It seems nothing brings a group closer together than a financial meltdown. Systematically higher growth rates in emerging economies led to a decoupling of potential output, but the severity of the downturn reinforces the notion of cyclical coupling in the interconnected contemporary world. Looking at the debris is telling: the global economy is now at 2008 levels, some USD7.5 bn smaller than most had expected it would be at the start of 2008. Rightly, ideological debate and multilateral reform played second-fiddle during the past three years. The highly synchronised fall in income, employment, output and trade demanded all hands to be on deck.
Truthfully, the exorbitant number of multilateral meetings held since the collapse of Lehman Brothers has yielded very few tangible results. Even the change in emphasis away from the G8 to the G20 was unavoidable: global institutions hoping to retain any semblance of legitimacy in an era of multilateral stasis had to (and still have to) reform. The shift could prove meaningful but crucially depends on the organisations ability to transcend multilateral static and deliver genuine results. Yesterday’s institutions are struggling to address today’s challenges. And won’t manage to deal with tomorrow’s.
To be sure, the recession and recovery period has exaggerated the divergence in economic momentum between advanced and emerging markets. The shift in political influence away from western exclusivity towards a wider inclusive arc of nations (from the East and increasingly the South) has accelerated. Explicitly, the economic momentum of the emerging markets is explaining a proportionately larger share of global fluctuations.
As their economies limp sluggishly ahead, finance ministers from the advanced nations arrive in Seoul, South Korea, exhausted and deflated in equal measure. Enormous fiscal policies intent on generating large domestic multipliers have run aground. Without inventory restocking and stimulus support the artificial recovery has lost momentum. For many the exorbitant explosions in public debt levels are now under the microscope. Financial markets demand credible pathways, back to fiscal respectability. Importantly, the policy response has been varied: for instance, the UK front-loaded fiscal consolidation and the US has spent to mend. Meanwhile, the monetary responses to these largely shared problems have been distinct too. Granted, each major economy cut rates dramatically to divert apocalypse. However, the US Federal Reserve Bank’s USD600 bn tranche in quantitative easing contrasts with the approach of the Bank of England and European Central Bank, which kept rates unchanged in the first week of November. Moreover, commodity-rich nations such as Australia and Canada have already started tightening cycles.
Clearly, with the advanced economies are meaningful variations. Add to the pot, big and small emerging markets and the broader G20 group has rehabilitating structural variations. For instance, the US economy is larger than the combined economies of the non-G7 members; Australia’s income per capita outsize’s India’s by a factor of 50; large surpluses in commodity exporters, Russia and Saudi Arabia, and manufacturing exporters, China, Germany contrast with deficits in the US, UK, India and South Africa; China and India is called home for over two billion people, whereas, Saudi Arabia’s population is less than 30 mn. Finding a lowest common denominator will prove illusory. Worryingly, the new club members bring even more divergent realities, interests and constituencies, further diluting the possibility of galvanizing common cause.
Even though the direction is remarkably clear, the shape and end point of broader reforms are still hazy, muddied by the shipwrecked capitalist system’s flotsam and jetsam. And akin to punch drunk boxers, a number of advanced economies are holding, white-knuckled, to vestiges of power. Most are rightly preparing to be underwhelmed by the ambitions and achievements of the latest G20 meeting. Going further, the shift from the G8 to the G20 could very well turn out to be a false dawn. Rather than a new era of multilateral inclusivity, powers past could be trying to hold onto the distribution of power. Inevitably the G20’s powerlessness could become even more exaggerated. The problem, of course, in this twilight zone scenario is that it impregnates the atmosphere with a false harmony and expectation.
It will become increasingly apparent that navigating a course within this ever-changing environment is complicated. Already he has made clear his disapproval of the manner in which the US has unilaterally opted for a further bout of quantitative easing. South African exporters continue to suffer from an overpriced local currency. While a powerhouse on the African continent, South Africa’s proportionately moderate economic clout globally elevates the importance of multilateral institutions and dialogue platforms for the country to raise the timbre of its concerns. The G20 is, perhaps, the most important forum in this regard. At last year’s Copenhagen summit on climate change, South Africa formed a core component of the BASIC alliance which ultimately scuppered advanced world domination of the pivotal event’s outcome. While not all of Africa’s 53 states agree, South Africa is held by most as the representative of a continent which is bursting with economic potential and incumbent strategic influence.