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G20
By Henry C.K. Liu This article appeared in AToL on April 14, 2009 Leaders of Group of 20 attending the second Summit on Financial Markets and the World Economy in London on April 2, 2009, echoing the first in Washington DC in November 2008, continued the tradition of superficial posturing for political theater on global television, while missing the real target which is the need not so much as to revive dysfunctional trade that has collapsed from its own internal contradictions, but to redefine the predatory terms of international trade created by dollar hegemony. British Prime Minister Gordon Brown, host of the G20 London summit, declared it as having created a "new world order". While unipolarity appears to be in the process of being replaced by emerging multipolarity, the world is still a long way from developing a new order. If anything, the G20 London summit was a desperate last-gasp attempt by the G7 to restore a failed old world order. Need for Restructuring Dysfunctional Terms of Trade To save the world from a prolonged depression, international trade needs to be restructured from its current destructive role of preempting domestic development towards a new constructive role of augmenting it. That the now nearly two-year-old crisis in financial markets has been created by excessive debt denominated in a fiat dollar whose issuer has for decades failed to live by prudent rules of fiscal and monetary discipline has been acknowledged by the new president of the United States only in passing during the summit, while the solution to a debt-infested financial crisis is mistakenly deemed to be simply shifting massive private sector debt into public sector debt by spending future taxpayer money to save zombie financial institutions from bankruptcy. This approach of saving the decrepit institutions of free market capitalism rather than saving the severely injured global economy will only exacerbate and prolong the current financial crisis into a decade-long global economic depression. For all economies except that of the US whose fiat currency has the unfair and unearned advantage of being the dominant reserve currency for international trade, excessive national debt denominated in foreign fiat currency, either private or public, threatens the economic and political sovereignty of independent nations. When international trade is denominated in fiat dollars, the Breaking Free from Dollar Hegemony Dollar hegemony prevents all non-dollar economies from financing domestic development with sovereign credit denominated in their own currencies and forces them to rely on foreign capital denominated in dollars. Moreover, the exporting economies are in essence shipping real wealth created by low wages and environmental abuse to importing nations that have unearned sources for dollars. The dollar-denominated trade surplus earned by the exporting nations cannot be spent in the domestic economy without first converting them to local currencies. But such conversion will create inflation since the wealth behind the new local currency has already been shipped to the importing nations. Thus the exporting nations, while starved for capital, have to invest the dollars they earn from low wages and environmental abuse back into the dollar economy, enabling the importing economies to have more dollars to import more. Capital from the dollar economy is in reality debt from the exporting economies. Yet such debt will return to the lending economies as foreign capital to invest in the export sector in a vicious circle. Dollar hegemony is in essence the venue for a free transfer of wealth from the poor economies to the rich economies. This free transfer of wealth hurts workers in both the poor and rich economies by keeping wages low through cross border wage arbitrage. Low wages then create overcapacity unsupported by adequate demand in every economy. When buyers and sellers are located within the same country, with settlements denominated in domestic currency, even with imbalance of payments, free trade is not predatory. But when buyers are located in different countries from sellers and trade is denominated in the buyer's fiat currency due to currency hegemony, trade is predatory in favor of the buyer even if the balance of payments is in favor of the seller. Essentially this is the situation with US-China trade. The False Promise of Market Fundamentalism Market fundamentalism is the belief that the optimum common interest is only achievable through a free market equilibrium created by the effect of countless individual decisions of all market participants each freely seeking to maximize his/her own private gain and that such market equilibrium should not be distorted by any collective measures in the name of the common good. It is summed up by Margaret Thatcher's infamous declaration that there is no such thing as society. The fact is that in a world of sovereign states, all economies are command economies. The World trade today