G20 roundup

The latest G20 summit seems to have gone off as well as could be expected – and perhaps a little better. Markets are up today.

It’s always hard to know how much was decided in advance, but damn near all of it would be a pretty good guess. The final communiqué is now available and it’s clear to see that the expanding role of the G20 itself is the most significant outcome, on the face of it, at least. More on that later. Interesting as well to see Nicholas Sarkozy continues to speak in quite progressive terms about banking reform and the decline of (what he would call) the Anglo-Saxon economic model (‘le laisser-faire, c’est fini’). Together with Angela Merkel, he’s been leading Europe’s push for firmer regulation and bonus caps. In comparison to these right-wing leaders, Gordon Brown (leading a social democratic party) has been dragging his feet somewhat on the caps, though seems to have relented in the end. However, The Economist believes that the outcome was a ‘fudge’:

Going into the summit they [France and Germany] had pushed hard for firm numerical limits on bonuses as a proportion of revenues or capital. The language of the communiqué, however, was closer to the Americans’ position.

Other key outcomes of the meeting included a declaration of intent to reform IMF voting structures by 2011. Any change will be at the expense of European board members, who will have to give up at least 5% of their voting weight, in part to China. Blake Hounshell is:

interested to see if Geithner’s ideas for reforming the IMF gain any traction. The micro story is a technocratic one, but the macro story could be yet another sign that China is being welcomed into the inner circles of global power. The scuttlebutt is that the Treasury secretary hopes to persuade China to sign on to his priorities on capital requirements and other reforms in exchange for getting a larger share of control of the fund. Anyone know the Chinese word for “bribery”?

The Fund is also getting another funding boost of $500bn. The IMF’s twin – the World Bank – was also discussed and noises (though no committments) have been made about small voting changes there too. More details will be available in the run-up to the Bank’s spring meeting next year.

Broader questions about banking regulations got a good deal of attention, though nothing firm came out of the meeting. However, it is important to note that since the London Summit, G20 leaders haven’t taken the easy route and gone quiet on the subject. This is presumably partly due to the domestic political benefits of looking tough on bankers. Somewhat surprisingly, though, the G20 does seem to be serious about real united reform and progress on tax havens has been substantive. The idea of ‘living wills’ for too-big-to-fail institutions has also been addressed in order to set up special regulatory regimes for systemically crucial firms.

On fiscal stimulus, politicians seem to be taking the necessity of working in concert more seriously. The EU fears that the US will ‘turn off’ its stimulus too early, perhaps fostering a much-feared ‘double-dip’ recession. However, the Group pledged not to pull pack on countercyclical policies just yet. The FT heralded ‘a striking area of consensus, given the arguments about stimulus that raged ahead of the previous G20 heads of government meeting in London in April.’

Outside, the protests apparently lacked focus, which is no real surprise. This is the danger of setting yourself up as ‘The Movement’. It’s not meant to be a secret society. On the other hand, Pittsburgh did witness what seems to be the first public use in a democratic country of the sonic blast cannon.

The really interesting point, as mentioned above, is the ascendance of the Group itself. Pittsburgh, in its own words, ‘designated the G-20 to be the premier forum for our international economic cooperation’. This is a body that theoretically represents 90% of world economy and 2/3 of its population. Summits will take place in Canada and South Korea next year and – in theory at least – annually thereafter. Brookings has a paper out on this (but I’d skip straight to the bottom of page four if I were you). Martin Wolf writes (FT leaflet) that ‘for the first time since the industrial revolution, economic power is no longer concentrated in western hands.’ One would have expected Wolf to be more sceptical of the idea that de jure power will translate to anything meaningful. Paul Collier certainly is:

In a world that needs collective action but is composed of 194 governments, the overarching problem is free-riding. The burden of global leadership inevitably will fall on those few governments that are manifestly too big to free-ride. There will be only five such governments: America, China, India, Japan and the 27-in-one European Union. Over the next decade each of these governments will realise that it can be a deal-breaker: if it tries to free-ride, the other four will refuse to step up to their responsibilities. These five will be the G5, the group that runs the world.

As Wolf acknowledges:

The whole point of the G20 is to allow the world’s most important leaders to have a proper discussion about the world’s most difficult problems. But with 29 people, plus support staff, in the conference room, it will be very difficult to break through the formalities. One diplomat involved in the planning for Pittsburgh points out that if everybody around the table insisted on making a three-minute opening statement, it would take an hour and a half before the discussion could even begin.

