination of stmulus spending in the center capitalist countries, greater representation in the International Monetary Fund for developing countries, or tighter regulation of reckless financial institutions.
One the other hand, with its lack of legitimacy as an international forum and its image as a club of the rich and powerful—albeit expanded to include China, India, and a number of other large developing countries—the G 20 has become a perfect target for protesters, several thousands of whom have been marching against free market economics, for global justice, and for other causes over the last week.
*Foreign Policy in Focus columnist Walden Bello, who was in Pittsburgh, in the last few days, is a member of the House of Representatives of the Philippines under the AKBAYAN! Partylist, president of the Freedom from Debt Coalition, and senior analyst at the Bangkok-based research and advocacy institute Focus on the Global South.