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World affairs

“I’m not sure the G20 will survive”

by Fernando J. Cardim de Carvalho
“The social policies of President Lula da Silva’s administration sustained demand by stimulating consumption.” A man checking out refrigerators at a store in Rio

“The social policies of President Lula da Silva’s administration sustained demand by stimulating consumption.” A man checking out refrigerators at a store in Rio

In past decades, financial crises used to start in emerging markets. Things have changed dramatically, and today countries like Brazil, India and China are considered sources of stability. Nonetheless, economists like Fernando Cardim de Carvalho from Rio de Janeiro warn against complacency. [ Interview with Fernando J. Cardim de Carvalho ]

Is the global financial crisis over?
No, far from it. The financial crisis is very much alive, and so are some of its causes, for instance the glut in the US housing market and the very sick balance sheets of American banks. And we still feel the impact of the original shocks, for instance in weak European banking systems and the sovereign debt problems in Greece, Ireland and perhaps Portugal. Investors have become risk averse, and government revenues have gone down while their social expenditure went up. Emerging economies sailed through these difficulties with relatively few and light scars, particularly in Asia and in Latin America with the exception of Mexico, which is too closely connected to the US economy. Nonetheless, the world economy is still in deep trouble.

What was the G20’s role in avoiding the worst?
The G20 was instrumental in promoting policies to fight the crisis that quickly became global after it emerged in the USA. The November 2008 meeting of political leaders in Washington temporarily transformed a more or less somnolent group of finance ministers and central-bank governors that had been meeting since 1999 into an effective policy-making forum to coordinate global policies. The policies the USA and Europe adopted would probably have been implemented anyway, but the perception of a global strategy certainly helped to stem panic in the aftermath of the Lehman Brothers bankruptcy.

What should the G20 strive for next?
Well, the unity of purpose that characterised the first summits of the G20’s heads of state and government has largely dissipated. Today, the USA on the one hand and China or Germany on the other diverge sharply on issues like exchange rates or trade imbalances. There no longer is a common understanding of the nature of the crisis, and accordingly opinions on remedies clash too. The summits in Toronto and Seoul did not produce consensus on urgent issues. Ideally, the G20 should now seek new ways of organising the international payments system, particularly in regard to reserve currencies. It should also coordinate macroeconomic policies in order to remove the sharp imbalances. As I have said before, this would be the time for a new Bretton Woods Conference. But that is not realistic at the moment. There is no clear hegemony, as there was in 1944, when the USA undisputedly led the world. The G20 does not have the legitimacy to conduct such a process, as the countries that are excluded from its meetings constantly remind us. This is certainly a very difficult moment for the G20. I am not sure this informal group will last.

Why are global imbalances undermining the stability of the global economy?
There can be no stability as long as the USA borrows money from China and, all summed up, uses that money to import goods from China. When will the money be paid back? And why should Chinese investors keep subsidising American deficits? There is a similar pattern in the EU, a stark divergence between countries with trade surpluses and trade deficits. It affects the eurozone too. After the debt crises of Greece and Ireland, and with Portugal in the direct line of fire, fears are growing about Spain. Investors have even begun to target Italy and are pushing interest rates upwards. Every episode of this kind boosts risk aversion, makes credit more costly and ultimately pushes down output and employment. The world is not less dangerous now than it was immediately after the 2008 panic. The greatest danger, perhaps, is the perception of inaction or, worse, even inability of enforcing an acceptable strategy to take the world economy out of the turbulent waters.

What should be done?
Let me reiterate: What we would need at this point is a new Bretton Woods Conference to prevent countries from opting for individual solutions that in the end cost dearly to the international community. Such a conference would be the civilised solution. But the outlook is not promising. It is much more likely that individual or regional initiatives will proliferate, while relations between the most important economies, notably the US and China, continue to deteriorate. Right now, the most important sources of uncertainty are the trade and monetary imbalances between the US and China on the one hand and the tensions within the eurozone on the other. Unlike in past decades, the emerging economies are now – and probably will continue to be – considered a source of stability. But these economies are not strong enough to sustain global stability, let alone promote effective recovery all over the world. We still need collective and cooperative action.

