When the finance ministers of the G20 group of leading world economies – including the so-called “BRIC” (Brazil, Russia, India, China) group of emerging-market nations – meet in London this weekend, you can bet that there will be only one topic: To figure out what the hell their governments should do about the global economic crisis.
Presumably, if any really good ideas emerge, the London Summit of the G20 Heads of Government can try to implement them in two weeks’ time.
Larry Summers, the former U.S. Treasury Secretary and head of President Barack Obama’s National Economic Council, certainly has a strong suggestion: He thinks the Europeans and other countries haven’t done enough “stimulus.” While the U.S. government has passed a stimulus spending plan that adds $787 billion to the federal deficit over the next two years – boosting it to 12% of U.S. gross domestic product (GDP) in 2009, and only a little less in 2010 – Summers contends that few other countries have been as bold.
Actually, that’s not quite true. China’s fiscal stimulus of $585 billion is bigger than the United States in terms of that country’s GDP, while Japan, Britain and India have both allowed their fiscal deficits to expand beyond 10% of GDP. However, if you believe China’s numbers, its budget deficit still will only be around 6% to 7% of GDP, while France and Germany are pikers, passing only modest stimulus plans and holding their deficits to around 5%-6% of GDP, in spite of the deep recession.
At the start of this week, the World Bank pointed out the flaw in Summers’ idea, estimating that the developing countries will have a financial shortfall of at least $268 billion – and possibly as much as $700 billion – in 2009. Capital inflows to those markets are expected to shrink drastically, falling to $165 billion, from their prior level of $467 billion. Rich countries – with their massive stimulus-fueled deficits – will require huge amounts of financing, a reality that will starve much of the developing world of badly needed funding, while also “crowding out” the rich countries’ private sectors.
Naturally, the World Bank proposes that it should be given the task of filling the developing world’s financing gaps – but since it would have to borrow the money to do so, that would only exacerbate the stress on the financing markets, and would almost certainly cause severe damage to private sector borrowers in rich countries.
If the G20 comes to any agreement on stimulus plans, those plans must be tailored carefully to each country’s projected budget deficit. Indeed, U.S. Treasury Secretary Timothy F. Geithner has suggested that a stimulus target of 2% of GDP in each of the next two years be adopted globally – which would require the United States to find about $230 billion of “un-stimulus”, as the recent $787 billion package overshoots that mark.
Countries like China and Germany, which have budgets that are nearly balanced, may be able to indulge in additional stimulus plans. However, countries like India, Britain and the United States, with 2009 budget deficits of more than 10% of GDP, should rein in their rapacious public sectors in order to free up financing capacity for both their private sectors and for the world’s developing countries.
As Summers has noticed, in a world where economies are interlinked, stimulus in a foreign country is as valuable in restarting the global economy as domestic stimulus. The corollary of that is that stimulus packages should be very limited in countries whose budget deficits are already large and the crowding-out danger to the private sector is correspondingly severe.
U.S. Federal Reserve Chairman Ben Bernanke has suggested that much tighter financial regulation is needed, and French President Nicolas Sarkozy has also proposed an international banking regulatory regime, with particular attention paid to tax havens. The problem with these suggestions is that it isn’t at all clear that tighter regulation would have led to a different (better) outcome. (After all, regulators missed the $65 billion Bernard Madoff fraud.)
Furthermore, little or none of the financial system’s problems seems to have stemmed from so-called “tax havens.” France has a problem with such havens, because it wants to overtax its citizens. In a world of $1.75 trillion budget deficits, Americans may start to see that tax havens perform a vital “safety-valve” function in preventing governments from ratcheting up taxes too far.
An international financial regulatory system would be impossibly cumbersome; it would inevitably be populated by the kind of overstuffed international bureaucrats who are intensively hostile to the free market system as a whole.
In Britain, the new and highly complex regulatory system set up by legislation in 1986 and 1998 – designed and staffed by civil servants – proved far less competent at regulating banks than the previous, much-simpler system run by central bankers at the Bank of England. Crooks and incompetents flourished in the London of recent years, in a way they did not before 1986 – at a staggering cost to the British taxpayer, who has been forced to guarantee more than $900 billion of debt in only two banks in a $2.5 trillion economy. An international regulatory system would be hostile to new businesses and to capitalism as a whole, and relatively easy for crooks to evade.
While international regulation and international stimulus are bad ideas for the G20 to pursue, there is a worthy objective: International free trade.
Exports from East Asia were down by more than a third in January, and even solid Germany’s exports fell by 21%. Protectionism – in tariffs, in regulations and in “Buy America” provisions – is almost irresistible to economically semi-literate politicians in a global downturn of this kind. The forces of free trade, essential to restarting global growth, are in comparison politically feeble.
It will not be enough to adopt a resolution condemning protectionism. The G20 did that at its last meeting in November, and several countries then adopted minor, but still significant, protectionist measures immediately after the meeting. As with riding a bicycle, it is impossible to remain stationary in the trade area: If a country isn’t making forward progress toward trade agreements, it means by definition that it’s increasingly backsliding to protectionism.
Hence, the G20 meeting must make a renewed commitment to completing the Doha Development Round of multilateral trade negotiations, stalled almost since its inception in 2001. To do that, the United States and European Union must sharply cut their subsidies to agriculture – politically very difficult, but economically enormously beneficial, especially for reducing budget deficits.
In a downturn this severe, economics at the G20 meeting should take priority over politics.
Sadly, this is unlikely to happen.