Globalaffairs

Issue 14/April-May 2009
By Glen Ruffle

On 2nd April 2009, many important global leaders gathered in London to discuss the global financial crisis. Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, the Netherlands, South Korea, Russia, Saudi Arabia, South Africa, Spain, Turkey, and the US were invited by the UK to meet and try to work out a shared way forwards through the crisis.

Ultimately this summit has made some steps forwards but is not a resounding triumph. Using debt, governments will try and protect people from the consequences of the recession, whilst another result of the summit was to construct a stronger global regulatory system.

The agreement that was reached [1] shows that what was argued in this magazine, Global Affairs, four months ago [2], has to some extent been recognised by global elites and adopted. Points 3 and 13 in the agreement reached in London pick up on the failure of the financial regulatory bodies and how they failed to understand and effectively monitor the dangerous activities of their clients, whilst recognising that the market system, combined with strong regulation, is the best way forwards.

Yet there is a feeling that the document produced contains a large amount of ’scape-goating’ and publicity-friendly material. While in many places the failure of banks and financial companies has been noted, the failure of politicians to understand that the excessive growth these banks were delivering was unsustainable, and the failure of ordinary people to live within their means instead of on credit, was overlooked. And the statements about trying to return “to trend growth” [3] cannot be true, as the massive growth of some economies in the past was unsustainable and partly preceded as a cause of the present crisis.

Financially speaking, the agreement is quite strong. Whilst it does state that the G20 governments will do ‘whatever is necessary’ (an open and potentially worrying commitment) to make growth happen, there are limits. The printing of money that has occurred in the UK and US, both national embarrassments, has a time limit and so will not go on indefinitely. These two major economies are not about to emulate Zimbabwe, just yet.

The eighth point of the agreement makes it clear that the leaders want a return to the growth seen at the beginning of this century. They want to restore the international capital flows and processes of lending and investment that occurred in this time period. Yet the leaders recognise that the methods chosen to deal with this involve an unprecedented fiscal expansion that has not been tried before. There are risks, but the G20 are in a stronger position now. Because so many banks have been rescued by governments, the financiers who would have previously threatened to undermine these plans by attacking currencies, as George Soros did on the British Pound on Black Wednesday in 1992 [4], are in a much weaker position to do anything about it.

The emphasis is on international cooperation, and one of the big winners was the European Union. The European Commission was given a seat on the new Financial Stability Board, showing that the EU is becoming an entity in its own right, surpassing the national states that comprise it, and taking up an independent role on the world scene.

The Commission benefited, but the G20 did also scape-goat hedge funds and other financial organisations. Under French and German pressure, steps were taken to regulate the global market, which is good, but governments must not be allowed to blame private financial organisations for mistakes that the governments themselves are also responsible for. Regulating hedge funds would have done little to stop the recession [5].

The G20 agreement focused on keeping capital flowing to the developing world and to emerging markets, doing this not by encouraging private finance to flow their, but through debt and IMF loans. Instead of private investment, the G20 will try and use public debt to keep development happening in poorer parts of the world. This of course, combined with the new IMF Flexible Credit Line, will bring the IMF in for much criticism. It will, once again, be making decisions about where money goes and who gets it, and in so doing, will be vulnerable to accusations of playing politics with people’s lives.

Once again, this is a step towards world government. The idealistic belief that the IMF can take such a global role without democratic accountability and without national bias is striking. Is it really possible, in a world where China, Russia, Brazil and India, as well as the Arab states, are all trying to gain power and replace Europe and America as the global leaders? Will the US really let go of its monopoly on IMF decision making?

The G20 communiqué is a liberal-idealist document. At its heart, it moves away from realist policies and towards a shared global agenda, that logically only point towards a world-governmental system. The IMF has been strengthened to help manage international finance. The new Financial Stability Board has been instituted to help international trade. And governments have pledged to work together. Thus the losers from this are states that fight for the interests of their own citizens. The US has been severely weakened. A Democrat President has agreed to pursue the international policies of harmony and consensus, and in so doing has even undermined the position of the dollar as the global currency [6].

Another state to be weakened is Switzerland, and one wonders if it was this tiny state that the (no doubt) European leaders were thinking of when they wrote in no uncertain tones “The era of banking secrecy is over”. For a long time the EU has been angry at Switzerland’s prosperity vis-à-vis the EU, and this crisis has given them a great chance to force the Swiss to leave their traditional and culturally neutral position and push them into international affairs. The Swiss electorate is the losers as the new global system being proposed lacks democratic accountability.