is free only to the extent of being free to support Market fundamentalism as the term is generally used in macroeconomics is a key component of neoliberal globalization of trade, in the same sense that the British, through Adam Smith, promoted "free trade" in the 18th-19th centuries. The difference between Smithian free trade and today's neoliberal market fundamentalism is that British free trade was limited to the sphere of political influence within the Market fundamentalism helps no economy. It helps only selected segments in economies that subscribe to it. Since the segment most helped by market economy is in political control of the G20 While publicly avoiding the divisive issue of whether to push for more government fiscal stimulus to their politically separate but financially interdependent economies, the G20 leaders reached general consensus on regulatory reform to rein in systemic and institutional excesses in risk-infested financial acrobatics that had led to the worst crisis in financial markets in a century. The summit pledged $1.1 trillion in emergency aid to soften the adverse economic consequences without addressing the real target of needed reform, which is to correct the predatory terms of trade based on currency hegemony. While $1 trillion is no small sum, it amounted to a band-aid cure to a massive hemorrhage. Washington Consensus Dead but not Buried The London Consensus appears to have abandoned the Washington Consensus, a term coined in 1990 by John Williamson of the Institute for International Economics to summarize the synchronized ideology of Washington-based establishment neoliberal economists, reverberated around the world for a quarter of a century as the true gospel of reform indispensable for achieving growth in a globalized market economy. Economic neoliberalism has turned most trade-dependent nations into failed states. (Please see my AToL article: World Order, Failed States and Terrorism - PART 1: The failed-state cancer) Initially applied to Financial capital growth is to be achieved at the expense of human capital growth. Sound money, undiluted by inflation, imposed on all by the US who ironically is the most flagrant violator of the sound money principle, is to be maintained by keeping wages low through structural unemployment and cross-border wage arbitrage. Pockets of poverty in the periphery are the necessary price for prosperous centers in the global economy. Such dogmas grant unemployment and poverty, conditions of economic disaster, undeserved conceptual respectability. Structural unemployment then becomes the vaccine against massive unemployment. Pockets of poverty become the venue to contain the spread of poverty. State intervention has come to focus mainly on reducing the market power of labor in favor of capital in a blatantly predatory market mechanism. The set of policy reforms prescribed by the Washington Consensus is composed of 10 propositions: 1) fiscal discipline; 2) redirection of public-expenditure priorities toward fields offering high economic returns; 3) tax reform to lower marginal rates and broaden the tax base; 4) interest-rate liberalization; 5) competitive exchange rates; 6) trade liberalization; 7) liberalization of foreign direct investment (FDI) inflows; 8) privatization; 9) deregulation and 10) secure private-property rights. These propositions landed the world economy in recurring crises every decade, each bigger than the previous one, until the current crisis which is now described as the crisis of a century. Of these ten propositions of the Washington Consensus, the G20 policymakers selectively called only for re-regulation and reform on uniform global standards on accounting, credit-rating and risk-management for banks, non-bank financial firms and hedge funds to prevent runaway systemic risk generated by aggregate externalization of unit risk. They left the more fundamental problematic propositions such as privatization, trade liberalization and FDI liberalization untouched. IMF Strengthened rather than Reformed G20 leaders tripled the financial resources of the International Monetary Fund (IMF) and offered less punitive cash loans to revive stalled trade to help affected governments, particularly those of poor countries, weather the effects of national insolvency such as surging unemployment and drastic cuts in social safety net budgets. All these measures of reform around the edges of the problem no doubt are needed, but their impact will be meaningless without a fundamental restructuring of the international financial architecture built on currency hegemony. Zhou Xiaochuan, governor of the People's Bank of China, the central bank, raised the pertinent question: The outbreak of the
current crisis
and its spillover in the world have confronted us with a long-existing
but
still unanswered question, i.e., what kind of international reserve
currency do
we need to secure global financial stability and facilitate world
economic
growth, which was one of the purposes for establishing the IMF?
