The run-up to the G-20 meeting has been interesting and colorful. President Lula Da Silva of Brazil declared that "this crisis was caused by the irrational behavior of white people with blue eyes, who before the crisis appeared to know everything and now demonstrate that they know nothing." His full remarks made it clear that he was not promoting biological race theories but calling attention to the injustice that the vast majority of the world, who happen to be both poor and non-white, should suffer for the greed and stupidity of a few. China also let loose with an uncharacteristic broadside against the United States, basically saying that we (the Chinese) have gotten our act together and are mobilizing massive resources internally to counter the downturn; now how about you clowns who made this mess step up to the plate, before we take more losses on your stinking treasury bonds? It was worded somewhat less rudely, but still a stunning departure from the "hide brilliance, cherish obscurity" motto that has guided Chinese foreign policy.
This is what happens when you change the composition of the Ad Hoc Committee to Run the World (the G-7), and the media spotlight wanders over to some of those previously excluded. The change was meant to be symbolic, but even symbolic changes can shift the debate, as new actors find themselves in the middle of an international forum where they can try to show some leadership.
Welcome to the multi-polar world. It’s not here yet but the direction is clear. President Obama will discover this week that as much as he is loved and respected around the world, he can’t reverse the declining influence of Washington that his predecessor clumsily accelerated.
U.S. leadership is taking an immediate hit because it was at the forefront in creating the current world recession. It’s hard to believe that Nicolas Sarkozy won the presidency of France barely two years ago by promising to make French capitalism more like the American brand. The idea that the "American model" was superior in economic terms has been promoted for years by the European press even though the statistical evidence has always been weak or non-existent (e.g. France has a productivity level about the same as the United States). But from now on these ideas will be a much harder sell.
Still, the debate surrounding the G-20 meeting is missing quite a bit on the economic issues. The problem of asset bubbles did not even make it into the G-20′s draft communiqué. Yet the housing bubble in the United States was the primary cause of its deep recession, and contributed enormously to the financial crisis – including through the over-leveraging of financial institutions and the toxic assets and derivatives that they spread around the world. This is also the second recession in six years in the U.S. — which comprises a quarter of the world’s economy — that was caused by the bursting of an asset bubble (the 2001 recession was caused by the bursting of the stock market bubble). Housing bubbles in Spain, the U.K., Ireland, and other countries also contributed to their severe recessions this time around. How to prevent asset bubbles from reaching dangerous proportions – which is actually much easier than the other forms of regulation being discussed – should be a major item on the agenda.
But it is the economic issues of the developing world that are most obscured and/or neglected. For most developing countries, the current economic crisis is a more acute form of what they have experienced for most of the last three decades – commonly known outside the United States as the era of neoliberalism. Since 1980, there has been a sharp slowdown in economic growth in the vast majority of low- and middle-income countries. As would be expected during a long period of reduced economic growth, there was also reduced progress in the areas of life expectancy, infant and child mortality, and other social indicators. This slowdown in economic growth, and its accompanying negative effects, is not attributable to "diminishing returns" – in other words, it is far beyond what would be expected from the natural course of individual countries facing reduced growth potential at a higher stage of development.
A likely explanation for this massive economic failure is that it had something to do with the neoliberal economic policy reforms that were introduced since the 1980s: the abandonment of development strategies, the introduction of much more restrictive monetary and fiscal policies, an indiscriminate opening to international trade and capital flows, and of course the de-regulation and excesses of the financial sector – including its excessive political influence – that the world is now forced to recognize as harmful. It is noteworthy that China, which has had the fastest growing economy in world history over the last 30 years, has mostly avoided these neoliberal reforms, even as it moved away from central planning and began a period of export-led growth.
A serious discussion of what has caused this long-term development failure is long overdue, but still not forthcoming. On the contrary, the draft G-20 communiqué reaffirms the importance of completing the current Doha round of the World Trade Organization (WTO), a set of rules that is so tilted against developing countries that it would not stand a chance of being approved by the legislatures of many WTO member countries today. Ironically, the WTO’s Financial Services Agreement seeks to establish rules that would make it more difficult for countries to undertake the financial regulations that this crisis has so painfully demonstrated are needed. There is no talk of reforming the WTO – only moving "forward."
The same is true for the IMF, which just a decade ago was Washington‘s main avenue of influence in developing countries. The collapse of the IMF’s creditors’ cartel in middle-income countries, in which many governments could not get credit from other sources without first agreeing to IMF conditions, was one of the most important changes in the international financial system since the breakdown of the Bretton Woods system in 1973. The U.S. Treasury department, with help from Europe and Japan, seeks to revive their lost power in a time of crisis by tripling the IMF’s resources to $750 billion and making the Fund the arbiter of conditionality for loans to countries hard hit by the crisis.
But regardless of how much money is added to the IMF coffers, the clock will not be so easily rolled back. Nor will the G-20 move us forward to a new financial architecture, as some had hoped. It took a Great Depression and a World War to get us the Bretton Woods agreement of 1944; fortunately we have not had either of these yet. And the leaders of the rich countries today are far more steeped in neoliberal ideology than the architects of Bretton Woods. In economics, as in the physical sciences during the Middle Ages, a significant amount of knowledge has been lost since the time of Keynes.
For now, at least, the most important economic reforms will take place more quietly and without the fanfare of the G-20. China‘s decision this week to provide $10.2 billion dollars in a currency swap arrangement with Argentina is an unprecedented (in this hemisphere) and prime example. The creditors’ cartel that forced Argentina to accept disastrous conditions from the IMF a decade ago is no longer operative there. That is progress, and there will be much more in the coming years, as national governments seek alternatives to failed policies, and co-operate with each other outside the structure of unreformed neoliberal institutions.
Mark Weisbrot is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. (www.cepr.net).