Some of the market’s strongest voices say the group’s biggest countries need to stop whining about their own problems and focus on their smaller brethren.
by Heidi N. Moore
It’s a big world out there. Tell that to the G-20.
In a global crisis, the G-20 — a gathering of finance ministers and central bank governors representing 20 major economies — has shown the remarkable ability of the world’s largest countries to be completely, narcissistically, focused on their own problems. Thomas Friedman argued that the world is flat, but it takes an immense crisis like this one to show that flatness to look very much like a mirror. That has led the most recent G-20 ritual meeting in Toronto to take some punches from big-time thinkers who’d hoped for more expansive views and issued some guidelines for what the G-20 should really look like.
Just to review, the results of the G-20 meeting in Toronto were skimpy at best. (You can read a nice summary of the high and low points as seen through tweets – really links – here.)
In the typical language of high palace intrigue, there were “winners” and “losers,” but in pragmatic terms, very little actually changed. The G-20’s attachment to caution, ritual and inoffensive language at the Toronto summit made the powdered courtiers that surrounded France’s Louis XIV look like screaming radicals. The U.S. was held back a bit as G-20 leaders shied from taking a strong stance on bank reform — compounding the problem of endless reform delays at home. China succeeded in making sure no one was staring too hard at its currency. The U.K. got a pat on the back.
Not surprisingly, some influential market mavens have declared themselves unimpressed by what they say is the group’s comfort with a loss of focus on the idea of global governance. The G-20 crowed that this was the “first Summit of the G-20 in its new capacity as the premier forum for our international economic cooperation.” What we seemed to get, instead, seems to be no different from the picayune tribal rivalries that have marked most of the history of international politics and finance. When times are this bad, and everyone is in it together, the world expected just a little more.
PIMCO chief Mohamed El-Erian certainly did. He issued a salvo deriding the G-20’s latest effort as “self-congratulatory” and noted that the summit was marked by “an inability to reconcile divergent views of the world. ”
“The communique illustrates the extent to which we now live in a multi-polar world with no dominant economic party and with excessively weak multilateral coordination mechanisms. The result is what game theorist label a ‘non-cooperative game,’ with a very high likelihood of sub-optimal outcomes,” El-Erian wrote. Translation: The G-20 has openly devolved into a game of every man for himself, and that makes it less likely that coordinated efforts to save the global economy will work.
Jeffrey Sachs, the star economics professor at Columbia University, shared the same view. He criticized the G-8 meeting — the clique of more developed countries that meets just before the G-20 — for reneging on global issues like promised aid to Africa, and then refusing to mention the issue. Sachs noted that it cost Canada nearly $1 billion to host the G-8. “It is tragic to spend so much money and then accomplish next to nothing in terms of concrete results and honest accountability,” he wrote.
Ousmène Mandeng, former IMF Economist and head of public-sector investment at Ashmore Investment Management, argued that the G-20 needs to shift its agenda to address its members from emerging markets instead of letting America and the Eurozone countries dominate the conversation with worries about their own crises. “The G-20 summit was in any event a G-5/7 summit as both fiscal consolidation and financial regulatory reform are above all G-5/7 concerns, consequence of a G-5/7 crisis. Looking forward, the G-20 will have to encompass issues of direct relevance to the emerging markets member countries.”
The purpose of the discussions, Mandeng said, should be to move away from G-7 crisis issues to the roots of the old G-5: talk about the international monetary system, including exchange rates; weakened financial regulation; leverage and how to prevent recessions.
What the G-20 is not getting right, according to Mandeng, is the issue of currencies. He says the biggest issue the G-20 should focus on is the touchy problems of exchange rates, which typify the “every man for himself” problem. Many of the G-5 currencies are out of whack — consider the beleaguered dollar and euro — while others, such as China’s renminbi, may play by different rules. Mandeng believes that currencies are the most important factor governing how assets in the emerging markets will perform over the next few years, “a reflection of key underlying changes in the world order.”
He wrote: “The absence of a serious debate about exchange rate issues at the G-20 can most likely be attributed to continuous sharp divisions among the G-20 membership. The U.S. may be concerned that any indication that the role of the dollar going forward may diminish its ability to refinance its large fiscal and external deficits. The Eurozone may have similar concerns. The emerging markets may feel that there is not enough common ground to coordinate exchange rate realignment. While China’s intentions have not been revealed, it seems likely that China’s biggest concern is not to lose too much competitiveness relative to other countries.”
The U.S.’s obsession with China’s currency is not likely to be fruitful, Mandeng noted, citing the cases of similar pressure on the Japanese yen and the German mark in the ’70s and ’80s that only strengthened the financial standing of those two countries. “The U.S. congress has put a lot of unduly great emphasis on China’s exchange rate,” Mandeng tells Street Sweep. “The point is not so much to see the exchange rate for China appreciate against the dollar, but to appreciate against emerging-market currencies. That’s where the concern is.”
Mandeng believes that including emerging markets in currency discussions would be “an integral part to seeing emerging markets as the principal source of non-inflationary growth and boost to global demand.” It’s a message of inclusion that will require major policy shifts, not to mention the screen time the G-8 give themselves.
Both Sachs and Mandeng attribute the narrow focus of the G-8 meeting in Toronto to the fact that the biggest economic players are on familiar turf in North America. Both have a lot more faith that the November G-20 meeting in Seoul will shift the focus to emerging players and turn it around. Sebastian Mallaby, author of the new hedge-fund tome More Money Than God, also believes that the G-20 has the power to focus leaders’ attention on issues of debt and growth.
Mandeng tells Street Sweep that the South Korea meeting may hew too closely to the South Korean leadership’s concern with “financial safety net” issues, a system that would provide emergency loans to struggling countries. That may not be a big issue for most emerging-market countries, Mandeng says, and so he believes that the financial safety net discussion could distract from talking about bigger issues.
And if that fails, just wait until France takes over the G-8 and the G-20 in 2011. French president Nicolas Sarkozy has pushed for a reform of the international monetary system and plans to pursue that agenda when France assumes the G-20 leadership. We’ll see if the G-20 proves itself ready for its closeup.