The discussion on IMF Special Drawing Rights Instead of dealing with the pertinent question, the G20 summit merely increased the resources of the IMF by $500 billion, plus new Special Drawing Rights allocation to be shared among its 185 members, 60% of which going to industrialized countries that do not need it, and $100 billion in increased lending by multilateral development banks. In addition, there was a $250 billion increase in trade credits to finance cross-border trade that has declined roughly 10% as a result of the credit crisis and the economic downturn. An additional $6 billion to boost lending to the poorest countries makes the total of $1.1 trillion to deal with the financial crisis. The The official statement issued at the end of the G20 summit reads like an attempt to write new regulatory rules on free market fundamentalism to save capitalism from self destruction in a financially integrated world economy that has outgrown the ability of sovereign nations to keep it from structural implosion. EU Demand for Global Regulation Rejected by US But a European demand for sweeping global regulation of financial markets was rejected by the Comparing 2009 to 1933 Comparison is made to the June 1933 Hosted by UK Prime Minister Ramsay MacDonald, the 1933 G66 London conference was attended by 8 prime ministers, 20 foreign ministers, 80 finance ministers and central bankers, and only 2 heads of minor states - King Faisal of Iraq and Swiss President Edmund Schulthess. The 2009 Within a month, the 1933 conference had collapsed, torpedoed by the opposition of the new The 2009 G20 London summit is no doubt mindful of the lesson of the 1933 G66 London conference. Participants leaned over backwards to project an image of cooperative consensus. Whether such a happy image bears any resemblance to unfolding economic reality is another question. Despite the symbolic absence of President Franklin D. Roosevelt who purposefully went sailing, the As president-elect during the first G-20 summit in While Roosevelt appointed Secretary of State Cordell Hull, a strong advocate of free trade, to lead the US delegation, watched over by Raymond Moley, trusted FDR personal representative, the new president hedged his bets by letting private US bankers, led by internationalist James Warburg, to begin secret negotiations on currency stabilization with European central bankers led by Montagu Norman, the governor of the Bank of England. National sovereignty has since emerged as the only effective defense on the part of weak economies against the predatory internationalism of the strong economies. Obama’s Position on Trade President Obama's position on free trade is hard to decipher since so far his words during election campaigns have not been validated by his actions in office. With NAFTA partner and Canadian Prime Minister Stephen Harper at his side, Obama said, “We have to be very careful about any signals of protectionism." And to Brazilian President Luiz Inacio Lula da Silva, he said: "Trade is an important engine for economic growth.” At the 2009 London G20 summit, the Brazilian president, in a bilateral meeting with Chinese president Hu Jintao, proposed a bilateral currency swap to facilitate trade to be entered into during a forthcoming state visit to A first step in this redirection of policy focus on domestic development is for Cross-border exchange of regional currencies is an important step toward circumventing a shortage of dollars and other currencies, as well as reducing exposure to exchange rate volatility. Developing countries in Eastern and Central Central banks in Currency swaps allow a central bank to inject a counter-party’s currency into its own financial system, allowing domestic businesses to borrow the other country's currency and use it to pay for imports of that country's goods, thereby easing the pressure on trade caused by an insufficiency of dollar. Technically, currency swap agreements are simply two-way loans between central banks. Foreign central banks generally use borrowed yuan to settle trades with “Buy American” Protectionism Notwithstanding Obama's rhetoric against protectionism, a "Buy American" provision was left in his $787 billion stimulus bill; and in the $410 billion omnibus spending bill that sets the budget of many government departments together. And a NAFTA-created pilot program allowing limited fleets of regulated Mexican trucks to use US highways was cancelled, in response to which Economic slowdown is increasing pressure for protectionism and insularism in domestic politics in all countries. The BRIC Countries Unlike the US, the EU and Japan, the BRIC economies (Brazil, Russia, India and China) are in a position to take advantage of the fall in international trade to abandon excessive trade dependence to refocus on domestic economic development, if domestic political pressure manages to reject the free traders that have been running their economies to the ground for the past three decades. In the case of International trade must be reformed to conform to new terms of trade so that trade will augment rather than obstruct domestic economic development. Under such new, equitable terms of trade, Free Trade Indefensible The economic case for defending free trade in a global market economy is not universally shared while it is politically increasingly difficult to make to injured domestic groups bearing unevenly the pain while not sharing equitably in the benefits of trade. Global labor has been the prime victim of globalized international trade. The state of the world's trading system is of prime concern to the Obama