G8

The rules of the global economy should be rewritten. Fascinating article on the future of the global economy, from a former chief economist of the International Monetary Fund.

He says that many people around the world, including in the rich countries, have "failed to find a viable alternative to the much reviled "Washington Consensus" of economic liberalization." Regardless, there is growing unrest.

A posting below (Who is responsible for the Global Economy?, 26 August) shows that many countries, including the US, have frantically been looking for and finding alternatives. Whether they are viable alternatives is an entirely different matter. Professor Rogoff has his doubts. And the situation is getting worse. The Washington Consensus needs rethinking.

Update
1) This view appears in the Wall Street Journal, in an op-ed highlighted by Thomas Barnett. "Revolutionary China, Complacent America," op-ed by Charlene Barshevsky and Edward Gresser, Wall Street Journal, 15 September 2005. "Biggest point Charlene and her co-author make is that China is generating new rules throughout the global economy. This is my favorite theme of BFA [TB's new book, Blueprint for Action]: the New Core sets the New Rules."

2) A What if? scenario was published recently. The essence is that history is repeating itself in US financial governance : a similar loss of financial control in the 1960's drove the US to a drastic solution in the following decade - which was to scrap the UN (IMF) system of global monetary discipline, and introduce floating exchange rates. There are lessons here for many countries.

The competing economic philosophies of big players the United States and the European Union are coming into focus.

Leaving aside the widely differing levels of commitment to give 0.7% of GNP in development aid, The Australian reports:
"THE US has pledged to tear down all tariff barriers and scrap billions of dollars in subsidies if Europe does the same, in a decisive move that revives hopes of a global trade breakthrough in December."

But why is the US administration refusing to lead the way, and set an example to the rest of the world? Perhaps free trade has had its day - see PINR's Economic Brief: French Protectionism. It'll have to be aid instead.

On energy, the UK presidency of the European Union thinks a global solution is needed (see update below).
However finding a solution to the growing dissatisfaction with global trade is an even greater priority, the UK's Chancellor suggested to a trade union conference yesterday. He cannot be serious (copyright J McEnroe).

An article in today's Herald sets out the problem:
"The strategy pursued by successive governments for the past 20 years of relying on services for economic growth is over. We've got to start making things again. . . Britain has allowed manufacturing to shrink to less than 17% of GDP. Since [1997], a million jobs have disappeared in manufacturing and British exports have evaporated. We have higher trade deficits than ever – more than £5bn in July. Manufacturing industry has been allowed to wither on the vine as Britain built a false economy based on complacency, services and inflated house prices. Scotland's manufacturing exports have crashed by 27% since 2001 and 100,000 manufacturing jobs have disappeared."

But the UK is very interconnected globally. And, even if it wasn't, there's little political will internationally - at present - to discontinue, or split, the European Union - let alone the global economy.

Disputes over global economics - such as the ongoing Doha Development trade talks, the impartiality of the United Nations - are temporary hitches that are put into perspective by this article.
"Three years ago, President Bush warned the UN that it would become "irrelevant" unless it took action against Iraq. The world body declined to endorse the 2003 invasion, but, far from making it irrelevant, Mr Bush has returned to it time and again to seek diplomatic cover for the subsequent occupation and America's plans for the political transition. Its strength drained by the Iraqi insurgency, the Administration has curbed its unilateralist swagger and discovered some benefits in pursuing a more co-operative foreign policy at the UN."

Update on a global solution to energy:

On energy, the UK presidency of the European Union thinks a global solution is needed. In this connection, the former chief of staff at the US state department commented at the New American Foundation on 19 October 2005. Larry Wilkerson said:

"The other thing that no one ever likes to talk about is SUVs and oil and consumption and, as one little girl said yesterday at the Yoshiyama Awards, do you know that we consume 60 percent of the world’s resources? We do; we consume 60 percent of the world’s resources. Well, we have an economy and we have a society that is built on the consumption of those resources. We better get fast at work changing the foundation – and I don’t see us fast at work on that, by the way, another failure of this administration, in my mind – or we better be ready to take those assets. We had a discussion in policy planning about actually mounting an operation to take the oilfields in the Middle East, internationalize them, put them under some sort of U.N. trusteeship and administer the revenues and the oil accordingly. That’s how serious we thought about it."

It's a start.

"EU finance ministers have suggested that part of the blame for the current oil price crisis lies with the US, saying Americans should do more to save energy."

"UK finance minister Gordon Brown said that "this global problem needs global solutions" adding that oil demand could rise by 50 percent in the next 20 years in the light of emerging markets in Asia." EU to push US for lower energy consumption.

Background
The EU helpfully compiled statistics on world energy use. Page 133 of the pdf shows the figures for 2002.

