Building Identity?

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Following the end of the Shanghai Cooperation Organization Summit (SCO), the leaders of the BRICs – Brazil, Russia, India and China met formally for the first time on June 16th.  This leaders meeting caps a series of ministerial gatherings of either the BRICs or the G5 (Brazil, Russia, India, China, South Africa and Mexico).

In the run up to the Leaders meeting there was much speculation over the Leaders’ possible statements or actions in reducing the reserve currency role of the US dollar.  But as noted by ‘Dr. Doom,’ Nouriel Roubini, Professor of Economics at the Stern School of Business at NYU, in an online piece on Forbes.com, “the inaugural summit focused primarily on forging common positions on financial regulatory reform and climate change, rather than foreign exchange rate management.”  Still the fact that these Leaders met at all is slightly stunning and adds to the overall momentum for large emerging economies collaborative efforts.  But we need to be realistic about such collaborative action.

The large emerging market powers, whether in the G5 or the BRIC gatherings, are making their collective presence known.  However, much of their focus is on the global financial crisis and the Leaders club – the G20.  The G5 and BRIC gatherings have called for coordination and have identified the G20 as the appropriate forum for such collaboration. In the Sapporo Declaration of July 8, 2008 the G5 declared:

Given current global macroeconomic imbalances, it is essential to enhance policy coordination not only among advanced economies but also with emerging market economies, including by reinforcing existing multilateral mechanism for Coordination.  The Financial G-20 is an appropriate forum for this endeavor.

And the BRIC Finance Ministers just prior the G20 Leaders meeting in London expressed their support for the G20:

We consider that the G20’s position as the focal point to coordinate with global economic and financial challenges and to lead international efforts responding to the current crisis should be consolidated.

Finally,  in their joint statement following the historic Leaders meeting, the BRIC leaders declared:

1. We stress the central role played by the G20 Summits in dealing with the financial crisis. They have fostered cooperation, policy coordination and political dialogue regarding international economic and financial matters.

2. We call upon all states and relevant international bodies to act vigorously to implement the decisions adopted at the G20 Summit in London on April 2, 2009. We shall cooperate closely among ourselves and with other partners to ensure further progress of collective action at the next G20 Summit to be held in Pittsburgh in September 2009. We look forward to a successful outcome of the United Nations Conference on the World Financial and Economic Crisis and its Impact on Development to be held in New York on June 24-26, 2009.

Too many commentators have been quick to declare the successful collective leadership either for the BRICs or the G5.  It is evident that these countries are exploring collective action but there is a long way to go before declaring these clubs a permanent presence.  Meanwhile that leadership of the emerging market countries is focused on the G20 and its attention on the global financial crisis.

‘G2’ and the Expectations Game

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While designed to build consensus among a broad group of countries, a significant aspect of the G20 has been a consolidated discussion between the leaders of China and the United States. US President, Barack Obama and China’s President, Hu Jintao have used these informal talks for relationship building.  These informal discussions have until now complemented the G20 leaders’ process. But if these US-China leaders’ talks take hold, it may also prove to be a principal rival to the G20 dialogue.

A new game of expectation-raising has begun to swirl over what has been dubbed the “G2” in anticipation of renewed strategic dialogue and the home-and-home state visits announced for 2009, with President Hu visiting Washington in late-summer and President Obama visiting Beijing in late-fall. While the US-China bilaterals will not lack for issues, indeed there are already a series of bilaterals between China-US officials, it remains to be seen how in-depth the two leaders will want to harmonize global economic strategies. Will these encounters survive expectations? Will the G2 serve as distraction to the G20 process?

China’s global status can hardly be ignored. While the economic fires rage on in New York, London and Tokyo, Beijing has demonstrated a cool confidence and continued growth. In the lead-up to the London Summit, People’s Bank of China Governor, Zhou Xiaochuan made very public declarations on the perils of over-reliance on a single currency for global reserves, advocating instead for a standardized, SDR-type currency valuation less prone to volatility. In London, Paola Subacchi of Chatham House commented that, “China graduated from regional to global power. It showed political and financial muscles and the appetite to be involved in the global dialogue – with also an interest in developing a closer relationship with Washington.”

