Getting China to Play Ball on Balanced Growth and More from the G-20

Writing in the Financial Times about the four things that stood out to him about the G-20 Summit, Philip Stephens points first to "China’s, albeit reluctant, embrace of multilateralism:"

Beijing is at last owning up to the fact that it is a leading actor on the global stage. A year or so ago, China was still clinging on to an essentially passive role in international affairs. Western injunctions for it to act as a responsible stakeholder in the multilateral system were met with protestations that such demands were premature: China was still a developing country, and it prized non-interference above western concepts of mutual dependence.

The global economic crisis upended that strategy by showing that Beijing cannot detach its domestic from its international interests. True, China has had a good crisis, demonstrating that it can continue to grow while the west is in recession. But the collapse of its exports has served as a potent reminder of the inextricable ties woven by globalisation.

This interdependence is taken for granted in western capitals. For Beijing it carries the uncomfortable implication that states have a legitimate interest in the framing of others' domestic policies.

This interdependence led to, as Stephens points out, China's headline grabbing climate change announcement, an important marker on the road to Copenhagen. Frankly though, that work by China, in the interplay between domestic and international politics, was a fairly easy calculation. China has already made a strategic decision to develop a home-grown renewable energy industry, this was a logical move.

Rather, the heavy lift for China will come in the commitment to balanced growth from the G-20. China’s consumers are notoriously reticent to, well, consume. And it's virtually entirely due to policy. As Michael Pettis, a professor at Peking University, writes in the New York Times:

The Chinese save such a high fraction of their income largely because of long-standing policies aimed at promoting and subsidizing domestic investment and manufacturing.

These policies inevitably require households to foot the bill, primarily through sluggish wage growth, low interest rates on their bank deposits, an undervalued currency and a weak social safety net. Since total savings is just the difference between what is produced and what is consumed, subsidizing producers at the expense of household consumers necessarily causes savings to rise.

Since, as NDN's Rob Shapiro writes, there is little chance of the U.S. bailing the world out of the great recession, there is, as Pettis says, a scary possible outcome to rebalancing:

As the U.S. rebalances its economy toward higher savings rates, China has no choice but to rebalance toward higher consumption rates. This can happen either because of a sharp pick-up in consumption growth or, more likely, a sharp slowdown in GDP growth. I worry that China will find it difficult to generate the kind of consumption growth that will take up some of the American slack, and we may be locked into a period during which the world adjusts by growing more slowly.

This G-20 seems to have been more successful than many would have thought, but the real crux of the global economic recovery may lie in getting the world's rising powers to connect their people to the global marketplace. As China adjusts to the responsibilities that come with others having a stake in their domestic economic policies, it will inevitably do what everyone else does: balance that responsibility with domestic politics. (Perhaps Chinese leadership will see fit to develop a social safety net in the form of universal healthcare; all the socialists are doing it these days.)

More from the G-20:

20 heads are better than 7 – NYT: Global Economic Forum to Expand Permanently

FT: World Leaders to Expand G20 Powers:

Rich countries will agree to give up 5 per cent of the total voting shares to be distributed to under-represented countries, including rapidly growing emerging economies such as China. The aim is to increase the legitimacy of these institutions. The leaders have agreed to put aside disagreements over the representation in the governing bodies of these institutions.

Lula – Rising powers doing their part (let them do more by concluding Doha):

Policies adopted by countries in the Global South have created tens of millions of new consumers, who will drive the recovery of the global economy.

WSJ Environmental Capital blog - Fossil-fuel subsidies to be phased out in the "medium run."

Developing countries—many of the same ones that are demanding that rich countries underwrite their transition to a clean-energy economy—spent $310 billion in 2007 to subsidize fossil-fuel consumption, the International Energy Agency says.

Stop spending so much to keep gasoline, diesel, and electricity artificially cheap, in other words, and you’ll have the cash to promote clean energy at home.

Message to World at the G-20 Summit: Don’t Depend on a Strong U.S. Recovery to Bail You Out

This week's U.N. General Assembly and the countless, private discussions between presidents, premiers and prime ministers will range from climate change to terrorism, but most of the leaders are more preoccupied with the outlook for their economies.  In this sense, the UN meeting is an opening act for the main attraction, the G-20 summit in Pittsburgh at the end of the week.  There, the leaders will focus on new regulation for global capital flows and the institutions behind them, with some good doses of finger-pointing at the United States.  (Christina Kirchner of Argentina, the world's largest debt defaulter, couldn't wait: She led yesterday with America-bashing at the UN.)   But the blame game is really a plea that the United States help pull the rest of the world out of its ditch. 