On the face of it, the environment is a big winner from this deal. But a closer look reveals that this is only hype and public relations. Ultimately the truth remains that you cannot make more to sell and produce whilst preserving and enriching the environment, and no government is really willing to pay the price of putting environmental protection before economic growth.

The Oslo research institute, ‘Point Carbon’, recently reported a drop in carbon emissions. It is no coincidence that the drop in carbon emissions coincided with the global recession [7]. To put it another way, you cannot have the same levels of growth we had in the past or even growth at all, if we want to build a true green economy.

Let’s think about this – the previous decade has been built upon rich Western consumers buying largely pointless objects that are made of plastic and often designed to break with money they borrowed. China, a large producer of these products, has earned massive amounts of foreign currency by making and selling these products to the West. Yet these products use up massive amounts of environmental and irreplaceable resources. Plastic uses oil. It is difficult to recycle. Yet nearly everyone now owns a plastic-covered mobile phone or MP3 player, and we all know that in five years time, we will probably have replaced the old one with a new design. Simply put, the current system demands our waste and the usage of limited and valuable resources in unnecessary and frivolous ways.

Can anyone imagine the necessary steps being taken to reduce the car industry? Quite simply, if everyone in the world drives a car, then the amount of pollution produced will rocket upwards. Yet which politician is going to close down General Motors and Ford? Which politician will stop the Toyota production lines? Who will bring Renault, Peugeot and Fiat to a stop? Yet we need to stop buying these cars, and the resources they use, and using them, if we are really serious about building a green economy. The same is true for aircraft, shipping and most other industries.

Yet the end of the London G20 agreement has two clauses near the end dedicated to commitments to low carbon economies and reducing pollution. It is interesting to note the exact details were left out of these, whereas when it came to reform of the financial system, there were many more sub-clauses and details. Perhaps it is skeptical to say so, but it looks like the green commitments were nothing more than political hot-air.

Point three of the communiqué states proudly “we start from the belief…that growth…has to be shared…”. It is surely a grand piece of political manipulation to hear this from the people who have overseen ten years of growing inequalities across the world. In Australia, inequalities have grown [8]. In China, the gap between rich and poor is still enormous [9]. In the EU, the gap between the north and the south has grown [10]. And Oxfam, the international development charity, has noted that generally the global wealth divide has risen to an all time high [11].

So we must ask, was the conference a success? If the answer is an economic one, then yes. By passing on the problem to future generations, todays politicians might have saved themselves from a global great depression. But few people will be fooled by the hot-air and rhetoric on climate change and development. This conference was about the rich keeping the same system from collapse, not about helping the poor. The Communiqué stated that the G20 believe wealth has to be shared. In all history, states have never before acted in this way. There is still no reason why we should believe them now.

Glen Ruffle
Masters from the University of Southampton and currently teaches in Moscow.

References
[1] G20 leaders seal $1tn global deal: Leader’s statement from the G20 summit in London. Thursday 2nd April 2009. http://news.bbc.co.uk/2/hi/business/7979606.stm
[2] Global Affairs (2008-2009) ‘The end of the world as we know it’, Global Affairs Issue 12 http://www.globalaffairs.es/Noticia-405.html
[3] G20 London Summit, at: http://www.londonsummit.gov.uk/en/summit-aims/summit-communique/ point 10
[4] Evan Davis (2002) lessons learned on black wednesday
http://news.bbc.co.uk/2/hi/business/2259648.stm
[5] Anatole Kaletsky (2009) ‘Cast doubts aside, G20 is right to borrow and spend’, The Times, April 6th 2009, at: http://www.timesonline.co.uk/tol/comment/columnists/anatole_kaletsky/article6041266.ece
[6] Ambrose Evans-Pritchard (2009) ‘The G20 moves the world a step closer to a global currency’, at: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/5096524/The-G20-moves-the-world-a-step-closer-to-a-global-currency.html
[7] http://eureferendum.blogspot.com/2009/04/intelligent-and-honourable.html
[8] Sydney Morning Herald http://www.smh.com.au/articles/2004/07/09/1089000354649.html
[9] Wu Jixue http://www.china.org.cn/english/BAT/173501.htm
[10] Ambrose Evans-Pritchard (2009) ‘France and Germany clash over inflation as north south divide widens’, at; http://www.telegraph.co.uk/finance/economics/2809130/France-and-Germany-clash-over-inflation-as-north-south-divide-widens.html
[11] Oxfam Canada http://www.oxfam.ca/what-we-do/campaigns/make-trade-fair

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