G20 stalemate points up disruptive power shift

BEIJING, (Reuters) – Economic power is leeching from  the old world to emerging markets. The politics of globalisation  are not keeping pace with this shift. And that makes it hard to  agree joint action to tackle urgent issues such as how to reduce  China’s external surplus.

The Group of 20 summit in Seoul amply corroborated each of  these truisms. The risk now is that, in the absence of policy  coordination, a purely market-driven adjustment of global  economic imbalances will be messier than it need be.

And where market forces are not allowed to prevail, as is the  case with China’s exchange rate, the temptation for politicians  in the United States and Europe to try to force the adjustment  through tariffs and import barriers can only grow.

“There is a pervasive sense that the G20 has reached the  limit of cooperative efforts towards rebalancing of the world  economy,” said Eswar Prasad, a Cornell University professor and a  senior fellow at the Washington-based Brookings Institution.

With advanced economies barely plodding along while emerging  markets are enjoying red-hot growth, reconciling the different  types of policies required has become difficult, Prasad said.

“In an increasingly integrated world economy with emerging  markets playing a prominent role, cross-border spillovers of  domestic policies then set up a situation ripe for conflict,” he  added.

These conflicts were on show in Seoul. Emerging economy members of the G20 flailed the easy-money  policies of the Federal Reserve, the U.S. central bank; President  Barack Obama, beset at home by high unemployment and low growth,  urged Chinese President Hu Jintao to ease the pressure on  American manufacturers by letting the yuan rise faster. But the writ of the United States in the global economic  system no longer runs unchallenged.

Gone are the days when a U.S. Treasury secretary could gather  four counterparts around a table and set in motion sweeping  changes to exchange rates and trade positions.

In the eyes of policymakers in many developing countries,  U.S. primacy and credibility have been eroded by the global  financial crisis, which had its origins in the U.S. subprime  mortgage meltdown.

The ultra-loose monetary and fiscal policies that the United  States has adopted in response is testing faith in the dollar to  destruction — and not just among the likes of China and Russia.

No less a figure than World Bank President Robert Zoellick,  himself a former U.S. Treasury official, said last week it was  time to start thinking about building a new monetary system.

So it is little wonder that Washington has repeatedly failed  to get Beijing to do its bidding on the yuan. In Seoul, a  different tactic fizzled: the G20 refused to back a U.S. plan for  numerical targets for current account surpluses and deficits — a  roundabout way of applying peer pressure on China.

Instead, Hu stuck to Beijing’s well-rehearsed stance that the  yuan’s rate of climb would remain gradual and calibrated to  China’s national interest. In case someone had not heard the  first time, Hu repeated his position at an Asia-Pacific leaders’  meeting yesterday in the Japanese port city of Yokohama.

Stewart Patrick with the Council on Foreign Relations in New  York said the Fed’s recent decision to embark on a $600 billion  bond-buying programme had undercut Obama at the summit.

Moreover, his party’s trouncing in mid-term Congressional  elections had made his G20 counterparts sceptical of the  president’s ability to deliver on global commitments

“Confidence in U.S. global economic leadership continues to  wane,” Patrick said.

“VICTORY FOR EMERGING MARKETS”
Illustrating how the sands are shifting, the G20 gave its  blessing to developing countries such as Brazil that opt for  capital controls to prevent incoming walls of cash from pushing  up already overvalued exchange rates.

Not long ago, such curbs were anathema to the United States  and the IMF.

In another nod to the growing clout of developing countries,  the Seoul summit formally endorsed a deal that gives them more  power in the running of the IMF, largely at Europe’s expense.

“On balance, this G20 meeting was a victory for emerging  markets,” commented Lena Komileva, head of G7 market economics at  Tullett Prebon.
The G20 is not doomed to deadlock as emerging giants try to  wrestle power from advanced economies. As well as settling on a  redistribution of chairs and shares at the IMF, the group agreed  new rules designed to avert future bank collapses. But the Seoul stalemate over imbalances points up the group’s  limitations when it is not confronted by an immediate crisis, as  it was at the first G20 summit two years ago.

Then, the freezing up of global credit markets and the onset  of recession concentrated minds and generated a coordinated  stimulus in response.

Today, divergent trade and inflation trends are leading to  tension rather than policy coordination, according to economists  at J.P. Morgan.

“Ironically, this tension is likely to produce a desired  aggregate outcome — an easier global monetary policy setting  that increases the likelihood of a strong global growth outcome  next year.

“However, widening imbalances alongside inappropriately  synchronised policy stances raise concern that the eventual  global policy normalisation will prove far more disruptive than  necessary,” they wrote in the bank’s weekly Global Data Watch.