Marc Weisbrot has suggested that the move from the G8 to the G20 is not as significant as has been made out, since the G20 lacks any (formal) power of enforcement. For Weisbrot, the G20 issue distracts from the structural iniquities of power at the IMF, World Bank and WTO.

The G20 is not a permanent body, nor does it have a headquarters or secretariat. This might help it in terms of flexibility – in global governance, there’s actually something to be said for ad hoc decision making (what wonks call variable geometry – but it won’t do much for equality between rich and poor countries. There’s also a danger that as ‘the premier forum’, the G20 starts to feel entitled to make decisions affecting non-members without consultation. Before this becomes too gloomy, though, it’s worth saying that 20 voices are better than 8  in democratic terms, so at least this is a move in the right direction, more or less.

From the scene, Paul Mason wrote that ‘bit by bit the world is moving from an order based on treaty and formal sanction to one based on consensus, horse-trading and the diffusion of power’, adding that ‘here inside the Pittsburgh G20 Summit it feels like being there at the birth of a postmodernist medieval empire.’ Has Mason been reading Hedley Bull? Either way, I suspect he’s right.

A Tobin Tax isn’t the answer, but it might be an answer

Kindred Winecoff (IPE at UNC) responded on Monday to an op-ed by Dani Rodrik, which advocated the Tobin Tax once more. This was in turn a response to the comments made by Adair Turner in last month’s Prospect and briefly discussed here at Davos to Seattle. (See also comments by the German finance minister). Kindred was sceptical, stating that:

if the tax is successful in limiting cross-national transactions (“throwing some sand in the wheels of international finance”), then the revenue from the tax will be less significant. Only if large, frequent, cross-national flows persist will the revenue come in, and if that happens then the other goal of the Tobin tax (protection from “hot money” flows) will be betrayed.

This is fair enough as far as it goes, but I’d suggest that the second goal is more important than the first. Indeed, I’d always interpreted the first goal as simply the means to achieve the second goal, rather than an end in its own right.

Additionally, I’d question what’s meant by “large” in this context. Obviously the Tobin Tax would have a minimum threshold so that it didn’t apply to the average holidaymaker at the Bureau de Change. But the limiting of large cross-national flows needn’t necessarily mean the tax would be utterly ineffective, as it would still apply to plenty of smaller (though still large in comparison to holidaymakers’) commercial transactions. It could raise significant money from such exchanges, even if the biggest “hot money” flows were limited. There’s an ideal equilibrium point to be found.

The post at IPE at UNC also argues that:

Rodrik says that a small Tobin tax would raise “hundreds of billions” worldwide. Presumably these will used on all sorts of really great projects that everyone loves (he lists “foreign aid, vaccines, green technologies, you name it”). But the vast majority of these taxes will be recouped by the countries with the biggest financial sectors (who receive the most inflows): the U.S., U.K., Germany, Japan. In essence, then, we would be taxing investors from poorer countries in order to redistribute to citizens of richer countries.

I’m willing to be corrected, but my understanding had always been that the Tobin Tax would be raised nationally, but pooled, administered and (re)distributed at a global level and then spent on projects of “net global benefit”.

So while the Tobin Tax is certainly not ‘the answer’, it might well be an answer. At the least, it has the potential to become a progressive and effective tool in global economic governance. The strange thing is that however much it might irk the city and financial institutions, the Tobin Tax is an idea that never quite seems to go away. Its simplicity and elegance, together with the fact that it’s not a tax that (directly) impacts much on the ordinary citizen make it perennially popular. One gets the feeling that however much structural power is wielded by those who stand to lose by it, every idea that manages to be both good and popular at the same time will have its time come eventually.

Financial crisis, macro-adjustment and poverty workshop: a few thoughts

Yesterday I attended the ESRC World Economy & Finance Research Programme workshop on the financial crisis, macro-adjustment and poverty. This was the first time I’ve attended an academic conflagration of this kind and  I enjoyed it greatly, especially the free food.

The best thing about an event like this is the interdisciplinary nature of the discussion – the event was attended by economists, ‘politics people’ (as they called themselves), development professionals and lawyers. (For interdisciplinary, read political scientists scholars like myself laughing at economists with all their silly models…) It’s also a bit embarrassing to hear middle aged academics refer to ‘the poor people’. Something about that turn of phrase just makes me cringe.