A leading voice in support of an informal G2 “leadership conclave” has been C. Fred Bergsten of the Peterson Institute. As early as 2006, he advocated bilateral diplomacy to support China’s and America’s “joint responsibility” to ensure global financial stability. Recent events have revived proposals for such a format.  These advocates have stressed the need for the two countries to resolve currency disputes and jointly enforce IFI reforms.

In his analysis, CIGI Senior Fellow Gregory Chin suggests that failure or frustration in a divergent G20 process may feed a “Great Power withdrawal into the bilateral track to deal with matters of highest strategic importance. This could mean confining the multilateral track to implementing the decisions made by the Big 2.” This should not immediately be considered a negative outcome. While the G20 scores high on legitimacy, its efficiency and compliance have waned. Resolution of the multitude of issues on the US-China bilateral agenda alone (from trade to currency valuation to intellectual property) could ease gridlock in many international negotiations. However, expectations for a lean and authoritative G2 assume that the two leader countries can abstain from squabbles over human rights, the proverbial ‘third rail’ of US-China relations.

While certainly there are larger strategic factors at play, the success of a G2 would heavily depend on ability of the leaders themselves to get along and work constructively. Can the ever technocratic Hu find common ground with the always affable Obama? The new American President shows an understanding of the importance of the bilateral relationship. Following their first meeting, President Obama noted that, “I continue to believe that the relationship between China and the United States is not only important for the citizens of both our countries but will help to set the stage for how the world deals with a whole host of challenges in the years to come.”

Indications from inside China, however, seem to downplay any expectations of a G2. In the days before the London Summit, leading scholar Huang Ping of the Chinese Academy of Social Sciences (CASS) asserted that “the so-called G2 is both unrealistic and problematic to fit in with the traditional Chinese value of a harmonious world.” By pushing other regional and global developing economies out of key international decision-making, China could risk alienating its like-minded allies in the global South. Continued success of the G20 fits in much better with this approach, and Dr. Huang suggests that China should promote this larger steering group.

Whether formalized or not, a G2 appears to be inevitable, if in nothing but name only. As the two leaders meet, the US-China forum will be cast in this light with enormous scrutiny. ‘G2’ will become the favored term of pundits, perhaps to its detriment.

A major stumbling block for the G2 may end up being the two nations’ cultural differences in their fiscal behaviors. Arguably, the US propensity to spend and the Chinese need to save drove the world into crisis and offered recovery, respectively. However, this balance has proven unsustainable and the macro-economic structure must be fixed. Recovery relies on the two governments providing their citizens with the correct incentives towards long-term restorative fiscal behavior. Yet, to appear successful, a G2 will need instantaneous results.

In his column, “What the G2 Must Discuss Now that the G20 is Over” (7 April 2009), the Financial Times’ Martin Wolf suggests that while China’s desire to engage the US may be self-motivated – to stabilize its US currency reserve, deflect exchange rate reform, and rebalance spending-saving – it is a “necessary condition for serious discussion of global reforms.” If arranged properly, a collaborative G2 would have the potential to remove policy obstacles and pave the way for general agreement across the board. However, if used as another opportunity to name and shame each other, it could heighten tensions in an already delicate relationship.

The most likely outcome is a mediocre G2, one that cannot live-up to the overblown expectations. Here, enters again the G20, this time with a strong dose of modesty and a previously excluded group of leaders more committed than ever to be a part of the process. If however the G20 can forgo this chain of events by harnessing leadership from within and boosting national compliance and effectiveness, plurilateral consensus may trump dyadic centralism.

The BRICs work on lending to nations in distress

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Since January the IMF has been working on the issuing of a first bond issue.  The bonds would be denominated in SDRs, with a maturity of 1 year and offered to Central Banks. Speculation has been rife for some time that the BRIC countries would be the principal purchasers of such bonds. The BRIC countries – Brazil, Russia, India and China met together just several days ago to work on possible terms of the bonds.  It is noteworthy that the BRICs again are seen as a self actualizing group and it appears that all are prepared to lend to the IMF in this way though it appears that the BRICs would prefer that their be a secondary market for the bonds to improve their liquidity.