What is your view on the “currency wars” – a term first introduced by your finance minister?
I think he meant that as a warning that the world could be moving towards a situation similar to the currency wars of the 1930s. Exchange rates are of deep concern for emerging economies like Brazil, where the degree of manipulation is much lower than the one practiced by China. On the other hand, the consequences of macroeconomic policies adopted by the US, especially what is called quantitative easing, can aggravate the already serious problem of overvalued national currencies, for instance of Brazil’s real. Unlike in the 1930s, the major actors on the world stage have so far shied from overly protectionist policies. But the situation is becoming unsustainable in different ways in different countries. The main problem is that exchange-rate policies are self-protection policies at the cost of other economies. If all parties manipulate the value of the currencies to promote exports – thus promoting employment at home at the expense of employment abroad – we all go back to square one, and everyone loses out.

What is the Brazilian position in the dispute over fiscal austerity versus more government-spending stimulus?
Our government implemented expansionary fiscal policies in 2008 and 2009 to fight the effects of the international crisis. Fiscal expenditure was increased, and indirect taxes were reduced to benefit the automobile and construction industries. Government-run credit institutions were ordered to increase credit supply while private banks tended to reduce lending due to their growing risk aversion. These policies were adopted with the explicit purpose of fighting the recessionary forces created by the international crisis. At the same time, the social policies of President Lula da Silva’s administration sustained demand by stimulating consumption. These policies included higher minimum wages, extended income support to poor families and the extension of social security to rural workers. Now that the economy has fully recovered, it is expected that the next administration, which will be inaugurated in January, will adopt more austere policies. This has already been announced by President-elect Dilma Rousseff. The reversal, however, should not compromise social expenditure and the funding of essential public investments, particularly in infrastructure, because they are not considered anti-cyclical.

What is Brazil’s approach to global politics and the G20?
Traditionally, Brazil has cultivated a rather isolationist position in world affairs. We like to welcome guests, but our country did not get involved in international conflicts unless it was directly affected. This has changed dramatically under President Lula. His predecessor Fernando Cardoso already took small steps in this direction, but President Lula made strengthening Brazil’s standing in the international community an explicit goal of foreign policy. The main goal is a permanent seat in the UN Security Council. Lula used his charisma to project the country internationally, but the Foreign Affairs Ministry has also become more activist. President-elect Rousseff is probably going to follow the same path. She will face the challenge of having to replace a particularly popular leader. In the long run, however, policy matters more than persons, and the choice was made for a greater presence in the world scene. The G20 was an important step in this process, but, as we just discussed, it is in trouble now. Brazil will certainly try to strengthen the G20, but it will also work on improving relations with China, India, Russia and other nations.

China and India often claim to be speaking for the developing world in general, and Brazil certainly feels a sense of solidarity with poorer nations. To what extent does the presence of the leaders of the big emerging-market nations in the G20 make a difference for the least developed countries – the LDCs – in comparison with the G8?
Well, I am not sure China and India, or Brazil in fact, really speak for poorer nations. Sometimes they do so in specific negotiations, in the WTO context for instance. But even then the interests of different and extremely heterogeneous countries often diverge. In the G20, the interests of LDCs have been poorly represented. The G20 members are struggling with their own very complex problems. So far, they have dealt with the needs of LDCs in a rather ceremonial and largely ineffective way. Foreign aid is still the object of symbolic statements in the final communiqués, but that is about it. This is certainly one of the shortcomings of the whole G20 process.

What do you think of the development consensus formulated in Seoul?
It could be a useful starting point for future discussions and it is important that the subject was raised. I don’t think the declaration will have a major impact on Latin America, however. The region’s governments – even the conservative ones – are actively managing their economies these days; the Washington Consensus really is a thing of the past. Given the degree of disagreement within the G20 over issues of fundamental relevance to its members, I think the real issue is not whether the G20 has a sensible development agenda or not. The real question is: will the G20 itself survive? I hope it will, but I am not sure.