Clueless in Seoul

What exactly do the leaders of the world want for the global economy? The official communiqué released by the G20 Seoul Summit suggests that they have little idea. That document conveys a sense of complete confusion, not just in terms of contradictions across the positions held by governments of different countries, but contradictions within positions, in terms of stated goals and the means to achieve them.

There has been a lot of talk about the “irreconcilable differences” between surplus and deficit countries, for example, or between countries that are trying to engineer lower values of their currencies through monetary policies and other measures and other countries who are trying to prevent appreciation created by the inflow of hot money. No doubt that these issues have emerged as significant areas of friction between some major economies. There are growing fears of currency wars and trade wars, and these fears can at best only be partly alleviated by the platitudes coming out of summit documents.

But the obsession with imbalances ­obscures the lack of coherence on what should be the more significant question: what are to be the major drivers of growth for the world economy? Remarkably the countries that ought to be the most concerned about this seem to be the most confused, particularly from a developing country’s perspective.

The United States government, for example, mooted the extraordinary idea of capping the external deficits or surpluses (as proportion of GDP) of major countries – as if such a thing could be done realistically, or indeed as if the global economy has ever really required such a false notion of balance. The idea clearly got no traction at the summit, but in any case, simply trying to enforce balance is hardly likely to resolve the problem of revival of growth and employment. If anything, it will exacerbate them.

The German position is at least as self-contradictory. On the one hand, the Germans want the US to reduce its external imbalance, which they have decided is a cause of many problems. Yet when the US Federal Reserve announces a policy of buying long-term bonds in order to provide more liquidity in the market, they rail against this strategy of bringing down the external value of the dollar. But surely such depreciation is one of the routes to greater “competitiveness” and achieving the trade balance that the Germans sup­posedly value?

Similarly, the Germans want the US to get into fiscal consolidation quickly, on the (wrong) presumption that this will not affect growth pros­pects. But if the private sector has to continue to wind down its debt, which it is already doing, then the slack has got to be taken up by the government or exports. If not, the US economy will not grow, and this will also affect demand for German exports.

It seems bizarre that global leaders have to be reminded that all countries cannot use net export growth as the route to expansion. But clearly this message has not yet struck home. How else can one explain the almost complete absence of any meaningful measures to enable sustained expansion of demand from low income countries, which is really the only sustainable and equitable way out of this global dilemma?

Clearly, this latest G20 Summit displayed lack of cohesion and imagination. But what is more startling is the extent of which it displayed the paucity of ordinary economic sense among those who currently control the world’s destiny.