Push and pull begins between leaders
Michael Stutchbury, Economics editor | September 26, 2009
But, as Kevin Rudd says, we have an enormous stake in the Group of 20 nations' bid to "rebalance" the world out of economic crisis.
The question is whether the new US plan set to be endorsed in Pittsburgh today actually works.
The answer could prove crucial to Australia's rekindled hopes for a new era of prosperity from fuelling the blast furnaces and power stations of China's industrialisation.
China's economic stimulus has underwritten Australia's world-beating performance among the G20 nations during the crisis. Treasury secretary Ken Henry this week noted that the value of Australia's merchandise exports to China - mostly iron ore and coal - have jumped a stunning 16 per cent since the global crisis hit a year ago.
But Henry also warned that our "increased reliance on China" posed a "key short-term risk". That is, we're being buoyed by Beijing's huge, but necessarily temporary, domestic stimulus. Australia's resilience could quickly dissolve if China cannot generate self-sustaining growth when this policy stimulus fades.
Enter the "framework for sustainable and balanced growth" that Obama and his Treasury Secretary Tim Geithner are putting to G20 leaders. It entails a new system of global oversight to make China less dependent on the American consumer and the US less hooked on borrowing Chinese savings. American living standards would be cramped. Chinese living standards would rise. Europe would deregulate more to encourage entrepreneurs and jobs.
Obama's choice of Pittsburgh symbolises such yes-we-can restructuring. The northeastern US "steel city" has lost its manufacturing base in the oil shocks of the 1970s, but has since revived on services and technology.
These 1970s oil shocks led the Group of Seven industrialised nations to co-ordinate the key international economic and exchange rate policies. Globalisation and the rise of China and India has forced enlargement into the G20, born in the 1997 Asian financial crisis and now elevated by the global crisis into leaders status. Australia's in because of our part in the Asian crisis and, Rudd says, we're the world's 14th biggest economy. For the first time, Australia has "a voice in the decisions of the management of the global economy, which directly affects us".
Since the London G20 summit in April, the financial panic has receded, stockmarkets have rebounded and global industrial production has stopped collapsing. US Federal Reserve chairman Ben Bernanke has declared that the American recession is over. The International Monetary Fund is about to again upgrade its growth forecasts.
But US and European recovery will probably be tepid. So the G20 leaders will be loath to withdraw the huge fiscal and monetary stimulus measures that headlined the London summit. Instead, reform of the global economic institutions will give China more IMF voting rights at Europe's expense.
Regulatory oversight of the global financial and banking systems will be strengthened. Obama and Geithner want banks forced to hold more capital, which threatens Europe's more leveraged banks. And Europe will demand tougher curbs on executive bonuses than the US will allow.
The initial G20 crisis response was frightened but relatively easy to co-ordinate; everyone had to furiously bail out the sinking ship. Now G20 countries will have to push and pull in different and difficult directions.
The US can no longer suck up the world's savings to finance its gaping budget deficit, consumer spending and housing construction. That strategy fuelled global growth out of the early 2000s tech wreck.
But a widening trade deficit also blew out the US balance of payments current account deficit to $US800 billion ($920bn). This was matched by a series of gaping current account surpluses run by China (more than $US400bn), the oil exporters ($US400bn) and Japan ($US200bn).
And other regions started tapping these global savings pools to finance widening external deficits.
But the music stopped because the US wasted the capital inflow from China on consumption and its excess housing investment.
Excess Chinese savings ended up in complex financial instruments, subprime mortgage lending and an unsustainable US housing bubble.
Rudd told the UN General Assembly this week that the pre-crisis model was based on "unsustainable imbalances; excessive consumption fuelled by consumer and corporate debt; and irresponsible risk-taking in systemically significant financial institutions".
"One of the failures of the old growth model of the last decade was the lack of effective global co-ordination," he said. "This allowed imbalances to grow unchecked and financial institutions to remain inadequately supervised."
