Page 2 of 3 World leaders miss the target
By Henry C K Liu
to US-led, one-size-fits-all globalization. This view was prescient in view of
the globalized market conditions that led to the current financial crisis and
is at variance with that put forth in the 2009 London G-20 summit.
Market fundamentalism helps no economy. It helps only selected segments in
economies that subscribe to it. Since the segment most helped by market economy
is in political control of the US polity, market fundamentalism is billed as
being the appropriate doctrine for the US and hence the world as well. Dollar
hegemony is also detrimental to the US economy, as it is only good for the
global dollar economy of which the US economy is but one component, albeit a
key major one.
Through globalization and the growth of euro-dollars (the name given to all
offshore dollars everywhere and has no direct relation to the euro or the
European Union), the dollar economy is
increasingly detached from the US economy. What is good for the dollar economy
is not necessarily good for the US economy. Economic nationalists in the US are
beginning to understand the threat of dollar hegemony to the US economy itself.
While publicly avoiding the divisive issue of whether to push for more
government fiscal stimulus to their politically separate but financially
interdependent economies, the G-20 leaders reached general consensus on
regulatory reform to rein in systemic and institutional excesses in
risk-infested financial acrobatics that had led to the worst crisis in
financial markets in a century.
The summit pledged US$1.1 trillion in emergency aid to soften the adverse
economic consequences without addressing the real target of needed reform,
which is to correct the predatory terms of trade based on currency hegemony.
While $1 trillion is no small sum, it amounted to a band-aid cure to a massive
hemorrhage.
Washington Consensus dead but not buried
The London Consensus appears to have abandoned the Washington Consensus, a term
coined in 1990 by John Williamson of the Institute for International Economics
to summarize the synchronized ideology of Washington-based establishment
neo-liberal economists which reverberated around the world for a quarter of a
century as the true gospel of reform indispensable for achieving growth in a
globalized market economy. Economic neo-liberalism has turned most
trade-dependent nations into failed states. (See
World Order, Failed States and Terrorism - PART 1: The failed-state cancer,
Asia Times Online, February 3, 2005.)
Initially applied to Latin America and eventually to all developing economies,
the term has come to be synonymous with globalized neo-liberalism or market
fundamentalism to describe universal policy prescriptions based on free-market
principles and monetary discipline within narrow ideological limits. It
promotes macroeconomic control, trade openness, pro-market microeconomic
measures, privatization and deregulation in support of a dogmatic ideological
faith in the market's ability to solve all socio-economic problems more
efficiently, and to assert a blanket denial of an obvious contradiction between
market efficiency and poverty eradication.
Financial capital growth is to be achieved at the expense of human capital
growth. Sound money, undiluted by inflation, imposed on all by the US - which
ironically is the most flagrant violator of the sound money principle - is to
be maintained by keeping wages low through structural unemployment and
cross-border wage arbitrage. Pockets of poverty in the periphery are the
necessary price for prosperous centers in the global economy.
Such dogmas grant unemployment and poverty, conditions of economic disaster,
undeserved conceptual respectability. Structural unemployment then becomes the
vaccine against massive unemployment. Pockets of poverty become the venue to
contain the spread of poverty. State intervention has come to focus mainly on
reducing the market power of labor in favor of capital in a blatantly predatory
market mechanism.
The set of policy reforms prescribed by the Washington Consensus is composed of
10 propositions: 1. Fiscal discipline;
2. Redirection of public-expenditure priorities toward fields offering
high economic returns;
3. Tax reform to lower marginal rates and broaden the tax base;
4. Interest-rate liberalization;
5. Competitive exchange rates;
6. Trade liberalization;
7. Liberalization of foreign direct investment (FDI) inflows; 8. Privatization;
9. Deregulation, and
10. Secure private-property rights. These propositions landed the world
economy in recurring crises every decade, each bigger than the previous one,
until the current crisis, which is now described as the crisis of a century.
Of these 10 propositions of the Washington Consensus, the G-20 policymakers
selectively called only for re-regulation and reform on uniform global
standards on accounting, credit-rating and risk-management for banks, non-bank
financial firms and hedge funds to prevent runaway systemic risk generated by
aggregate externalization of unit risk. They left the more fundamental
problematic propositions such as privatization, trade liberalization and FDI
liberalization untouched.
The G-20 summit strengthened the International Monetary Fund rather than reform
the body. The gathering tripled the financial resources of the IMF and offered
less-punitive cash loans to revive stalled trade to help affected governments,
particularly those of poor countries, weather the effects of national
insolvency such as surging unemployment and drastic cuts in social safety net
budgets. All these measures of reform around the edges of the problem no doubt
are needed, but their impact will be meaningless without a fundamental
restructuring of the international financial architecture built on currency
hegemony.
China calls for new international financial architecture
Zhou Xiaochuan, governor of the People's Bank of China, the central bank,
raised the pertinent question:
The outbreak of the current crisis and
its spillover in the world have confronted us with a long-existing but still
unanswered question, ie, what kind of international reserve currency do we need
to secure global financial stability and facilitate world economic growth,
which was one of the purposes for establishing the IMF?
The
discussion on China's proposal to create a new international currency based on
IMF special drawing rights (SDRs) to replace the dollar was not on the summit
agenda. But "discussions on this subject in a bilateral format" took place
between China and Russia.