America, with 23.5 percent of worldwide GDP - Japan is second at 8.1 percent, followed by China with 7.3 percent - is the only country with the economic heft to move other nations.   Much of our impact comes from our annual imports of $2.5 trillion, which help keep employment up in most other large economies.  If we could get our imports growing strongly again, the world's finger-pointing would turn into high-fives.  But that depends on reviving American consumption and investment, and the outlook for that is mixed at best. 

Washington's optimists point to recent gains in a number of important indicators - but look closely, and they're less encouraging.  Retail sales in August were up 2.7 percent over July, for example.  But that's 5.3 percent below levels a year earlier, when things already were pretty grim.  It's the same story with other measures.  Housing starts were up 1.5 percent in August, but down 29.6 percent from a year earlier; and industrial production was up 0.8 percent, to a level still nearly 11 percent below August 2008.  These are the numbers that led Ben Bernanke and Janet Yellen to caution that while the recession may be technically over, hard times could be with us for another year or longer.

The bottom line for most Americans is that the steep decline in the value of their investments and homes is driving them to cut back their spending and restore some savings.  Mostly, they're paring down the record credit card debt they ran up during both the first stage of the recession and an expansion before it which didn't produce income gains.  This spending slowdown is unlikely to change soon.   And as we have argued here for more than a year, jobs will probably continue to contract for two or three years after this recession ends, just as they did after the 1990-1991 and 2001 downturns.  It's hardly a recipe for a recovery strong enough to lift U.S. incomes or the prospects of other economies.

Nor can we expect help from other countries boosting our exports.  Of our five largest foreign markets, U.S. imports are still falling in three of them (Canada, China, and the UK); and American imports in all five (Mexico and Japan, plus the other three) are still running 17 percent to 27 percent below their levels a year earlier. 

What if the modest pick-up we're seeing now only reflects the President's stimulus package finally kicking in?  Republicans had some cynical fun a few months ago charging that the stimulus had failed, since everything was still headed down.  Now, it's the Democrats' turn, as its effects increase over the next several months.  The hard question is whether the economy will keep growing once the stimulus runs out.  The administration's economic strategy depends on the stimulus triggering self-sustaining growth - by creating jobs, which boost spending and then, in turn, lead to more jobs, more demand, and finally more investment.   That's also the basis of their financial strategy, hoping that expanding growth will bring down foreclosures and bankruptcies, easing the pressures on banks so they can lend more.

Their economic logic is perfectly reasonable; but it may be a long shot in the world where we now find ourselves.  And it certainly doesn't take account of the possibility of yet another nasty shock to the economy.  The most likely candidate is an implosion of securities based on commercial real estate.  Price movements in commercial estate have been running 12 to 16 months behind those in residential housing.  So, they remained strong for more than a year after the housing bubble began to deflate - and then began to fall sharply in the last six months.  Now, more and more commercial developers can't keep their properties sufficiently occupied to service the loans they took out to build them.  As they default, the securities and derivatives based on those loans also go bad.   It could be another very nasty hit, with most of the impact falling on the regional and local banks across the country that made the loans.  That's why we're already seeing a sharp rise in bank failures.

The good news is that the Fed and the Treasury have more advance notice this time, and they have a better idea of what works and what doesn't.  The bad news is that at after what we've already been through, Washington couldn't borrow the money required to manage the failures of large numbers of big commercial banks, with all of the fallout, without risking the credit of the United States. 

There's a good chance we'll dodge that particular bullet.  But even if we do, the prospects for a strong U.S. recovery are slim, especially one strong enough to help the rest of the world.  And that will be the biggest, unspoken disappointment at this week's G-20 meetings.

Obama's Weekly Address Focuses on Global Cooperation

President Barack Obama, aboard Air Force One, speaks this week on the need for global cooperation and explains his overseas trip to the American people. He begins with the now-familiar, but still excellent refrain on global interconnectivity.

In this new century, we live in a world that has grown smaller and more interconnected than at any time in history. Threats to our nation’s security and economy can no longer be kept at bay by oceans or by borders drawn on maps. The terrorists who struck our country on 9/11 plotted in Hamburg, trained in Kandahar and Karachi, and threaten countries across the globe. Cars in Boston and Beijing are melting ice caps in the Arctic that disrupt weather patterns everywhere. The theft of nuclear material from the former Soviet Union could lead to the extermination of any city on earth. And reckless speculation by bankers in New York and London has fueled a global recession that is inflicting pain on workers and families around the world and across America.