Process-driven Rudd set out four elements of Obama's global recovery plan. G20 nations should agree to rebalance global growth. They should show how their own national economic strategies fit with this. The IMF would judge whether individual national plans were consistent with balanced global growth. Then the IMF conclusions would go to a G20 "peer review process which would identify specific risks and vulnerabilities".
The financial crisis itself will brutally correct some of these imbalances. But it soon gets harder. The central underlying imbalance, the enormous US budget deficit, is tipped to blow out to $US1.6 trillion this year thanks to Obama's fiscal stimulus. At 11.2 per cent of gross domestic product that's the biggest US budget deficit since World War II.
A Chinese economy driven by more domestic spending would no longer generate the excess savings or export receipts to finance such US budget deficits. But that requires China to liberalise its economy as it bases its growth more on consumer and infrastructure spending. Its banking system has to be geared more to small business and entrepreneurs than state-owned heavy industry.
It also will require a big currency realignment. The US dollar needs to fall to promote American exports in place of domestic spending. The yuan needs to be allowed to rise to encourage Chinese domestic-led growth.
It is today's version of the G7 Plaza Accord, reached 24 years ago this week in New York, to depreciate the US dollar against the yen and the deutsche mark. A weaker greenback aimed to generate export-led growth out of the early 1980s recession and help struggling cities such as Pittsburgh.
This time there's a complication: the heavy weight of US Treasury bonds within China's $US2.1 trillion foreign exchange reserves. China would initially lose from a weaker US dollar.
As well, the 1985 Plaza accord didn't prompt Japan - Australia's other big export market - to restructure in favour of domestic-led growth. And, now efficient manufacturing exporter Germany bristles at suggestions that it should rein in its external surplus.
But the biggest question may be whether Obama's America will provide the global leadership that Rudd this week maintained it would.
Contrary to Rudd's hopes, Obama has provided no leadership on international trade. The World Trade Organisation's Doha round remains stalled. And Obama slapped a protectionist 35per cent import tariffs on Chinese-made tyres a fortnight before the Pittsburgh summit. He bought trade union support for his healthcare policy at the risk of a trade war with Beijing! This will increase Chinese suspicions that the US will welsh on its part of Obama's global recovery plan.
Rather than more health spending, Australia needs the US to attack its budget deficit and avoid the easy route of using inflation to "monetise" its mounting government debt burden. It doesn't matter much to us whether China's growth is based on domestic spending or exports; it will still buy our iron ore, coal and gas.
This underlines the Australian oddity, as Rudd seeks out G20 alliances with Obama, Britain's Gordon Brown, Germany's Angela Merkel, South Korea's Lee Myung-bak and even Italy's Silvio Berlusconi. We're a rich commodity exporter, the only developed economy to have grown during the past year. Our banks and banking supervision are so strong that G20 financial reforms won't require us to do that much. We will lead the developed world in exiting emergency low central bank interest rates.
And as Henry noted last month, Australia will probably attract more foreign capital to finance our Asian-oriented mining and energy development. As the rest of the world tries to shrink global "imbalances", Australia could run bigger current account deficits as our investment in new capacity exceeds our domestic savings base.
Australia's challenge is to put our external imbalance to productive use so it doesn't all end in tears. That's Rudd's day job.
http://www.theaustralian.news.com.au...017771,00.html
Michael Stutchbury, Economics editor | September 26, 2009
But, as Kevin Rudd says, we have an enormous stake in the Group of 20 nations' bid to "rebalance" the world out of economic crisis.
The question is whether the new US plan set to be endorsed in Pittsburgh today actually works.
The answer could prove crucial to Australia's rekindled hopes for a new era of prosperity from fuelling the blast furnaces and power stations of China's industrialisation.
China's economic stimulus has underwritten Australia's world-beating performance among the G20 nations during the crisis. Treasury secretary Ken Henry this week noted that the value of Australia's merchandise exports to China - mostly iron ore and coal - have jumped a stunning 16 per cent since the global crisis hit a year ago.