While the BRIC targeting is noteworthy in and of itself, it would appear additionally that the bond issue is a means for the BRICs to contribute to nations in distress but also to avoid providing longer term commitments to the IMF.  Some, like Cornell’s Eswar Prasad, formerly the chief of the financial studies division in the research department of the IMF, see the bond issue as a means to put pressure on the IMF and leading members to increase the voting shares of countries Continue reading →

The Bad News Continues

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This week finance ministers are meeting at the International Monetary Fund (IMF) and the World Bank (WB).  In advance of the meeting the IMF release a Report yesterday that raised the total projected losses from the global financial crisis to banks and other financial institutions to $USD 4.05  trillion.  That’s a big number and few steps have been taken by the institutions to write down those amounts.

To date the IMF has loaned $55 billion to to countries such as Iceland, Ukraine, Hungary, Serbia, Romania, Belarus and Latvia. In a continuing effort to identify the impact on emerging countries in either the G5 or the N11 a November arrangement to loan funds to Pakistan was concluded.  Mexico has just concluded (March 24, 2009)  a flexible credit Continue reading →

‘From Architects to Gardeners’ with Joshua Cooper Ramo

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I first encountered (not literally mind you) Joshua Cooper Ramo in his description and analysis of what Ramo called the ‘Beijing Consensus’.  Difficult to unearth the consensus part of the story, but that’s for another post, still I was intrigued by his effort to describe a developmental approach that emerged from the ‘new’ China.  I was also interested in the fact that he lived – at least part time – in China (hat’s off to any ‘louwai’ (foreigner) for doing this) and that he was the Managing Director of Kissinger Associates though he’d previously been a journalist including a stint as foreign editor and assistant managing editor at Time Magazine.

So, with the recent publication of, The Age of the Unthinkable: Why the New World Disorder Constantly Surprise Us and What Can We do about It, I was drawn to it – not least because the book was focused on the failure of current Continue reading →

Prevailing Winds and India

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I had the great pleasure of attending a presentation at the C.D. Howe Institute here in Toronto by Montek Singh Ahluwalia, currently the Deputy Chairman Planning Commission of India.  Unfortunately these sessions, probably wisely, are undertaken as off-the-record discussions.  So, I cannot comment directly on what was said.

Mr. Ahluwalia has had a very distinguished public career spanning the World Bank, the IMF, the Ministry of Commerce and the Ministry of Finance in India as well as a special secretary to the Prime Minister in the latter eighties. His appointments, writings and research point to what can only be described as a thoroughly erudite public servant.

Not surprisingly the focus of questions centred on the state of India’s economy in the midst of the global financial Continue reading →

N-11 and the Global Financial Crisis

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 Late in 2005, Goldman Sachs (GS) introduced the concept of the N-11. As described by Dominic Wilson and Anna Stupnytska in the GS Global Economics Paper, No. 153  (March 28, 2007), “The N-11: More than an Acronym.”*

The N-11 appeared to be a GS effort to introduce a further tier of emerging economies and determine whether the next group of large developing countries with large populations had the potential to become ‘BRIC-like.’  Their summary conclusion:

 

“The diversity of the N-11 makes it difficult to generalise. But our projections confirm that many of them do have interesting potential growth stories, alongside reasonable scale, although their prospects vary widely and some face much greater challenges than others.  …Of the N-11, only Mexico, Korea and, to a lesser degree, Turkey and Vietnam have both the potential and the conditions to rival the current major economies or the BRICs themselves. Other N-11 economies – Indonesia and Nigeria in particular – have the scale to be important if they can deliver sustained growth. But while the rest of the N-11 may not have a BRIC-like impact any time soon, the Continue reading →

BRICSAM and the G20: A Week Later

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The London G20 summit turned to be an unanticipated success. In the weeks and days before the event, signs were gloomy of any positive outcome. The French and Germans were saying ‘no’ to any major collective stimulus package. Gordon Brown as host was losing his personal bounce amidst increasingly pessimism about the UK economy. And even the Barack Obama phenomenon, as directed towards his trip to the London G20, appeared to be more about style than substance.

