Bretton Woods 1944 or London 1933? That is the question European leaders will be asked as they face their constituents this week. In other words, does the G-20’s six-point plan represent any fundamental change in the global financial outlook or is the two-part G-20 document issued on Saturday simply a collection of non-committal ideas?
The Bretton Woods summit (1944) did succeed in producing the architecture for the rebuilding of Europe and for the modern-day financial environment. The London Conference (1933) of Allied nations, on the other hand, failed to stem the widespread negativity of the Great Depression and, according to one school of European historians, strengthened fascism in Europe, and created political and economic havoc in former Ottoman dominions and in dozens of far-flung British and European colonies; six years later the Second World War broke out.
Two days prior to the Washington gathering, French Finance Minister Christine Lagarde said that “we see friction between Anglo Saxon capitalism on one hand and European capitalism on the other.” Given the huge bailout schemes on both sides of the Atlantic, it is difficult to figure out who exactly is a genuine capitalist today, despite President Bush’s proclamation that the free market principles must not be compromised.
But, in any event, the question of whether Washington 2008 will resemble New Hampshire 1944 or London 1933 is going to be answered by the fate of the developing world economies through the course of 2009; as far as the G7 nations are concerned, one can safely assume that the stimulus-after-stimulus process is ushering in a new era of state capitalism whose longer term shape is highly unpredictable.
It is the emerging market fund managers and investors who now need to recheck their buy signals, keeping 1933 clearly in focus. Because the first visible signs on the horizon reiterate a sell-on-rallies call, a stay-out recommendation and a get-out alert.
Powerful voices from Latin America, Africa and Asia today are pointing to the fact that the G-20 summit largely ignored the one key challenge which is threatening third-world economies with severe contraction, in real terms, regardless of GDP data: increasing levels of poverty, and a steady deterioration in living standards amongst the middle classes who contributed so significantly to the growth in consumer demand in recent years. In fact, emerging market political leaders continue to worry about currency devaluations, capital flight, declining foreign investments, shrinking exports and domestic interest rates, none of which are going to effectively counter political movements rooted in urban and rural discontent, and in sheer frustration at five decades of plans, schemes and programmes promising better tomorrows.
This is not the forum to engage in a country-by-country analysis of the political formations (military and civilian dictatorships, political Islam and ineffective coalitions) which dominate the emerging market spectrum today. At this juncture, it is evident from the facts on the ground that those granted favoured-nation status in Washington (i.e. Brazil, India, China, Russia, Indonesia, Argentina, Mexico, South Africa, Russia, Turkey, Saudi Arabia and South Korea) are not in need of any monetary actions which prop up banks and industry; what they need deep within their economies are thorough structural changes: land reforms, rural-debt elimination, higher crop yields, revamped food distribution channels, efficient tax-collection drives, diminished underground (black) money pools and, most importantly, anti-corruption measures.
Mutual fund managers insist that, despite the bearish tone of the persuasive general evidence, junior exchanges continue to offer selective, above-average investment windows. In that event, let them disclose the full extent of currency risk and political risk (as distinct from default risk) in their portfolios today.
