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As global imbalances worsen, G20 takes another stab at a solution

The world's most powerful economies resume their quest to smooth the global economy this weekend facing a troubling change in circumstances: the situation is getting worse, not better.

At meetings in Canada and South Korea last year, leaders and ministers from the Group of 20 nations laid out plans to finally resolve risks that had long been discussed: Asia's dependence on exports and the U.S.'s reliance on debt-fuelled consumption.

This goal looked achievable because economic forces already were bringing about the changes that policy makers wanted to achieve.

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Savings rates in the United States jumped to around 6 per cent from zero as consumers tried to rebuild wealth lost to the housing crash. China poured hundreds of billions into its own economy, generating domestic demand for factories that had for so long thrived on international sales. The U.S. trade deficit shrunk to a more sustainable level, and China's authorities appeared ready to allow its growing middle class buy more of the world's excess production.

But as G20 finance ministers and central bank governors gather for their first meeting of 2011, a new, harsher reality is sinking in: Instead of getting better, global imbalances are instead getting worse.

That's the message in a report by the International Monetary Fund that was prepared for the G20 meeting, scheduled for Friday and Saturday in the French capital. The fund warns that economic imbalances have increased and will continue to grow without action by governments, according to Reuters, which obtained a copy of the IMF document.

"Static policies will lead to even higher imbalances," John Lipsky, the IMF's deputy managing director, told a meeting of G20 deputies, according to Reuters.

An ideal world might look like this: Big exporters such as China and Germany would focus as much on stoking demand at home as they do conquering global trade, providing an opportunity for struggling economies such as the U.S. and Spain; the U.S., Britain and most developed European countries would get their deficits and debts under control, eliminating a significant source of financial risk; and emerging markets such as Brazil would stop trying to limit the value of their currencies by putting up capital controls.

The problem is that the world economy as it is constituted now is almost exactly the opposite.

By refusing to allow their currencies to rise, emerging markets such as China are forgoing a powerful tool to stamp out inflation, which is becoming a threat in Asia and Latin America. In the U.S., President Barack Obama this week passed on an opportunity to send a clear signal that he is serious about reducing the country's fiscal woes, submitting a budget to Congress that would leave the debt-to-GDP ratio above 70 per cent for another decade.

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"Imbalances are still there," said Glen Hodgson, chief economist at the Ottawa-based Conference Board of Canada.

The meeting's host isn't hiding from the problem. "That can't go on too long," French Finance Minister Christine Lagarde said on Thursday. "As is often the case with big imbalances, a system collapses."

Ms. Lagarde is pushing for agreement this weekend on a range of indicators that G20 members would follow to determine when a country's policies risked knocking the global economy out of whack. The French also are in the early stages of trying to win agreement on a broader overhaul of the international financial system, a push that won the endorsement Thursday of Bank of Canada Governor Mark Carney.

"We need a system that functions better," Mr. Carney said at a conference hosted by the Institute of International Finance in Paris, according to Bloomberg News.

The current system "is an increasingly unstable hybrid of fixed and floating exchange-rate regimes," he said. "It promoted in our opinion the enormous build of debt that preceded the crisis and is complicating the necessary balance sheet repair in its wake."

Discussions on the international monetary system will involve issues such as a code of conduct for the use of capital controls, more aggressive economic management by the G20, the proper role of the IMF and lessening the global economy's dependence on the U.S. dollar.

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Few of these things will be decided quickly, and it would be a victory for French President Nicolas Sarkozy if the G20 agreed to carry on the debate after his presidency ends in November.

More immediate is establishing "indicative guidelines" for assessing global imbalances. Canada is in the middle of negotiations as co-chair with India of the G20 subcommittee that was handed the task of drawing up a list of indicators that could act as warning signals for future crises. The list under consideration includes current accounts, real exchange rates, public debt and deficits, currency reserves and private savings rates.

Reports from Paris Thursday suggested that while there was broad agreement on the indicators, there was resistance to forcing countries to meet designated targets. China and Germany last year blocked a U.S. plan to have all G20 countries maintain current account surpluses or deficits of less than 4 per cent of gross domestic product.

"Having warning bells that go off is a good idea because you can have a better conversation," said Mr. Hodgson, a former Canadian Finance official who also worked for Canada's representative at the IMF in Washington. "It's a means of engaging people in a global dialogue about how their behaviour has a consequence for the rest of us."

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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