The summit with no answers

April 4, 2009

The Group of 20 meeting of leaders of the world's biggest economic powers was marked for failure even before it began on April 1.

Convened to come up with solutions to the biggest economic crisis since the 1930s, the G20 meeting was billed by its host, British Prime Minister Gordon Brown, as a vehicle for international coordination of economic recovery policies and major changes in financial regulation.

Yet little more than a day before the summit began, French President Nicolas Sarkozy — under mass pressure from strikes and demonstrations — threatened to walk out of the G20 if the meeting couldn't agree on regulations to rein in what he calls "Anglo-American capitalism".

Meanwhile, most big European Union countries, led by Germany, are opposed to US President Barack Obama's and Brown's calls for huge government spending to stimulate global growth.

The April 1 Wall Street Journal explained: "As the U.S. and the UK pressed the case for greater government stimulus to lift the global economy, they have encountered stiff resistance from European leaders, forcing U.S. officials to downplay the targets.

"The 20 nations, while promoting free trade, also have had to face their own penchants for protectionism — with many recently moving to guard their own economies and companies from the downturn."

Certainly, there is a dire need for an international economic policy to counter the international downward spiral.

Economic contraction

The Organisation for Economic Cooperation and Development (OECD), the club of rich industrialised countries, predicts the world economy will shrink by 2.75% in 2009.

"The world economy is in the midst of its deepest and most synchronized recession in our lifetimes", wrote OECD chief economist Klaus Schmidt-Hebbel. The OECD also forecasts that unemployment in 30 industrialised countries will near 10%, up from 6% last year.

The World Bank forecasts a milder contraction of 1.7%. But in a speech in London, World Bank president Robert Zoellick said that even this decline would have a devastating impact on the world's poorest countries.

"These events could next become a human and a social crisis, with political implications", he said. "People in developing countries have much less cushion: no savings, no insurance, no unemployment benefits, and often no food."

The enormous resources of the G20 countries — they produce 80% of the world's economic output — could be harnessed to counteract that downward spiral.

Instead, the meeting is turning out to be — as it was in its November meeting — a talk shop.

Of course, the G20 will issue statements about the urgent need for countries to work together to combat the global slump and avoid protectionist measures like higher trade tariffs.

There may also be an agreement on reform of the International Monetary Fund to give China and other developing countries a greater role in the institution and to increase funding for loans.

Yet the reality is that each major economic power is taking steps to prop up its own economy — often at the expense of its rivals and of the world's poorer countries.

For example, the World Trade Organization expects trade to decline by 9% this year — the worst drop in 80 years. Most of the decline is due to the overall impact of the recession, but mounting protectionist measures are taking a toll.

"The World Bank estimates that 17 [of the] G20 countries have instigated 47 policies that have restricted trade since the November G20 summit in Washington", the March 31 Financial Times said.

Other "beggar thy neighbour" policies have also been adopted, such as devaluing national currencies to make exports cheaper and imports more expensive.

But falling trade levels and protectionism are only two of the deepening cracks in the world economy. Another is collapse of foreign direct investment (FDI) in Eastern Europe and developing countries in Asia and Latin America.

For example, Russia saw $130 billion flee the country last year, and another $170 billion could flow out again this year as Russian banks and other businesses struggle to repay debt.

In China, long the world's biggest magnet for foreign investment, FDI has dropped five months in a row, including a 26.2% drop in just the first two months of 2009.

So while the G20 leaders will line up for photo ops and issue suitably solemn and resolute statements about international cooperation, their policymakers are working overtime to foist the costs of the slump on to one another.

Balance of power

For the US government, negotiating agreements among the G20 is complicated by a qualitative shift in the international economic balance of power.

A quarter-century ago, the US was able to contain rising economic competition from Europe — mainly from then-West Germany — in part because Europe was locked into the US camp during the Cold War between Washington and Moscow.

The US could also use its political leverage over Japan to force the Japanese government to accept "voluntary" restraints on exports to the US, as well as an increase in the value of the yen that made Japanese goods much more expensive in the US market.

This gave the US economy the breathing space to restructure and emerge in the 1990s as more competitive against its rivals.

Today, however, the picture has changed radically. The US emerged a decade ago as the importer of last resort in the East Asian financial crisis, thanks to super-low interest rates implemented by then-Federal Reserve chair Alan Greenspan.

The low rates softened the blow of the dot-com stock market bust and the 2001 recession that followed. Plus, low interest rates led to the housing bubble that allowed US consumers to go into debt to compensate for stagnating or falling wages until the recession began in December 2007.

But the economic expansion of 2001-07 helped redraw the economic map of the world. The US, having poured hundreds of billions of dollars in investments into China since the 1980s, to counteract Japan's rise in East Asia, now confronts China as an industrialising rival and a major source of imports.

At the same time, China is the US's leading creditor, with an estimated $1 trillion of US Treasury bonds and other government-backed bonds held by Chinese banks.

This has allowed China room to maneuver economically against the US — most recently, by proposing the replacement of the dollar as a means of payment in international transactions.

While there is little prospect of such a development, it's a signal that if China is to continue to fund US trade and budget deficits by buying government bonds, it will seek something in return.

Brazil, while not nearly as powerful economically as China, has been strong enough to block US plans to extend the North American Free Trade Agreement throughout the Americas. Further, Brazil has overseen regional economic integration in Latin America that has often left the US on the sidelines.

India, too, has become a key economic power, both because of its high-tech and software industries and the rise of companies like Arcelor Mittal that have allowed it to become a major player in the global steel industry.

And the European Union, though fraught with internal problems, has a greater economic output than the US.

Plus, given that the US economy is no longer capable of using debt-financed consumer spending to spur international growth, the entire global trading system is crumbling.

All this complicates Obama's agenda as he calls on the G20 to endorse a US program for a global recovery effort.

Military power

Nevertheless, the US, despite its shattered financial system and discredited neoliberal economic doctrines, retains considerable economic clout, not least because the dollar remains the world's reserve currency.

The US remains the overwhelmingly dominant military power in the world as well, which reinforces US economic power in countless ways.

However, given continued volatility in Iraq and the prospect of another endless war in Afghanistan, the economic crisis could constrict US imperial power as well.

That's why Obama is spending much of his European trip trying to shore up NATO support for the occupation of Afghanistan.

All this means that the G20 and NATO meetings are at best stopgap efforts for a US administration confronting multiple economic, political and military crises.

The G20 will offer platitudes about international economic cooperation while it's really straining to prevent the fragmentation of the world economy into rival trade blocs.

And while the US's NATO allies will dutifully proclaim their commitment to preventing the spread of "terror" and bringing "democracy" to Afghanistan, their commitments of troops and resources are likely to be far less than what Obama wants.

Obama's meetings with the G20 and NATO, intended to restore international public confidence in the US as a global leader, will inevitably highlight the fact that the world capitalist system is in the midst of a profound and intractable crisis.

[Reprinted from US Socialist Worker,]

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