The challenges of our time threaten the peace and prosperity of every single nation, and no one nation can meet them alone. That is why it is sometimes necessary for a President to travel abroad in order to protect and strengthen our nation here at home. That is what I have done this week.

Take a look at the whole address:

Also, Obama's town hall in Strasbourg yesterday, following a surprisingly successful G-20 summit, was pretty amazing, both in itself and its symbolism of a new era of American leadership. His tone and policy prescriptions are right on the mark. Read Simon's blog about it and the politics of bottom-up going global.

Shapiro Speaks on G-20, Need for Global Economic Action

NDN’s Globalization Initiative yesterday hosted "The G-20 and Beyond: Challenges Facing the Global Economy." The event featured U.S. Rep. Adam Smith, Foreign Policy magazine Editor-in-Chief Dr. Moisés Naím, and NDN Globalization Initiative Chair Dr. Robert Shapiro. Shapiro delivered wide-ranging comments on the global Great Recession, its causes, and the global leadership necessary to combat it:

ShapiroThe world’s political leadership meets today under very unusual circumstances.  Summits of this kind generally involve the ratification of understandings or agreements worked out in some detail long before the leaders meet in the public spotlight.  This time, they convene in the midst of the worst global economic crisis in 80 years.  Not only have they not yet agreed to a set of responses; they and their advisors haven’t come to a common view of what the problem is.  Instead, much of the value of this meeting will come from President Obama, Prime Minister Brown, President Sarkozy, President Medvedev, Chancellor Merkel, and President Hu listening to each other.  They can learn how each of them sees the crisis affecting their own countries, what they understand as its causes, who or what they blame, and what they’re prepared to do.   Last weekend, German officials leaked a communiqué drafted by Gordon Brown calling for coordinated stimulus – leaked it in order to knock it off the table.  Thus far, the United States, China, and Spain are the only nations that have initiated significant stimulus, in part because other major industrial countries have such extended safety nets that there’s less political pressure to stimulate. But as global demand sinks, global stimulus is called for. Even so, it’s clear that the summit is unlikely to produce a coordinated response in this area.   

This is a real loss, because the crisis demonstrates the extraordinary degree to which globalization integrates the economic trajectories and fates of the world’s majorNaim economies.  Part of this reflects the most highly-globalized sector of all, finance, where the products created in New York – mortgage-backed securities and credit default swaps, for example – are traded furiously around the world.  It may be that the European banking system incurs as much damage as our own.  At a minimum, the steps we’ve taken to bail out our own large banking institutions have been taken, in part, to protect the major institutions of our allies.  This was particularly clear in the early takeover of Fannie Mae and Freddie Mac, after the Chinese and European governments informed the Bush Administration that their own central banks held large quantities of Fannie and Freddie paper.   

This deep integration is not limited to finance.  Under globalization, the share of everything produced in the world that’s traded across borders jumped from 18 percent in 1990 to 30 percent in 2007.  The result is that a severe economic shock like the one shaking the world today can produce the mainSmith result of protectionism – a sharp drop in global trade – without any new protectionist laws.  Compared to the year before, exports in January of this year were down over 20 percent here, down about 30 percent in Germany, France, Mexico and Britain, down 30 to 40 percent in Korea, Italy, Canada, Japan, Argentina and – here’s the big one – China, and down by more than 40 percent in Russia.  And one early result is rising unemployment in virtually every nation.

So, the world finds itself in not only a systemic crisis, but a cascading one as well:  That is, a systemic crisis that becomes more and more serious through feedback effects, and a cascading one that also spreads across sectors and countries.

Full remarks here.

Obama Advisor Previews G-20 Summit

With the G-20 Summit approaching tomorrow, Obama Deputy National Security Advisor Mike Froman spoke about the high stakes at the upcoming meeting.

It's no surprise to anybody that we're gathering the G20 at a time of the most severe economic and financial crisis in generations.  These 20-plus countries represent about 85 percent of the global economy and they come together at a time when incomes are falling, unemployment is on the rise, trade has collapsed and financial markets are strained in all of their countries.