Solid fuels: China 29.7%; USA 22.6%; EU (15) 9%; India 7.4%; Russia 4.4%; Japan 4.2%; Others 22.7%

Oil: USA 25.2%; EU (15) 16.7%; Japan 7.2%; China 7%; Russia 3.6%; India 3.3%; Others 37%

Gas: USA 24.7%; EU (15) 16.1%; Russia 15%; Japan 3.1%; China 1.6%; India 1%; Others 38.6%

The United Nations system may be seriously damaged this week at the World Summit. And so would the framework for the G8, NATO etc.

The UN World Summit was the subject of the posting on 31 August. But more information about the event came out in the past few days, following the release of a report on Iraq. The opinions in the oil-for-food report will be significant in deciding the continuing existence of the United Nations.

It is mentioned in the article that this report is well timed. However the report is only a provisional one on the Iraq scandal - the final version is expected in October.

The EU might want to take lessons from China. There is good news here for national economies and taxpayers; but bad news for the arms industry and international military alliances, such as NATO.

Extracts from the interview with Singapore's first-ever prime minister, Lee Kuan Yew:

SPIEGEL: The political and economic center of gravity is moving from the West towards the East. Is Asia becoming the dominant political and economic force in this century?

Mr. Lee: I wouldn't say it's the dominant force. What is gradually happening is the restoration of the world balance to what it was in the early 19th century or late 18th century when China and India together were responsible for more than 40 percent of world GDP. With those two countries becoming part of the globalized trading world, they are going to go back to approximately the level of world GDP that they previously occupied. But that doesn't make them the superpowers of the world.

"The Russian mistake was that they put so much into military expenditure and so little into civilian technology. So their economy collapsed. I believe the Chinese leadership have learnt: If you compete with America in armaments, you will lose. You will bankrupt yourself. So, avoid it, keep your head down, and smile, for 40 or 50 years."

"The idea of Europe, united and working together, is essential for our nations to be strong enough to keep our place in this world." But Mr Blair's trip to China and India this week has exposed the limits of the EU's ability to forge ties with other global actors. . "

"Indeed, José Manuel Barroso, European Commission president, proved unable to answer a question in New Delhi about India's bid for a permanent United Nations Security Council seat because there is no common European position. FT.

The World Summit is fast approaching if the EU wants the semblance of a united front.

Update 2 October, 2005
The press report comments from the former commissioner for EU external affairs: "You hear so much rhetoric about Europe playing a significant role in the world. What the hell signal do we send to the rest of the world if we can't accept Turkish accession to the European Union?"

For example, new member Poland is said to be a prime mover in challenging the EU's Franco-German-Russian axis.

"Poland is actively pursuing its own agenda as a regional power, while functioning as a mainstay for Washington's policies in an enlarged Europe. In this context, Europe's Common Foreign and Security Policy appears once again to be a mere set of institutional instruments and unable to effectively coordinate its member states' policy priorities."

Washington's policies are reported to promote 'economic determinism' in a global economy. Strategist Thomas Barnett blogs today:

To be successful in the global economy, a mature nation should "allow a certain amount of income equality in order to remain competitive and efficient (i.e., you're going to have to let the market move your labor for you). Otherwise, you find yourself funding ghost towns that correspond to no economic logic, making your economy as a whole more uncompetitive."

What should the EU promote? This surely requires urgent debate.

As a start to the debate, the comments here suggest that both Washington and Brussels are looking for protection from the global economy. The comments include "The drive for global free trade, once championed by states with advanced economies, appears to be encountering an obstacle, if not a limit."

The European Union is described as an economic giant - but a political dwarf. Why should this be? Half the G8 comes from the EU, ie the UK, Germany, Italy and France. Link.

But each nation still wants to go its own way. As a result, there is little wish to have an EU position at the G8, let alone the International Monetary Fund or the United Nations. Very ineffective!

A coordinated stance at international meetings would give the EU a great deal of political influence in global affairs; perhaps even a chance to lead. Changing sovereign minds is a priority for the presidency; presenting a coherent position at international organisations is surely one of the reasons the EU was formed. Will there be a joint position at the World Summit for UN reform later this month?

What if there is no agreement on security threats?

In its absence, the Institute of International Economics is stepping into the breach. The Director of the IIE has warned that the growing demands for protectionism may result in an economic barrier to globalisation being drawn down the middle of the Pacific. He spoke yesterday at a meeting of the Pacific Economic Cooperation Council (PECC).