On the day, however, the G20 turned sunny like the actual weather in London. Although the tensions between the ‘Anglo-Saxon” stimulators and the Continental regulators were still played up the real agenda was playing out in other ways. As predicted by CIGI blogs in the past the trans-Atlantic tensions should increasingly be seen as the side show. The Continue reading →

So, Decoupling is not Dead

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Jim O’Neill, Head of Global Economic Research for Goldman Sachs, is not ready to declare decoupling dead – at least with regard to the BRICs.  O’Neill, the ‘inventor’ of the BRICs, recently sought to resuscitate the notion that the BRICs can continue to grow even after their largest export market, the US, succumbs to the Great Recession, because they rely on domestic demand.  The piece is entitled “The New Shopping Superpower:  The BRICs rely increasingly on domestic demand and can boom even if export markets like the US slow,” and was published in NEWSWEEK (March 21, 2009 in the published magazine, March 30, 2009 issue).  Indeed, Jim not only defends decoupling, he has revised his estimate of when he believes the BRICs, collectively, will outgrow, in dollar terms, the G7.  Earlier predictions by Jim argued the BRICs would collectively have a larger economy in 2035.  Now Jim, with an examination of current rates, predicts that the shift could occur as early as 2027.

Though Jim recognizes that, collectively, the BRICs are likely to grow at only 4 percent, predictions for the global economy are a decline of 1.1 percent.  Individual developed states are in much more difficult shape, with Goldman Sachs’s predictions for the US down 3.2 percent, worse for the Euro zone and a dizzying 6.1 percent decline for Japan.

Meanwhile China is predicted to grow at 7 percent this year and over 8 percent in 2010 and India at 6.6 for the same year.  As O’Neill concludes:

“Within the overall picture, there is clear evidence of major rebalancing, as BRIC shoppers account for an increasingly large share of global consumption.  When we track retail shoppers from 2004 to 2008 (using data adjusted for inflation and the relative size of national economies), it becomes clear that European and Japanese shoppers are barely contributing anything to real consumption growth.  American shoppers gradually contributed less up to 2007 before completely zipping up their wallets in 2008.  BRIC shoppers slowly contributed more, and, importantly, their contribution continued to increase into 2008, despite the collapse of the US shopper.”

Jim looks to better growth for China on the basis that China’s retail sales grew by 15 per cent in February.  Consumer prices have declined sharply providing a boost to real income for Chinese consumers.  Jim also notes that the government has announced plans to strengthen medical coverage that he, and I’m sure the government, hopes will help release the savings of the public. And then there is infrastructure spending, etc., etc., ending with the current stock market rally. Notwithstanding the lowering of current growth predictions, Jim remains optimistic over China’s growth prospects.

And he may be right, though the cascading implications of the global financial crisis and its impact on trade, investment and jobs should not be underestimated.  For instance, I note that Brazil’s economy – another of the BRIC economies – is now suffering.  A recent article in the New York Times (“Brazil’s ‘Teflon’ Leader Nicked by Slump,” by Alexei Barrionuevo, dated April 3, 2009) suggests the real economy is now “hurting”. Brazil’s GDP has fallen 3.6 percent in the last quarter of 2008 from the third, and the country lost 654,946 jobs in December 2008, with 101,748 more lost jobs in January.

I would continue to hold all bets on decoupling for the moment.

The Cost of Support

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Today’s New York Times article by Andrew Kramer, “Russian Auto Bailout Protects Jobs (Efficiency Not So Much)” (Tuesday April 7, 2009) chronicles the Russian governments efforts to prop up employment in automobile manufacturing including the Lada (Avtovaz) factory in Tolyatti.  The Russian government is giving billions of dollars, no strings attached,  in an effort to subsidize employment in a facility that has a wretched productivity – each worker producing on average 8 cars a year as opposed to 36 cars a year per worker at GM in Bowling Green, Kentucky.  At the same time, as identified in the World Bank’s trade protection (reported in Elisa Gamberoni and Richard Newfarmer’s “Trade Protection: Incipient but Worrisome Trends“) list, Russia in the fall imposed a tariff on imported cars.  The collapse in automobile demand in Russia has come later than the United States, according to the Times article, but it could be more severe.  And the Russian government is now supporting a no-layoff policy.