Instead of dealing with the pertinent question, the G-20 summit merely
increased the resources of the IMF by $500 billion, plus a new SDR allocation
to be shared among its 185 members, 60% of which going to industrialized
countries that do not need it, and $100 billion in increased lending by
multilateral development banks. In addition, there was a $250 billion increase
in trade credits to finance cross-border trade that has declined roughly 10% as
a result of the credit crisis and the economic downturn. An additional $6
billion to boost lending to the poorest countries makes the total of $1.1
trillion to deal with the financial crisis.
The US, still the world largest economy by far, has said it will contribute
$100 billion, pending Congressional approval. Japan and the European Union each
pledged $100 billion. China is expected to contribute $40 billion, an excessive
allocation if per capita GDP, rather than total GDP or foreign reserves, is
used as a basis for allocation.
The official statement issued at the end of the G-20 summit reads like an
attempt to write new regulatory rules on free-market fundamentalism to save
capitalism from self-destruction in a financially integrated world economy that
has outgrown the ability of sovereign nations to keep it from structural
implosion.
EU demand for global regulation rejected by US
But a European demand for sweeping global regulation of financial markets was
rejected by the US. While G-20 leaders agreed to create a new Financial
Stability Board to monitor the global financial system for signs of risks, they
stopped well short of giving regulators cross-border authority as proposed by
France. Instead, G-20 leaders agreed only to more closely coordinate their
regulation of "systemically important" financial institutions. They failed to
endorse a proposed mechanism to resolve cross-border disputes that can be
expected to arise in the continuing winding down of liabilities of insolvent
banks.
Instead of addressing the problem of toxic asset held by banks, G-20 leaders
settled on an esoteric change in US accounting regulations that allows banks to
defer write-downs in the value of their most troubled toxic assets to mask
insolvency. "Regulation is still sovereign," declared US Treasury Secretary Tim
Geithner.
Comparing 2009 to 1933
Comparison has been made of this latest G-20 summit with the June 1933 London
Monetary and Economic Conference. Delegates from 66 countries then gathered in
London to try to agree on plans to revive the world economy in the midst of the
Great Depression. Organized by the League of Nations, the G-66 conference aimed
at reviving stalled global trade and at stabilizing commodity prices by
restoring the gold standard. The 1933 G-66 conference took place in the grand
Geological Museum in London, a testament to the solid value of gold, in
contrast to the warehouse-style conference center at London's Docklands as the
venue for the 2009 G-20 summit, evidence of the need of political leaders for
protection from anti-trade, anti-globalization protests from an angry,
victimized people.
Hosted by UK prime minister Ramsay MacDonald, the G-66 London conference was
attended by eight prime ministers, 20 foreign ministers, 80 finance ministers
and central bankers, and two heads of minor states - King Faisal of Iraq and
Swiss President Edmund Schulthess. The 2009 London summit was attended by
leaders of all G-20 member states.
Within a month, the 1933 conference had collapsed, torpedoed by the opposition
of the new US president, Franklin D Roosevelt, to any agreements that would
restrict his freedom to act boldly to revive the US economy as part of the New
Deal, essentially a domestic program.
Historians have since suggested that the collapse of the 1933 London conference
engendered grave political consequences from economic ramifications. France and
Britain concluded that US domestic politics was beset with isolationism and
thus Washington was an unreliable ally for dealing with international problems.
Germany's new chancellor, Adolf Hitler, was forced by Anglo-Franco policy to
seek a solution from economic autarchy, the success of which enabled rearmament
to wash away the national shame of defeat. Protectionist trade barriers of
goods were made more destructive by competitive devaluation of currencies.
Rising unemployment in market economies contributed to socio-political
instability across Europe that eventually led to war.
The 2009 G-20 London summit is no doubt mindful of the lesson of the 1933 G-66
London conference. Participants leaned over backwards to project an image of
cooperative consensus. Whether such a happy image bears any resemblance to
unfolding economic reality is another question.
Despite the symbolic absence of Roosevelt, who purposefully went sailing, the
US played a key role in the 1933 conference, just as it did at the 2009 G-20
summit. In both gatherings, the US, despite being the most severely affected
economy, was the most powerful participant. In both gatherings, the US was led
by a new president. Unlike FDR, Barack Obama appeared eager to go to London
more to use the occasion to demonstrate his hitherto untested diplomatic skill
by meeting publicly with key leaders of major countries than to demonstrate any
greater hope for international cooperation than did Roosevelt.
As president-elect during the first G-20 summit in Washington DC in November
2008, hosted by lame-duck president George W Bush, Obama said: "As this is a
global economic crisis, a coordinated global response is needed. And yet as we
act in council with other nations, we must act immediately here at home to
address America's own crisis." In March 1933, FDR said in his inaugural
address: "I shall spare no effort to restore world trade by international
economic readjustment, but the emergency at home cannot wait on that
accomplishment."
While Roosevelt appointed secretary of state Cordell Hull, a strong advocate of
free trade, to lead the US delegation, watched over by Raymond Moley, trusted
personal representative, the then new president hedged his bets by letting
private US bankers, led by internationalist James Warburg, to begin secret
negotiations on currency stabilization with European central bankers led by
Montagu Norman, the governor of the Bank of England. Hamburg-born Warburg
famously told the senate committee on foreign
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