'A wider order comes into view'
By Quentin Peel
April 6 2009
[emphasis added - FoC]
It may take months to discover whether the actions taken by
last week's Group of 20 summit in
rescue the world economy from a prolonged recession, if not
depression. The substance of its conclusions will have to
convince capital markets, global financial institutions,
investors and humble consumers that they can start to
spend, borrow or lend again.
But the symbolism of the event may be more important than
the substance. For even if the G20 countries are a strange
ad hoc selection, initially brought together by the Asian
financial crisis in 1997, they represent a whole new
element in the world order. They are not the Group of Seven
- the club of western powers and
plus
crisis is a clear indication that the old order has
outlived its time.
Another pointer came four months ago when the US National
Intelligence Council, part of
apparatus, published a startling forecast. The
international system as constructed after the second world
war would, it predicted, be "unrecognisable" by 2025,
thanks to globalisation, the rise of emerging powers and
"an historic transfer of relative wealth and economic power
from west to east".
"The next 20 years of transition to a new system are
fraught with risks," the document declared. "Strategic
rivalries are most likely to revolve around trade,
investments and technological innovation and acquisition,
but we cannot rule out a 19th-century scenario of arms
races, territorial expansion, and military rivalries."
That report was largely written before the full force of
the financial and economic crisis had become apparent.
Nevertheless, its authors were convinced that the "unipolar
moment" of unchallenged
came down was already drawing to an end. The future world
order would be "multipolar".
The extraordinary thing about the present moment is that
several fundamental adjustments are taking place at the
same time. That is what makes the outcome so unpredictable.
The end of the cold war, with the fall of the Wall in 1989,
cleared the way for new powers to rise -
particular - and removed ideological obstacles to
globalisation. Cross-border migration has surged. The
technological revolution of the internet has transformed
international communications, the flow of information,
financial trading and political awareness. The breakdown in
the global financial system, caused not just by the bubble
that burst in the
explosion of financial speculation across world markets,
has rapidly turned into a recession in the real economy. No
one has been spared. Credit has frozen up in markets from
A massive rebalancing is starting to take place in world
trade flows between the unsustainable
the equally unsustainable surpluses of
exporters. US consumers are no longer going to be the
engine for Chinese export-led growth, but nor can Chinese
savers continue to finance American borrowing.
Finally there is the underlying adjustment - one that would
normally still take decades to be realised - that the NIC
report identifies, of the switch in power from west to
east, especially the rise of
the prominence they held when
There is an assumption in many parts of the world that the
"crisis of capitalism" represented by the freezing up of
the financial system will accelerate the long-term
geopolitical shift, heralding the decline of
European influence. Last year's choice of the G20 as the
forum to tackle the crisis was a belated recognition that
China, India and Brazil, at the very least, must be at the
table. But will the G20 provide lasting leadership? It
smacks of an emergency solution, not a considered
construction. For a start, it has no permanent secretariat.
Gordon Brown,
struggled for months with a tiny team of British civil
servants to forge a consensus. There were divisions between
the
priorities for the industrialised countries and emerging
economies. It was remarkable they managed to agree on a
communiqué.
"It is an arrangement that works for finance ministers and
central bank governors to meet once a year," says Trevor
Manuel, the South African finance minister. "When you take
it up to heads of state and government, the imbalances are
accentuated."
But at least there were few signs of schadenfreude in
between the crisis-hit economies of the west and the less
exposed emerging markets have vanished. The pain is global
and the solution had to be, too.
The real economic effect of the financial crisis has hit
emerging markets harder than the developed economies, with
a collapse in trade flows and a dramatic fall in commodity
prices. It is clear that those worst hit will be the
poorest - especially in
back on.
Second hardest hit are those commodity producers that have
always faced big social and demographic challenges, such as
energy-rich
oil producers have been affected. All had become used to
swollen export and tax revenues and face readjustment.
Finally, emerging economies still in transition from
poverty to prosperity - or from communism to democracy -
have been caught by the economic crunch before they could
build stable systems of governance and root out endemic
corruption. They include many in central and eastern
that emerged from the Soviet empire.
Some observers are sceptical about the geopolitical fallout
from any financial crisis. "Geopolitical events like the
disappearance of Mao in
Wall, have far greater consequences than financial shocks,"
says Robert Cooper, director-general of external affairs at
the Council of the European Union. "Look at the technology
bubble in the 1990s. There were no obvious consequences. Or
the 1970s crisis with oil prices. Any geopolitical
consequences rapidly disappeared."
