Once again, the industrious finance ministers of the G-20 met to solve the world’s economic problems, this time in Paris, and after hours of haggling and arm-twisting over the weekend, ended up with something that looks like an agreement on one of the biggest challenges facing the global economy today: giant imbalances. There is almost full consensus among economists that global imbalances – huge external surpluses in countries like China and Germany, and huge deficits in the U.S. – were at the root of the global economic crisis. Such imbalances are a sign of structural problems within economies, which, if not addressed, can make the global economy more vulnerable to crises. For example, China needs to stimulate domestic demand to reduce its dependence on investment and exports; the U.S. needs to increase its savings rate to reduce its dependence on debt-driven consumption. Finding ways to bringing the world into better balance has been one the key objectives of the G-20 for the past two years.
In theory, this latest meeting made progress in that direction. But the outcome shows both the promise and the perils of the new global economic order.
First, the specifics. The agreement eventually reached in Paris (which you can read here) lays out a list of indicators that will be monitored to judge the progress made by member countries in reducing imbalances. The indicators include public and private debt levels, private savings rates and trade balances. The ministers agreed as well to devise “guidelines” (not targets) for each indicator against which this progress can be measured. These guidelines are supposed to be formalized by the next G-20 powwow in April. That’s the good news. On the other hand, getting this agreement was the diplomatic equivalent of having your wisdom teeth pulled out. The agreement conspicuously fudged the matter of exchange rates, which, obviously, should be included in any discussion of imbalances, since they factor into trade surpluses and deficits. According to press reports from Paris, China, eternally sensitive about any criticism that it controls the value of the yuan to promote its exports, objected strenuously to including exchange rates on the list of indicators. Eventually, Beijing’s negotiators accepted a compromise. The result is a sentence in the communiqué that no high school English teacher would allow on a mid-term exam:
While not targets, these indicative guidelines will be used to assess the following indicators: (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies.
If that leaves you a bit dizzy, you’re not alone. My favorite comment on the communiqué came from Christine Lagarde, France’s finance minister, who told reporters: “It means what it means what it means, just like a rose is a rose is a rose.”
But does this agreement smell as sweet? If we look at the G-20 agreement as a glass half full, it shows that, if pressed to the wall, the diplomats of the world’s most influential nations can actually find ways to sort out differences and achieve a basic consensus on the fundamentals of reform for the global economy, despite their immense disparities of political systems, income levels and economic circumstances. In the end, China was willing to at least make a partial concession to make sure G-20 negotiations didn’t completely implode. So there exists a willingness among the world’s great nations to maintain a certain degree of cooperation on the direction of global economic policy.
If we look at the glass half empty, however, we can see how far we still have to go to get anywhere near a real working framework for global economic reform. If we had such a tussle over simply choosing the indicators to be watched, we can only imagine the brutality of the upcoming battles over the specific guidelines themselves. At what level is a trade surplus or deficit sustainable? Should there be “minimums” as well as “maximums” put on indicators like government debt? Then there’s the toughest issue yet – how in the world can these guidelines be enforced? The biggest problem with reducing global imbalances is that to do so, individual countries must take reform measures to adjust domestic economic policies. In other words, they have to act locally for the global good. But will they? And what happens if countries ignore or fail to meet guidelines? How can we make independent governments alter economic policies to meet the guidelines, if those measures run counter to domestic economic or political interests? The result is a hard-won agreement that exits in something of an alternative universe to the real world of real policy. Barclays Capital economists Luca Ricci and Jeffrey Young, who were generally upbeat on the outcome of the summit, described the agreement this way in a report on Monday:
The indicative guidelines can be viewed as an expression of the “rules of the game.” Although we are skeptical that this step will lead anywhere in the near term, the setting of norms, with a dose of “peer pressure” (under the IMF’s surveillance), is a sort of halfway house between anarchy and a rigid system of controls.
But is a “halfway house” enough? The problem with the G-20 format is that any one of the 20 nations can object to anything, and thus squelch any agreement. The result is always going to be a “halfway house” to appease contending interests. That may be sufficient to stop the world’s most important nations from descending into trade wars and other destructive policies. But it likely won’t be enough to goad governments beset by their own political and economic challenges to put the good of the world ahead of their own perceived, immediate good. What we’re left with is agreements that look lovely like roses, but wilt after a few days anyway.