Wanted: A United Nations Economic Security Council
G20 – leading the charge
In last week’s column I argued that the global economic crisis had become very complex, involving immense human and social suffering, thereby constituting a grave threat to past global developmental efforts. As such, I argued for global solutions to the crisis. In my judgement no country or region can emerge from the crisis sustainably without a collective global effort.
I also pointed out that the world body coordinating the global response is the G20 group of countries. This grouping comprises finance ministers and governors of central banks of leading economies and representatives of international financial institutions (IFIs), with direct responsibility for global financial coordination, review, regulation, oversight, and the delivery of development financing. Finance ministers carry direct political portfolio responsibility for national efforts to address the crisis, while the central bank governors have the highest level of technical responsibility for this.
As a group, G20 countries represent 85 per cent of global GDP, 80 per cent of global trade, and 65 per cent of global population. While the G20 represents the technical/political face of global efforts at finding solutions to the crisis, the G8 constitutes the highest level of political authority for this. If the United Nations had an elected Economic Security Council for economic matters, as a counterpart to the present Security Council for political matters that body would have been the appropriate one to seek to resolve the global economic crisis. It does not, and by default the G8 group fills this void.
G8 group of countries
The G8 comprises eight industrialised countries: Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States. It also includes the European Union (EU). Their heads of government meet annually, but sub-groupings, such as finance ministers, foreign ministers, and environment ministers meet more frequently.
Unlike most other international organisations, the G8 does not have a permanent secretariat. As an informal body its annual meetings rotate, and the host determines the agenda for the summit. By practice, other key countries are invited to ensure broader representation. The most regularly invited so far have been Brazil, China, India, Mexico and South Africa, to the extent that the G8 is sometimes called the G8+5.
Because annual summits are limited to a few days and there is no permanent secretariat, G8 meetings focus on broad policy issues, leaving implementation details to be filled in by the agencies it identifies.
While G8 countries represent the leading industrial economies, it is by no means as representative as the G20. It only includes about one-seventh of the world’s population, although it represents more than two-thirds of global GDP, and the vast majority of global industrial, military, and research and development capacity. It thus falls far short of a United Nations Economic Security Council, similar to the present Security Council of the UN.
Recent summit decisions
At the recent G8 Summit 40 nations and organisations attended. Four economic items dominated the agenda: the global economic crisis, food security, trade, and climate change. What was achieved?
Global crisis
Similar to these columns, the G8 Summit found it impossible to arrive at certainty as to where the global recession presently stands. It admitted that significant risks remain to global “economic and financial viability.” While the various stimulus packages may be working, it was considered inappropriate to discuss the global economy post-stimulus packages, as recovery is by no means assured. This is important, as the global economy faces risks of inflation and runaway budget deficits in several countries, as they pursue efforts to stimulate national economies and provide safety nets through deficit financing (printing money). Already in the USA, the deficit has reached the trillion dollar mark – the highest level ever.
Food security
Because of the human and social fallout from the global economic crisis much attention was given to problems of hunger, malnutrition and poverty. To the surprise of many, the summit committed as much as US$20 billion over three years to agricultural investment in poor countries.
The emphasis on agricultural investment signifies a shift in focus away from the traditional “emergency food aid,” which development experts had long criticised for not having a long-term sustainable focus. President Obama has been credited for much of the success in shifting focus to farm investment in poor countries and away from emergency food aid. He committed the US to providing US$3.5 billion towards this goal.
Trade
As I have repeatedly argued, growth in global trade is indispensable for global economic recovery. As future columns will argue, resumption of the stalled Doha Development Round of trade negotiations is a critical component of successful recovery. The summit recognised this and agreed to try to complete the trade negotiations in 2010. In pursuit of this, commitments were given towards convening a WTO Ministerial Conference, before September this year.
Climate change – ‘Not enough’
There was an effort to do two things about climate change. One was to narrow differences over cuts in greenhouse gas emissions. The group aimed at a target of an 80 per cent cut by 2050. Neither India nor China agreed to their target of 50 per cent by 2050. Canada declared the goal “aspirational,” and along with Russia said it could not meet the target. The second effort was to increase funding for low carbon technology.
Both these efforts are geared towards a new United Nations climate change agreement, emerging out of the scheduled December, Copenhagen UN Summit, to replace the Kyoto Protocol. The world press has reported UN Secretary General Ban Ki-moon as describing the progress on climate change at the G8 Summit, as “not enough.”
Oil
Finally, rising oil prices over the years 2007-2008 helped fuel the crisis of commodity price inflation in energy products and food items that immediately preceded the present global economic crisis. Concern was expressed that, although oil prices had not regained the peak of that period (US$150 per barrel), rising prices as the recovery developed could de-rail the recovery. Discussions on “regulating energy markets in order to reduce volatility” took place, but this did not make progress, as two major oil-exporting G8 countries: Canada and Russia deemed it technically infeasible.
Next week I shall look at the G8 Summit in light of the just concluded UN Conference on the global financial and economic crisis.
Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.2 trillion. What will happen when those assets are depleted? Today’s recession is the answer.
Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.
Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?
At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.
One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!
Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world’s population.
Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.
If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)
Please forgive me for the somewhat spammish nature of the previous paragraph, but I don’t know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.
Pete Murphy
Author, “Five Short Blasts”