Yet he admits that two financial crises of the 20th century
- the Depression of the 1930s and economic collapse in
results. The former led to the rise of Nazi Germany, the
isolationism of
latter, far more positive, resulted in the Marshall Plan
that financed the German Wirtschafts-wunder and economic
revival across the rest of the continent, which led to the
eventual establishment of the EU. The lessons of the 1930s
also led to the setting up of the Bretton Woods
institutions - the World Bank and International Monetary
Fund - to bring monetary order to the main industrialised
states and a system of crisis management that has survived
for more than 60 years. But today their legitimacy and
representativeness are being called into question.
The central nation in the ongoing geopolitical
transformation is
read. "They want everything and nothing," says a senior IMF
official. "What they really want is just to be among the
big players. The coming 20 to 30 years will be the era of
the
reflect its rapidly growing economy. But before the G20, it
did not want to contribute from its massive foreign
reserves to increasing the Fund's resources because
is still, per capita, a poor country. In the end, Mr Brown
announced that
$100bn each from the EU and
total. "The crisis emphasises that
player," says Bobo Lo of the Centre for European Reform in
has accelerated that trend."
If
loser from the upheaval. The choice of the G20 as the
crisis forum rather than the G8 has abolished
privileged position as the only outsider at the same table
as the wealthiest countries. At the G20 it is one of many
middle-sized economies, such as
But
may rise and fall but the crisis has exposed its failure to
diversify beyond the energy sector. Its financial
institutions are inefficient, its judicial system corrupt.
In the longer term, it faces a chronic demographic crisis
likely to result in severe labour shortages in the next two
decades. What of the rest of
Like
population. Slow growth is inevitable, although most west
European economies have the reserves and the social safety
net to cope with the recession. That is not true of eastern
For the EU, the risk is that solidarity within the
will crack, as sneaking protectionism undermines the single
market and the old member states show reluctance to bail
out the new ones that face acute social crises, with a
freeze on bank credit and investment.
The outcome of the G20 - reinforcement of the international
financial institutions and a big emphasis on regulation -
is what
the one hand, Europeans have a strong voice in the
institutions, especially the IMF. But they will have to
give up some of that influence in exchange for
contribution and the representation of other developing
countries.
As for the G20 itself, the chemistry of the group is
unstable. But what seems clear is that without a firm line
from Barack Obama's new
would have been more feeble. It was
to triple IMF resources. The EU was happy just to double
them. Mr Obama played the role of mediator.
week that the crisis spelt the demise of "Anglo-Saxon
capitalism". Yet experience suggests that of all the
countries affected, the
capacity to recover quickly. The EU and
sluggish growth and declining demographics. As for
the requirement to adapt from export-led growth to a
radical expansion of domestic demand could be a huge
political challenge. The Communist party will have to
countenance a much faster growth of the middle classes than
it has prepared for. A new world order may be replacing the
old - but it will be a bumpy ride.
Respect quest
When the Group of 20 leaders met last November, there were
great expectations that
economy still firing on most cylinders, would make a hefty
contribution to the debate.
In the event,
saying that its main useful role was to keep its own
economy, worth one-tenth of global output, ticking over at
8 per cent real growth by means of a $570bn fiscal
stimulus.
Last week's G20 was different. Both in the run-up and at
the summit itself, there were clear signs that the economic
crisis has accelerated
Perhaps the most closely scrutinised bilateral meeting in
and Barack Obama.
co-operative stance than before on boosting the
International Monetary Fund. He also showed
not be bounced into positions it did not like when he
objected to an attempt by
Hong Kong and
too,
the
deficit without something in return. It lectured Mr Obama's
new administration on the need to follow stimulus spending
with a renewed effort at fiscal consolidation.
More startling still, a few days before the summit, Zhou
Xiaochuan, governor of China's central bank, suggested that
the IMF enlarge the scope of special drawing rights, its
unit of account, so that SDRs could challenge the dollar as
a global reserve currency.
Ben Simpfendorfer, economist at Royal Bank of Scotland,
says that while that proposal is unrealistic, "it
demonstrates global leadership and underscores the rise of
the east". China, he says, is staking a claim for its
renminbi to become the de facto Asian currency unit, which
would help consolidate its emergence as regional leader.
Shi Yinhong, a politics professor at Beijing's Renmin
university, says
choice but to keep bankrolling the
buying a currency it suspects will one day collapse, it
will seek more respect for its views on issues including
arms sales to
activities in countries such as
Indeed, there are already signs that
financial leverage is paying political dividends. When
Hillary Clinton, US secretary of state, visited
February, she said human rights "cannot interfere" with
bigger economic and diplomatic priorities. That Mrs
Clinton, of all people, should adopt such a restrained tone
shows just how far things have tipped in
(end)
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