administration. Yet, there is little sign that the Obama administration is focusing on producing a truly salutary global trade regime that promotes balance and sustainable economic development for all. Ironically, to internationalists in the Obama administration, one frustrating feature of the current financial crisis is that it is so international in scope, leaving many elements and control points out of reach for US policymakers and even transnational financial institutions. In a globalized interdependent economy operating still under the US Populist Opposition to World Trade In the FDR’s Monetary Reform In the 1933 G66 London Conference, conservative central bankers in FDR's New Deal chose to devalue the dollar to reduce the excessive debt burden and stimulate economic expansion with government injected liquidity through deficit financing. New Dealers had lost faith in Unfortunately, The nature of and constraints on US internationalism after World War I had parallels in the rise of US internationalism after World War II and in US globalization after the Cold War. (Please see my FDR expanded the interventionist cure that The New Deal legalized labor unios, established the Work Progress Administration (WPA) relief program, the Social Security Act, and programs to aid the agricultural sector, including tenant farmers and migrant workers. The Supreme Court ruled several programs unconstitutional. Most of the New Deal's relief programs were shut down during World War II by the Conservative Coalition. Many regulations were ended during the wave of deregulation in the late 1970s and early 1980s. Several New Deal programs remain active, with some still operating under the original names, including the Federal Deposit Insurance Corporation (FDIC), the Federal Housing Administration (FHA), and the Tennessee Valley Authority (TVA). The largest programs still in existence today are the Social Security System, the Securities and Exchange Commission (SEC), and Fannie Mae, albeit most of these program have been modified to reflect the rise of neoliberalism in Market Fundamentalism and Inequality Neoliberal market fundamentalist trade globalization has proved itself to be the mother of economic inequality. Bill Moyers, key participant in President Johnson's Great Society that was tragically aborted by the Vietnam War, in a June 3, 2004 speech: The Fight of Our Lives, given at the Inequality Matters Forum at New York University, said: "Astonishing as it seems, no one in official Washington seems embarrassed by the fact that the gap between rich and poor is greater than it's been in 50 years - the worst inequality among all western nations. Or that we are experiencing a shift in poverty. For years it was said those people down there at the bottom were single, jobless mothers. For years they were told work, education, and marriage is how they move up the economic ladder. But poverty is showing up where we didn't expect it - among families that include two parents, a worker, and a head of the household with more than a high school education. These are the newly poor. Our political, financial and business class expects them to climb out of poverty on an escalator moving downward." The inequality that Moyers rightly protests about did not start with the Republican second Bush administration. It started with the Democrat Carter administration's deregulation policies and the neoliberal free trade policies of the two-term New Deal Protectionism All through the New Deal, FDR protected threatened sectors of the economy, particularly agriculture, that had been hardest hit by the depression. Aware of the history of the struggle by the agricultural populists against the Gold Standard in favor of silver, FDR sent a devastating telegram to the 1933 London G66 conference accusing it of bad faith and repudiating any attempt to get a deal to fix the value of currencies. "I would regard it as a catastrophe mounting on a world tragedy," FDR said, "if the conference should allow itself to be diverted by a purely artificial and temporary experiment... the focus on [currency] stabilization shows a singular lack of proportion and failure to remember the larger purposes for which the conference was called." And, he added that "the old fetishes of so-called international bankers are being replaced by efforts to plan national currencies" around domestic needs. FDR's telegram, popularly received in the For the organizers of the 2009 London G20 summit, the lesson of 1933 is that boosting market confidence by maintaining a united front in the face of the global recession has to be a key objective, independent of concrete policies that may well fail to reach agreement. Critics of summitry warn that the risk of failure, and its negative effect on confidence, is greater than the potential gain from a soothing image of international cooperation. History has shown that international cooperation is achievable only through the strong leadership of a dominant power with the economic and political strength to enforce a new world order. The international politics of But in the current financial crisis, as it was during the Great Depression, a weakened US has neither the economic strength, the financial resources, the political will not the moral righteousness to be the lead organizer of a new world economic order. "By any measure, the In defense, Obama admits: “We won't solve the problem of the world in one summit.” Yet even a clear definition of the problem has escaped two summits thus far. The next summit is reported to be held in |
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