I was particularly interested to hear from a member of IMF staff in attendance. I should make it very clear that he was speaking in a personal capacity and was not representing IMF views or policy. Once he got into algebraic equations I became a bit lost. I could understand what he was trying to do – to explain the rationale behind conditionality decisions – but surely this kind of methodology, which included an attempt to operationalise the degree to which governments care about the views of their citizens on a scale of one-to-ten is going to yield a  somewhat rigid and reductionist explanation (see comment above re. silly models). Over the course of the day I came to the opinion that the role of the politics department is to constantly remind the economics department than life just isn’t that simple. Of course, there’s a place for both approaches. However, when the speaker began to invoke pi I could no longer cope. How could pi possibly have a bearing on this? It’s beyond me. I’m trying to find out from a mathematician friend, who may be able to shed some light.

Another point that bothered me – and which I was going to chase up, but was beaten to it – was the suggestion that special interest groups ‘distort’ governments’ economic policies. This is a perfect example of what’s wrong with the IMF’s mindset – the assumption that there exists some kind of ideal, neutral, objectively correct policy positon, from which everything else is a deviation.

Anyway, despite calls – which even I considered somewhat alarming – for the nationalisation of the entire financial sector, I had a very informative and thought provoking day.

Liberté, égalité, fraternité… et moralité?

According to the FT a few days ago:

France is to step up efforts to instil moral values in the global market economy by urging policymakers to consider fresh ways of combating financial short-termism.

So far so unrealistic. Don’t get me wrong, I very much like the idea of a self-regulating, morally upstanding and responsible financial sector.

I am particularly enamoured of President Sarkozy’s call ‘for a capitalism for entrepreneurs rather than speculators’. The utopian side of me rejoices. But the sceptical-realist in me (which seems to be growing stonger by the day) laughs aloud. France is going to teach the world to forsake short-term thinking for profit? To quote Joe Strummer:

Greed… it ain’t going anywhere! They should have that on a big billboard across Times Square.

Actually, that might be an idea… They can get the Élysée Palace to fund it.

Beginning to sink in?

The Financial Times made me laugh this morning as it mourned the real impact of the financial crisis/recession with the following headline:

New Year honours short on bankers

The crisis in quotes (part one)

A couple of thoughts:

“Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich.”
– James Grant

“Economists are pessimists: they’ve predicted 8 of the last 3 depressions” — Barry Asmus

(HT: financial-crisis-blog.com)

Recession and the wisdom of crowds

The FT reports that ‘most Britons believe the recession will last for two years’ rather than the 12 months or so being predicted by the government and many experts. Could this be a case of the wisdom of crowds? Does the British hive mind know or feel something deep down that isn’t yet apparent to our leaders and industry’s professional analysts? I know who I’d rather trust.

Ecaudor defaults on international debt

Ecuador has defaulted on its debt. Interestingly, President Correa’s justification behind this wasn’t just that the debt was not longer manageable. He didn’t – as one might have expected – emphasise the fact that Ecuador has been forced to prioritise servicing its debt above suppling services for its own citizens. Correa’s argument was that the debt was simply ‘obviously immoral and illegitimate’. These are strong words and perhaps are indicative of a change in attitudes.  In bankruptcy law, there is an expectation that the lender has some obligation to lend responsibly. In this case, where once, such a default would have stood as a sign of a failing economy, it would appear that the government has realised that the financial community acknowledges that a lot of these debts were never realistically servicable. Of course, time will tell as to how the markets respond.

According to the FT, the loans are seen by Ecaudor as so illegitimate that it plans to take the case to court (though what court isn’t clear). The paper adds:

Mark Weisbrot, co-director of the Center for Economic and Policy Research, a Washington think tank, said Mr Correa may have judged the cost of default was acceptable.

“As far as you could see into the future they were going to keep on paying off debt, but they were never going to reach a situation where the country actually benefits from the foreign capital,” he said.

Perhaps the most important question is how many others will follow suit as the financial crisis takes its toll. As the FT reports:

Neil Watkins, executive director of Jubilee, an advocate of debt relief for poor nations, said Ecuador had faced “an impossible choice” between defaulting and losing credit or continuing to pay a debt it considered illegitimate at the expense of social spending.

