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Main Content
G-20 The New World of Finance
Conflicts reveal divergent economic approaches at the G20
G20 leaders are meeting in Seoul, South Korea this month to coordinate responses to the global economic and financial crisis.
The group of 20 nations represent some 85 per cent of the global economy. Trade imbalances are high on the agenda, and balancing these is a central focus of the meeting. Currency valuation will also be a point of contention.
A joint letter by Presidents Barroso and Van Rompuy to G20 leaders urged countries to “refrain from competitive devaluation of currencies”, advising them to “consider the possible effects on their partners and the global economy and refrain from actions that may have negative spillovers”. The Presidents are keen to highlight their belief that trade is the key to sustaining economic recovery, as“in times of limited budgetary resources, this is the most effective to boost global growth”.
A joint report by the OECD, WTO, and UNCTAD warns that “the stability of the trading system will be put at considerable risk if currencies move in what some perceive as the pursuit of an exchange-rate-induced comparative advantage”. The report notes emerging market concerns about global macroeconomic imbalances and the effect they are having on their economies, predicting that “the resulting policy tensions could degenerate into a protectionist spiral”.
The USA imports far more than it exports while many emerging economies are net exporters. This means their objectives are different. Exporters want to keep their currencies low to boost export sales. China has been criticised for undervaluing its currency to boost exports by making its goods cheaper to import.
The USA announced that the Fed was to inject USD$600 billion into its economy, which emerging countries fear will cause their currencies to be forced up by foreign capital flooding into their markets. This has caused discontent among developing country governments.
There are also divisions, particularly between Europeans and Americans, over the merits of short-term budget austerity. The USA strategy of injecting cash into the economy to boost spending contrasts with the more cautious EU model of cuts.
The USA tends to spend more than it saves and has one of the lowest household saving rates in the world. A report by Eurostat found that there was a significant difference in the household savings rates in the US and the EU. In 2007, the US rate of 5.2% of disposable income was less than half the EU rate of 10.8%. This should be worrying for US economic managers because, as the OECD explains “household savings are the main domestic source of funds to finance capital investment, which is a major driver of long-term economic growth”.
Disagreements at this month’s G20 meeting in South Korea highlight the divergent economic management strategies, and perhaps psyches, of the USA and the rest of the world. While the rest of the G20 are a bit more prudent, the USA’s unrelenting faith in the supremacy of the capitalist model means that it is trying to fix the economic bubble trouble by inflating the economy with money. Not only is this irritating emerging country leaders, it is ultimately an unsound strategy.
Economist Laurence Kotlikoff suggests that the focus of the G20 should be on encouraging national saving rates increases rather than balancing trade. He argues that “if America wants to reduce its current account deficit, it has but one option - consume less and save more”.
It is worth recalling two facts about the financial and economic crisis. First, it started in the USA; second, the countries who weathered the storm the best were those with a healthy amount of reserves, such as Brazil and China. Given these truths, the US leaders would be wise to use the opportunity to learn from their G20 peers and agree on a more sustainable, savings based economic approach.