To put this a bit in historical context, international cooperation at times of crises is very important.  Most people agree that the Depression was made great by the lack of cooperation, that the Latin American debt crisis of the '80s lasted a decade in part because there was difficulty in formulating a common approach.  But historically, it's proven difficult to cooperate around international crises because nations controlled their own fiscal policies, their monetary policies were dependent on independent central banks, and their regulatory policies were shaped by their own culture and national traditions.  And if you look back at the history of summits, there have been very few examples of summits that have achieved significant gains in terms of international cooperation during times of crisis.

This has become all the most important now because of the interconnectedness of the economy now, of markets now, and of this crisis -- in particular, financial problems in one country spread quickly to others, and exports to all countries are dependent on the ability of demand in each country to rebound. 

There was a global economic summit here in London in 1933.  The U.S. President did not attend and the summit failed to provide what at the time was seen as good direction to try and get out of the Depression at the time. 

The stakes for this summit are very high.  They are magnified by the fact that much has happened since the last G20 summit in November.  The last summit focused largely -- and importantly -- on a number of regulatory issues.  But the economy has declined in November and December, the crisis has spread, and the countries of the G20 have been focused on restoring demand and restoring growth.

And that really is the agenda here.  It's really two tracks: restoring growth, on one hand, and engaging in broad and deep regulatory and institutional reform on the other.

More on the talk here.

And if you're interested in the G-20 Summit, come to NDN's event tomorrow at noon, "The G-20 and Beyond: Challenges Facing the Global Economy." U.S. Rep. Adam Smith, Foreign Policy Editor Moises Naim, and NDN Globalization Initiative Chair Dr. Robert Shapiro will preview the summit and discuss the difficult challenges facing the global economy. Click here to RSVP.

Rep. Adam Smith to Join Naím, Shapiro Wednesday at "The G-20 Summit and Beyond: Challenges Facing the Global Economy"

NDN is pleased to announce that U.S. Rep. Adam Smith will be speaking at "The G-20 Summit and Beyond: Challenges Facing the Global Economy" this Wednesday, April 1 at NDN. Smith sits on the House Armed Services Committee and the House Intelligence Committee, chairs the New Democrat Coalition Trade Task Force, and is a leading voice in Congress on international economic policy.

More on the event:

Amidst a Great Recession that has deepened and spread since the G-20 last met in November here in Washington, the leaders of the G-20 nations are now preparing for their April 2 summit in London. The stakes include growing threats of protectionism, resistance by many governments to stimulate their economies, the pitfalls in trying to unravel trillions of dollars in bad assets, prospects of political instability created by the deep downturn as well as the future of the international economic institutions.

With many calling for unprecedented global cooperation to address both the crisis and other, longer-term challenges such as climate change, the G-20 leaders face a very difficult and crowded agenda.

Please join the NDN Globalization Initiative on April 1, the day before the talks in London, for a preview of the G-20 summit and the challenges that world leaders will need to tackle during this Great Recession. This event, to be held at NDN’s offices -- just one block from the White House -- will feature U.S. Rep. Adam Smith, NDN Globalization Initiative Chair Dr. Robert Shapiro and Dr. Moisés Naím, the Editor-in-Chief of Foreign Policy magazine. NDN President Simon Rosenberg will moderate the discussion.

The event, which will be held at NDN, 729 15th St., NW, 1st FL, will start at 12 p.m., with lunch beginning at 11:30 a.m.

The G-20 forum also will be Web cast live at http://www.ndnblog.org/livecast starting at 12:15 p.m. ET.

To RSVP, please click here.

We're looking forward to seeing you on April 1 at NDN or via live Web cast.

NDN Backgrounder: Looking Ahead to the G-20, the Long Road Back, Fixing Finance

Today, as Republicans release a manifesto labeled as an alternative budget and President Obama meets with CEOs of major banks, we're pleased to present you with some helpful thinking on these issues.

First, though, I'd like to draw your attention to an April 1 NDN event: The G-20 Summit and Beyond: Challenges Facing The Global Economy. This event, to be held at NDN and hosted by NDN President Simon Rosenberg, will feature NDN Globalization Initiative Chair Dr. Robert Shapiro and Dr. Moisés Naím, the Editor-in-Chief of Foreign Policy magazine. Click here to RSVP.

  • Hope and Optimisim II by Michael Moynihan, 3/16/2009 - Moynihan looks at some recent developments in the financial world and sees cause for cautious optimism. 
  • A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.
  • Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.
  • Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.

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