It’s a common story. In many ways, it might be the smart thing to do for a lot of poorer countries and I would expect to see more of it, almost as a (somewhat desperate) rejection of the debt regime as a whole.

Expert financial crisis analysis from Bird and Fortune

Because these two always know what’s going on.

A black swan?

As the UK warns that the world is on the precipice of total financial collapse, it looks like IMF reform might be on the table for real this time. On the other hand, one of my tutors today predicted a whole new international banking regulation organisation would be created in the aftermath of the crisis.

Either way, the idea that what we’re seeing is a black swan event is very seductive. With that, I’m going to listen to Thom Yorke’s song of the same name.

Some tentative thoughts about the financial crisis

I have until now restrained myself from writing anything about the ‘global financial/economic turmoil/crisis/etc’. This is in good part because blog posts about the crisis have saturated the market. Also, I simply don’t know enough (though who does?).

Anyway, I have the following observations to make. Firstly, there seems to be a lot of anger at the greed of bankers and professional investors. And this is quite legitimate. But there should also be a focus on the greed of the rest of us. (I’m a student, so I’m going to claim that my debt doesn’t count.) But, as the FT’s Lex column says,

Bankers earned obscene and undeserved sums of money because they best exploited the excesses of a consumerist age. But they were no more self-serving than the armies of consultants, real estate agents or life-coaches feeding at the table of excess. It is easy to blame “spivs and speculators” for the world’s woes. If bankers catch it on Judgment Day, so will we all.

My second obersvation comes from neorealist hegemonic stability theory. The theory states that the existence of a hegemonic power (currently the United States) is necessary (though perhaps not sufficient) for the maintenance of a liberal international economic order. Many believe that the US’s time as hegemon is coming to a close and has been for several years now. Witness the rise of India and China as economic powers, for example. Hegemonic stability theory predicts that a period of hegemonic decline is concomittant with a higher risk of extended and severe financial crises, as the hegemon is unable and/or unwilling to take responsibility for crisis management, as it would have in the past. Witness the unwillingness of the House of Representatives to approve the TARP legislation. It is expected to be passed in some form tonight, but Congress’ reluctance the first time around is telling. I think this is in part because at some level American politicians and by implication their constituents are fed up of feeling that they are responsible for maintaining the system, especially as now the benefits of that leadership are seeming to be outweighed by the costs. The prevalence of this latter perception is taken to be both a cause and indicator of hegemonic decline.

See also: Jagdish Bhagwati and the selfish hegemon.

Gold rush 2008

Dag nabit! Apparently, gold bullion is now the investment vechicle du jour. Solid, physical gold bars are flying off the shelves (or however they store the stock at these places), as they are believed to be more secure than traditional banking as a means of saving.

This reminds me of the last days of the British Raj, when membership of the Indian National Congress became so fashionable that Congress membership receipts began to be circulated as currency. They were known as ‘Gandhi notes’ and were tied in with a mythical, forthcoming, ‘Gandhi Raj’. These notes undermined British rule, insofar as they created an alternative source of authority to the formally-constituted state.

Today’s gold rush (queues are forming) may be a completely different situation, but the lack of confidence in (or plain hatred of) the status quo (the British/bankers) is a common thread.

Of course, this isn’t the first time gold has been used in these circumstances. In times of turmoil, people have always fallen back on more tangible and stable forms of value. When the normal currency of exchange is undermined like this, you know something is wrong.

See also: Executive Order 6102.

Russia in Georgia: the economic consequences of war

Since Russia’s incursion/invasion in Georgia, foreign investors have been wary of the country. Indeed, according to the BBC, foreign reserves fell by £8.8 billion between 8 and 15 August. The Financial Times reports that Russian businesses are finding it increasingly difficult to access credit flows. One banker said that “the major Achilles heel of the Russian market is that there is very little domestic long-term capital.”

Does the threat of capital flight now have the potential to act as a force to discipline countries that fall out of line with international norms? Political condemnation of Russia’s actions has made investors see the country as a risk. Via the conduit of international capital markets, world opinion now has the ability to influence Russia through that Achilles’ heel. Could this be new globalised soft power at its best? It didn’t stop the Russians from moving into Georgia, yet one feels that something significant has occured. Above all else, markets abhor instability. This is the argument for the capacity of economic globalisation to ensure peace.

UPDATE: On the other hand, Mark Rice-Oxley looks at it this way. Anders Aslund at the Peterson Institute has this to say.