The G-20’s New Thinking For the Global Economy

NEW YORK – The Seoul G-20 summit was notable for the increasing political weight of the emerging economies. Not only was it located in one, but, in many ways, it was also dominated by them. In two crucial areas, macroeconomics and global economic development, the emerging economies’ view prevailed. And an excellent proposal to link the two agendas – macroeconomics and development – emerged from the summit, and should be implemented in 2011. A key feature of the world economy today is that it is running at two speeds. The United States and much of Europe remain mired in the aftermath of the financial crisis that erupted in the fall of 2008, with high unemployment, slow economic growth, and continuing bank-sector problems. Emerging markets, however, have generally surmounted the crisis. Whereas 2009 was a tough year for the entire global economy, emerging markets bounced back strongly in 2010, while rich countries did not. Recent data from the International Monetary Fund’s World Economic Outlook tell the story. During 2010, high-income countries are expected to achieve modest annual GDP growth of around 2.7%, while the G-20’s emerging economies, together with the rest of the developing world, are expected to grow at a robust 7.1% rate. Asia’s developing economies are soaring, with 9.4% growth. Latin America is expected to grow at 5.7%. Even sub-Saharan Africa, the traditional laggard, is expected to grow at 5% in 2010. This two-speed global economy largely reflects the fact that the 2008 financial crisis began with over-borrowing by the rich countries themselves. Two high-income economies got themselves into trouble. The US, where consumers – assisted by reckless lending to non-creditworthy households – had borrowed heavily to buy houses and cars, was the main culprit. The periphery of the European Union – Ireland, Portugal, Spain, and Greece – also began a borrowing binge a decade ago, upon joining the euro, fueling a real-estate boom that likewise went bust. Emerging economies, for the most part, avoided this disastrous over-borrowing. One reason, certainly, was the vivid memory in Asia of the 1997 financial crisis, which underscored the need for limits on bank borrowing and capital inflows. By and large, Asian emerging economies were more prudently managed during the past decade. The same can be said about Brazil, which learned from its own crisis in 1999, as well as Africa and other regions. In the run-up to the Seoul summit, the US government put forward a proposal that the surplus regions of the world should increase their domestic demand – mainly consumption – to boost imports and thereby help the deficit regions (including the US) to recover. The G-20’s emerging economies were not impressed. Their answer was straightforward: the crisis began with US over-borrowing, so it is America’s responsibility, not theirs, to clean up the mess. The US should cut its budget deficit, increase its saving rate, and generally get its own house in order. The emerging economies reacted similarly to a second US initiative, the Federal Reserve’s so-called “quantitative easing.” Emerging economies once again spoke nearly in unison. They told the US not to boost the money supply artificially, as this would create the risk of yet another financial bubble, this time in the emerging economies and in commodity markets. Once again, the clear message to the US was to stop using gimmicks like fiscal stimulus or printing money and instead undertake a serious longer-term economic restructuring to boost saving, investment, and net exports. For their part, emerging economies wanted to change the subject from short-term macroeconomic stimulus and imbalances to longer-term development issues. The host government, South Korea, was especially dynamic here. South Korea called on the G-20’s members to focus on challenges such as meeting the United Nations’ Millennium Development Goals, raising agricultural production, and building sustainable infrastructure in developing economies. This was the first time that long-term development issues had been put so clearly on the G-20 agenda, and it is a sign of the growing geopolitical weight of the group’s emerging-market members. The result of the deliberations is a new framework for the G-20’s engagement with the rest of the developing countries, known as the Seoul Development Consensus for Shared Growth. The G-20 rightly decided to focus on those areas of the global development agenda where the major economies have a comparative advantage: financing of infrastructure such as roads and power; business development; and support for agricultural upgrading in the poorer countries. Other parts of the development agenda – for example, health and education – will not be the G-20’s focus. The new G-20 development agenda offers an excellent way to merge concerns about global imbalances with the need to accelerate the pace of development in the poorer countries. The US has been pushing China, Germany, Japan, and others to raise consumption in order to boost demand. But there is a better way to put these surplus countries’ high saving rates to use. Rather than pushing their households to consume more, the G-20 should work harder to channel these savings to the poorest countries in order to finance urgently needed investments in infrastructure. India’s Prime Minister Manmohan Singh put the matter perfectly. He noted that sub-Saharan Africa is now in a position to absorb more capital inflows to build infrastructure. He recommended that G-20 surpluses be recycled to those countries, and to other poor countries, to finance such investments. “In other words,” said Singh, “we should leverage imbalances of one kind to redress imbalances of the other kind.” By channeling the savings of China, Germany, Japan, and other surplus countries into infrastructure investments in the poor countries, the world’s economies truly would be working in harmony. The G-20 Seoul Summit may well have initiated that important process. Jeffrey D. Sachs is Professor of Economics and Director of the Earth Institute at Columbia University. He is also Special Adviser to United Nations Secretary-General on the Millennium Development Goals. www.project-syndicate.org