SPEAKING FREELY An imbalanced summit By Oscar Ugarteche
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A group of seven highly indebted rich countries (HIRC) of the world have
organized a meeting of 20 nations in London next month to discuss the future of
the world's finances. They have called to the table some creditor developing
countries, such as Brazil, Argentina, Mexico, some Arab countries, China and
India, but have left aside all the world's other surplus countries, creditors
to the US and Europe.
After all, the accumulation of export surpluses over a 20-year period is what
has allowed deficit countries to overborrow to the
tune of about 200% of average gross domestic product, and growing fast. For
good measure, British Prime Minister Gordon Brown, feeling a bit weak, invited
two more European nations into the talks.
A few things come to mind. First, "He who pays the piper calls the tune"; and
certainly now those who pay the piper are from outside Europe and the US.
Secondly, the world order we have known since 1944 and the institution of the
Bretton Woods financial framework have finished and the new world order will
have to take a new Group of Seven into account.
This means China, India, Brazil and Russia are in and some European countries
are out. Whatever discussions are held by the 20 countries plus 2 (the European
Union also has its say) will be irrelevant, as this needs to be a global
discussion, given who the new creditors and debtors are.
Third, the significant new role of Asia as a whole in both international trade
and international finance calls for a reconsideration of the International
Monetary Fund/World Bank Board reflecting this major change and diminishing the
European and US role.
Fourth, this leads to the elimination of US veto power in these institutions
established in 1944 and of the mechanism by which each institution has a
director from Europe and the United States, respectively. This is hardly
relevant these days, aside from being undemocratic, opaque and does not reflect
current economic and financial realities.
Finally, a system where economic policy leads to massive surpluses that help
finance massive deficits created by the model itself cannot work forever, as
this crisis has come to show.
What has emerged is a group of leading nations that are now the major world
debtors. These are highly indebted rich countries that have sustained trade and
fiscal deficits for more than a decade and have accumulated major debts,
thereby draining credits to developing nations.
These are countries that have over-consumed systematically and in some cases
have done so with very lax domestic credit policy. The argument was that the
consumer in the West was better off with cheaply manufactured goods from Asia,
Central America and Africa. The fact that no nation can borrow indefinitely for
consumption did not come to mind.
Initially surplus countries bought US Treasury bills and kept their reserves
partly in those instruments; then this was extended to British and European
government bonds. It was not clear that buying government bonds in large
quantities was going to lead to overborrowing on the other side. The
table shows the picture of the present Group of Seven countries (the
US, Japan, Germany, the UK, France, Italy and Canada), which hold roughly one
third the reserves of the new leading emerging nations.
If Japan is removed, the group of leading nations holds one sixth the reserves
of the seven largest emerging nations, most of which are in Asia. The external
debtor position, both private and public in other currencies, is very high for
the UK, France and Germany, in the 150%-450% of GDP range, followed by the US,
which is in the 90-100% of GDP range.
Public debt, in local currency, is highest for Japan, Italy and the US. The
very high level of Japan's public debt - at about 170% of GDP - is a result of
the banking crisis of the 1990s. Taken together, the sum is in the range of
over 200%. The growth perspectives of those countries is negative for all.
Is it reasonable for lenders to continue lending to contracting economies? What
happens to debt payments when the economies that have overborrowed stop
growing? Will they enter a depressive cycle because they have to adjust
consumption downward in order to live within their means? Is it reasonable or
fair that developing nations finance rich nations openly?
The role of the IMF was to be a watchdog for all countries and to be a
whistleblower. It was designed to this end, but it lost its track and ended up
looking at emerging nations instead of looking at its constituency. The
Financial Stability Reports (FSR) are a case in point.
The present financial crisis began to unfold after October 2007 in the US, but
the FSR looked elsewhere. The first support programs between the US Federal
Reserve and the European Central Bank happened in late 2007 and the IMF kept
very silent. It did not blow the whistle and hence did nothing to prevent the
crisis from unfolding.
True, it no longer has the capacity to do so, as the value of derivatives is
now 12 times the world GDP. No one can prevent a major crisis unless we all
agree to new rules that forbid some financial instruments from being used and
that returns reserves to banks and foregoes hedging risk.
In this context, then, faced with Asia's major leading role in the
international finance and a new enhanced role for Latin America and the Middle
East, Russia and its neighbors in world financial and economic affairs, it
seems odd that Brown wants to lead the discussions on the changes. Debtors are
in no position to set the rules of the game, as debtor nations learnt in the
1980s.
It may well be that the export-led model needs to be buried and a new model put
forward at the same time that we end floating currency exchange rates. We went
through this same problem in the 1930s and agreed then to have fixed exchange
rates and industrialization policies together with welfare policies. This was
the background to the Bretton Woods system. This had both a fiscal and external
angle supervised by the then newly created IMF. It seems these days the IMF
does not look into HIRC accounts, or does not care about them, or HIRC don't
care much about IMF opinion.
All of this must come to an end and be addressed by all UN member countries, as
no country should be outside the scope of international supervision and no new
lending should go to shrinking overborrowed economies, however developed they
may be, unless they reorganize their economies and bring financial order to
their nations. At the World Social Forum in Belem do Para this January, we
agreed that this means much more than changing IMF governance. A new world
order is possible.
Dr Oscar Ugarteche, a Peruvian national, is a senior research fellow at
the Instituto de Investigaciones Economicas, UNAM, Mexico; a member of the
Mexican Research System; and president of ALAI, the Latin American Information
Agency based in Quito. His Genealogy of the International Financial
Architecture 1850-2000, is to be published in Mexico next year. Dr Ogarteche
last year cosponsored with Yoko Kitazawa from Pacific Asia Resource Center,
Tokyo, and Paul Dembinsky, Observatoire de la Finance, Geneva, the conference
"Beyond Bretton Woods. The transnational economy in search of new institutions"
in Mexico City.
(Copyright 2009 Oscar Ugarteche.)
Speaking Freely is an Asia Times Online feature that allows guest writers to have
their say. Please
click here if you are interested in contributing.
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