The first recommendation was that China should "promptly" take political steps to increase the value of its currency by up to 25%; otherwise the US will be forced to impose high tariffs on Chinese goods. This revisits a defence put forward in June:

>Nobel economics laureate Robert Mundell . . . said Friday there is no reason for China to change its much-criticized currency peg to the US dollar. . . "China has had a dollar anchor for over 10 years, and it's a winning policy."< >He echoed an argument made by a number of other prominent economists, such as US Federal Reserve Chairman Alan Greenspan and fellow Nobel Prize-winner Joseph Stiglitz. They contend that while a revaluation would make Chinese goods more expensive in the US, American consumers would just buy imports from other low-cost countries instead. In that case the US trade deficit with China might fall, but the size of its overall trade deficit would not.<

Emphasising that the US administration was under intense pressure from its electorate to level trade with China, the second recommendation was that China and the US should work towards a single Free Trade Area of the Asia Pacific.

"A number of Leaders including reportedly from Australia, Canada, Chile, New Zealand, Singapore and Taiwan supported the Free Trade Area of the Asia Pacific (FTAAP) idea, but the largest members, including China and the United States, did not and hence no action was taken."

The involvement of the World Trade Organisation, or the European Union (not a 'locomotive' of the world economy), wasn't mentioned.


However the WTO got a mention a couple of weeks ago. The IIE said then that a joint US-China initiative to revive the WTO's Doha round of global trade negotiations is needed: "through offering substantial reductions in their remaining agricultural and other trade distortions." But the large economy of the EU (economic giant, but political dwarf) doesn't seem to qualify it as a player.

How should collective security be funded? Assuming that there will eventually be agreement internationally on security threats.

NATO have this dilemmato solve, urgently. The different levels of contributions that member countries make to the Alliance have long caused friction, and this is inhibiting plans for the Alliance's future. See the huge variances in an interactive version of the UK's Hansard.

A leading commander of NATO forces, General James Jones, spoke earlier this year about the problem of funding.

>MUNICH NATO'S top commander says he is seeking a radical overhaul of the alliance's finances as it becomes more involved in peacekeeping missions in distant countries yet continues to use a system introduced during the cold war to pay for them.< >When NATO was established nearly 56 years ago, military operations. . . were financed in two ways. One was through a common fund into which all countries contributed. The other, known as "costs lie where they fall," meant that any country that contributed troops or equipment to a NATO mission was obliged to pick up all the costs. But as NATO moves outside Europe and ventures as far afield as Afghanistan, where it commands an 8,000-member peacekeeping mission, or to Iraq, where it will run a modest training mission, Jones said the new demands facing NATO required financing arrangements that involved more common funding."< >Jones said his big concern was that if the current financing system was retained, it could jeopardize the NATO Reaction Force. It could mean that countries willing to contribute troops to this force might end up being reluctant because they would have to pay on the basis of "costs lie where they fall." . . In practice, this means that countries like Belgium, which agreed in 2003 to the NATO-led Afghanistan mission but then delayed sending aircraft after its Finance Ministry objected to having pay the crew and maintenance charges, often contribute nothing to those missions.<

Update
With a view to discuss future funding, among other matters, NATO met on the 13th and 14th of September 2005. It was pointed out that a poll of the German Marshall Fund has shown there is little public support for increasing defence spending. The S-G said: "And that means that we have, . . . as NATO, to do lots of public diplomacy, to explain why we are in Afghanistan. Why is the German Bundeswehr making such a big contribution in Afghanistan, far away from home, unthinkable ten years ago. Why is that?"
Without public support, defence spending - nationally and internationally -, will surely reduce. This must be a huge worry.

'Defence' may be key to harmonising international politics, as the French suggest (see 'Common Military Policy' below) . Three principal alliances around the world are NATO, SCO and CSO. Leaving aside the fractious NATO, SCO seems to be more representative of Eurasia than CSO.

What information do we have on SCO? The Journal Of The China-Eurasia Forum has a special feature this summer.

On July 5 2005, representatives from the six members of SCO gathered in Kazakhstan: China, Russia, Kazakhstan, Kyrgyzstan,Tajikistan and Uzbekistan. Also in attendance were observers from India, Iran, Mongolia and Pakistan. Political connectivity is the aim.

"SCO’s new observer status at the UN General Assembly, and the signing of Memoranda of Understanding between the SCO and the CIS and the SCO and ASEAN."

"calls by the SCO for the United States to draw up a timetable for the eventual departure of U.S. forces from Centrals Asian bases as operations in Afghanistan wind down."

" while this statement says little more than what the Pentagon itself has said about when U.S. forces might leave the region (i.e. when they are no longer needed in Afghanistan), the mere fact that it was uttered demonstrates a new calculus that the Central Asian states may feel confident enough with the support of China and Russia to publicly challenge the United States to address their individual needs."

This is getting out of hand. Perhaps a reorganised NATO could unite the military alliances?