High aspirations

In the Asia Pacific Journal, Edward Barbier (2010) spelled out the case for a more comprehensive “green” stimulus to improve en­vironmental conditions in G20 countries and create positive spillover effects to developing economies. His starting point is an assessment of sums: only 16 % of the 3.3 trillion dollars worth of stimulus programmes worldwide were earmarked for environmental purposes so far. Barbier considers this share woefully insufficient given the environmental troubles humankind faces.

Ultimately, Barbier demands that the G20 adopt a coordinated global green stimulus programme, though he does acknowledge that there are significant challenges to such an approach in political, technological and economic terms. On the more optimistic side, he outlines the macroeconomic benefits that could be gained from reducing the dependency on fossil fuels and boosting energy security. For example, such a strategy would ease current account deficits endemic to oil importers like the USA and accordingly reduce the trade surpluses of oil exporters.

His argument is in line with often-made ­recommendations for rich nations to shift industrial output away from labour-intensive goods to skill-, capital- and technology-intensive production. This approach, he states, could benefit top-tier and smaller economies, as innovation would be crucial. The dynamics would obviously be particularly strong if such a shift was propelled by a global stimulus programme.

The snag, of course, is that policymakers tend to consider investments in clean energy to be “still too costly” compared with conventional sources. The reason, as Bar­bier points out, is that energy markets are distorted due to fossil fuel subsidies in many countries and the fact that polluters are not being forced to bear the full costs caused by their emissions. In Barbier’s view, the lack of coherent action in this field is the G20’s “biggest failing”.

Barbier applauds green progress made by South Korea and China. The government in Seoul used 80 % of its stimulus programme to boost environmental sustainability. ­Beijing’s percentage was smaller, but thanks to the sheer size of both the country and its stimulus programme, its ecological measures are impressive. Barbier bemoans, however, that such action was inward looking. The chance of leveraging domestic policies for a global green recovery programme was missed, he states.

Club talk

Masahiro Kawai and Peter A. Petri (2009) of the Asian Development Bank Institute in Tokyo made an earlier academic attempt at influencing the G20 policy making. They argued for an enlarged, hierarchical set of organisations composed of existing global organisations and new regional ones, the latter of which could more effectively address matters at a local, regional, or continental scale, freeing up institutions such as the IMF and World Bank to focus on the provision of global public goods.

To support their position, the authors invoke the “club” theory of economics, with international organisations. A basic tenet of this theory is that voluntary associations, or clubs, can be helpful in creating public goods, but they may also suffer from congestion, lack of direction, or other factors. According to Kawai and Petri, regional integration makes sense for countries to manage issues like trade, tariffs, development and macroeconomic stability.

Kawai and Petri state that it does not make sense to overburden the G20 with new initiatives since there is “no capacity to carry them out”. In their view, moreover, global institutions tend to suffer from mission creep due to their desire to please many different constituents. Therefore they suggest that the G20 seek changes to bodies such as the IMF, World Bank and WTO while delegating responsibilities to an enlarged set of regional organisations, including regional analogues of development banks, lending institutions, financial stability dialogues and trade entities. Their vision is a kind of global federalism.

Kawai and Petri certainly have a point, however, they hardly deal with the fact that regional organisations can also obstruct ­policymaking, for instance, if their charters or voting mechanisms do not allow them to rise to new challenges in a flexible manner. Kawai and Petri argue that smaller regional groups of closely linked economies are best suited to manage macroeconomic issues for their region. They are thinking in models, and it is doubtful, to say the least, whether their ideas will always hold true empirically. The EU’s travails with the Greek and Irish debt dramas suggest that, in practice, things are likely to turn out quite difficult.

In the Third World Quarterly, Susanne Soederberg (2010) wrote one of the sharpest recent G20 critiques. She accuses the G20 leaders of intentionally obscuring the genu­ine causes of the financial crises as well as of promoting a process (“financial fetishism”) that serves to depoliticise the issues.

Soederberg argues that G20 documents characterise markets as technical, even ­“scientific economic” entities. In her view, such labelling not only hides ecological necessities and profit motives, it also blurs the distinction between privatised econo­mies (including credit and finance markets) and nation states. As a result, dynamics of a political-economy nature appear to be ­“natural”. Soederberg points out that the G20 managed to mobilise massive funds for bail-outs and stimulus packages to bolster the established world order, but did little to redress the suffering of those who were thrown into poverty by the crisis.

According to Soederberg, there should be “rigorous, state-led regulation”, but instead the G20 favour market-based, voluntary measures for more transparency and more symmetrical financial information, combined with a dash of ideologically popular but only vaguely defined “good governance” measures. While Soederberg’s approach goes against the grain of the conventional wisdom in North America and Western Europe, it certainly resonates with Asian ­policy makers who are keenly aware of the leading role governments have played in de­velopmental states from Japan in the early 20th century to Vietnam or China today.

Advice for Asia

Writing in the Asian Economic Papers, George de Menil (2010) sheds further light on the crisis, prospects for reform and the implications for Asia. On the whole, de Menil questions the sufficiency of conventional crisis explanations. He points out that this was not the first time a developed nation faced an asset bubble. In his view, several factors need to be explained including
- the complexity of “structured” financial products such as mortgage-backed secu­r­ities,
- the “startling ” use of leverage by financial institutions in western nations,
- the confidence that new strategies “were the right ones” and
- the “faith” in markets.
According to de Menil, the economic atmosphere has become so gloomy that “there is no chance that any major financial institution in the developed world will soon repeat the excesses of the beginning of this century”. In this context, he argues the real issue is not whether reforms are ne­cessary, but, in view of political pressure, what the targets of reform should be.

Prospects are mixed, he argues. In his view, it is feasible to eliminate loopholes within a country, but international coordination is another matter, and tackling finance institutions of global relevance at the national level only makes sense to a limited degree. Moreover, he warns that the “Volcker Rule”, under which commercial banks would be prohibited from engaging in high-risk activities, is not satisfactory, as such a prohibition would only shift these activities to “casino” banks whose assets aren’t guaranteed.

Asian countries, de Menil notes, were not substantially involved in the structured debt markets that rocked the West. Moreover, their economies were buffered by large ­foreign exchange reserves. In view of their fast recovery, moreover, de Menil thinks Asian leaders should opt for “prudent liberalisation”, learning from mistakes made in North America and Europe, but not repu­diating liberalisation all together.