The communiqué for the Group of Twenty (G20) meeting in Pittsburgh said that
it would become the forum for global economic management. The old Group of
Eight (G8), comprising the main developed nations plus Russia, is being
superseded by a body representing a much wider group of countries, including
the emerging giants, China, India and Brazil, and key regional players such
as Indonesia, Saudi Arabia and South Africa.
For those who have been banging on about the transfer of economic power from
the old world to the new, from the G7 to the Bric countries, this is
tremendously encouraging. The point about effective international gatherings
is that the political forum must reflect economic reality. Either this year
or next, China will pass Japan to become the world’s second-largest economy.
It would be absurd not to include it, and the other key emerging nations, in
global economic management. The G20 covers some 85 per cent of the world
economy. Now I appreciate that the remaining 15 per cent matters too, but in
simple power terms if the 85 per cent can agree of broad strategies the rest
will benefit hugely.
Having said that, we should all be aware of the limits of top-down economic
management. It would be great if we understood how growth might be best
sustained in the long term, sustained being the key word, because if growth
is not environmentally and socially sustainable, then the entire goal of
growth becomes questionable. But even with perfect 20-20 foresight, we don’t
have a clear enough model of the world economy to be able to frame optimal
policies. It seems to me that the function of the G20 will be the apparently
modest, but actually vital, one of helping countries to avoid serious
What the G20 will do, however, is to reflect the views of the emerging world
more strongly, which is something we in the West will have to get used to
over the next generation. Even those of us who accept this intellectually
will find it hard to appreciate quite what it will mean in practice. Let me
give you three examples.
First, take the relatively narrow issue of consumer standards. Europe and
North America set them and the rest of the world has to follow, right? In
the past, that has certainly been the case for the simple reason that a
global manufacturer of say, cars, has be able to sell them in the two
biggest markets, the US and the EU. But this year, for the first time, China
has become a larger market for cars than the US. The recession has speeded
the shift. Consumption in the developed world has slumped, while that of the
emerging world has continued to rise, with only a slight check to growth. As
the pattern of consumption shifts, the tastes and aspirations of these new
consumers will start to dominate and global standards must take that into
account. It won’t happen suddenly, but over a period of years we will be
nudged towards the standards set by Asia, not by Europe or the US.
Now take the somewhat wider matter of national taxation. Countries set their
own tax levels and are naturally upset when their citizens find ways of
avoiding them. Thus, one of the areas of progress in the past few years has
been improving the standards of reporting and accounting in the various tax
havens around the world. Many of these have been relatively small island
states and it has been easy to encourage them, some would say bully them, to
adopt global standards. Some larger countries ? larger that is in terms of
the size of their economies ? including Switzerland, are now also moving
towards adopting the international norm.
This has happened because of combined pressure from the EU and US, which have
up to now called the shots. But looking ahead to a G20 world, the shots will
be called by countries such as India and China. I’m not saying they will
want to encourage tax-dodgers; not at all. But the ideas of this new world
on appropriate levels of taxation, plus accounting and other requirements,
will increasingly shape the old world. So if China, perhaps through Hong
Kong, wishes to take international financial business from New York and
London, it will set tax levels and regulatory procedures to encourage the
business to move.
Now take a wider social issue of the role of government. We have in the West a
broad consensus about the appropriate relationship between the state and the
individual. True, this varies from country to country even within Europe,
and there are quite a few issues on which European nations depart from the
US. But the similarities are surely greater than the differences. Go to
China, India, Indonesia or Brazil and the relationship is quite different.
To take one simple example: in Hong Kong, the government owns all the land
and leases it out to other users. (The only freehold piece of land in the
territory is the plot under St John’s Cathedral.) It also runs one of Hong
Kong’s largest industries, for the Hong Kong Jockey Club has a monopoly over
gambling. That is a degree of socialism that would be unacceptable in any
Western European nation, even to the Scandinavian countries where the state
plays a very large role in economic activity. In Sweden during the early
1990s, the government sector accounted for 67 per cent of GDP and even now
it is well above 50 per cent. But look at the size of government in Hong
Kong ? using this measure of the proportion of GDP. It is around 15 per
cent, less than half that of the US, about one-third the level in most
So you have, in this special part of China, a completely different notion from
that of any “Western” nation of where the boundary between state
and individual should lie. Long before China becomes the world’s largest
economy, as will probably happen in about 20 years’ time, its ideas of how
an economy should be ordered will start to shape ours.
None of this will happen overnight. Long-term shifts of power are almost
imperceptible as they happen. This shift is a bit like the ageing of
populations. From one year to another, there is no noticeable change; but
over a period of years, the shifts are massive. For example, people
gradually become aware that the workforce is shrinking and the pressures of
supporting pensioners are rising. I suppose changes to the environment are
similar ? with the danger being that, when we do wake up to change, it is
hard to do much about it. But, as I said, if you want to take one moment
when we can say the balance of economic power shifted from the old world to
the new, this G20 meeting is as good as any.
The Government’s wartime finance threatens to make investors freeze
What happens when quantitative easing ends? One of the effects of the G20
meeting has been to focus on the path back to normality. The practical point
is: what would happen to UK gilts if the Bank of England were not propping
up the market and who will buy the over £200bn of debt the Treasury will
seek to issue over the next year, with the prospect of as much again for
some years beyond?
There simply are not the savings available here to fund the Government, so
much of it will presumably have to come from abroad. Will investors be
prepared to take the exchange-rate risk, particularly since Mervyn King has
been doing his best to talk down sterling on the foreign exchanges?
Sterling has not yet been as weak as it was in the spring, but there are nasty
rumblings coming from the currency commentators. The dollar is also weak, so
this doesn’t show up on the dollar-sterling rate, but it is possible the
pound might go down to parity against the euro ? well below its long-term
sustainable level which would have political consequences for the Government.
It is hard to know quite how fragile financial confidence in the Government
is. My suspicion is that investor confidence in all governments in serious
deficit is fragile and the present low rates at which they can borrow won’t
last beyond the winter. As rates rise, the US and particularly the UK will
One of the odd things about markets is that they lose confidence suddenly. We
saw that with the sub-prime crisis in the US. Weaknesses in the housing
market were evident for months before the price of the complex sub-prime
instruments collapsed. Then when they went, they fell like a stone. We have
never in peacetime seen this level of gilts being issued. This is wartime
finance. If investors felt there was no credible plan to cut the deficit,
they might freeze. You may not like dollar assets, but who would you rather
lend money to, the German government or the British one? I am afraid that is
not much of a contest.
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