But Henry also warned that our "increased reliance on China" posed a "key short-term risk". That is, we're being buoyed by Beijing's huge, but necessarily temporary, domestic stimulus. Australia's resilience could quickly dissolve if China cannot generate self-sustaining growth when this policy stimulus fades.
Enter the "framework for sustainable and balanced growth" that Obama and his Treasury Secretary Tim Geithner are putting to G20 leaders. It entails a new system of global oversight to make China less dependent on the American consumer and the US less hooked on borrowing Chinese savings. American living standards would be cramped. Chinese living standards would rise. Europe would deregulate more to encourage entrepreneurs and jobs.
Obama's choice of Pittsburgh symbolises such yes-we-can restructuring. The northeastern US "steel city" has lost its manufacturing base in the oil shocks of the 1970s, but has since revived on services and technology.
These 1970s oil shocks led the Group of Seven industrialised nations to co-ordinate the key international economic and exchange rate policies. Globalisation and the rise of China and India has forced enlargement into the G20, born in the 1997 Asian financial crisis and now elevated by the global crisis into leaders status. Australia's in because of our part in the Asian crisis and, Rudd says, we're the world's 14th biggest economy. For the first time, Australia has "a voice in the decisions of the management of the global economy, which directly affects us".
Since the London G20 summit in April, the financial panic has receded, stockmarkets have rebounded and global industrial production has stopped collapsing. US Federal Reserve chairman Ben Bernanke has declared that the American recession is over. The International Monetary Fund is about to again upgrade its growth forecasts.
But US and European recovery will probably be tepid. So the G20 leaders will be loath to withdraw the huge fiscal and monetary stimulus measures that headlined the London summit. Instead, reform of the global economic institutions will give China more IMF voting rights at Europe's expense.
Regulatory oversight of the global financial and banking systems will be strengthened. Obama and Geithner want banks forced to hold more capital, which threatens Europe's more leveraged banks. And Europe will demand tougher curbs on executive bonuses than the US will allow.
The initial G20 crisis response was frightened but relatively easy to co-ordinate; everyone had to furiously bail out the sinking ship. Now G20 countries will have to push and pull in different and difficult directions.
The US can no longer suck up the world's savings to finance its gaping budget deficit, consumer spending and housing construction. That strategy fuelled global growth out of the early 2000s tech wreck.
But a widening trade deficit also blew out the US balance of payments current account deficit to $US800 billion ($920bn). This was matched by a series of gaping current account surpluses run by China (more than $US400bn), the oil exporters ($US400bn) and Japan ($US200bn).
And other regions started tapping these global savings pools to finance widening external deficits.
But the music stopped because the US wasted the capital inflow from China on consumption and its excess housing investment.
Excess Chinese savings ended up in complex financial instruments, subprime mortgage lending and an unsustainable US housing bubble.
Rudd told the UN General Assembly this week that the pre-crisis model was based on "unsustainable imbalances; excessive consumption fuelled by consumer and corporate debt; and irresponsible risk-taking in systemically significant financial institutions".
"One of the failures of the old growth model of the last decade was the lack of effective global co-ordination," he said. "This allowed imbalances to grow unchecked and financial institutions to remain inadequately supervised."
Process-driven Rudd set out four elements of Obama's global recovery plan. G20 nations should agree to rebalance global growth. They should show how their own national economic strategies fit with this. The IMF would judge whether individual national plans were consistent with balanced global growth. Then the IMF conclusions would go to a G20 "peer review process which would identify specific risks and vulnerabilities".
The financial crisis itself will brutally correct some of these imbalances. But it soon gets harder. The central underlying imbalance, the enormous US budget deficit, is tipped to blow out to $US1.6 trillion this year thanks to Obama's fiscal stimulus. At 11.2 per cent of gross domestic product that's the biggest US budget deficit since World War II.
A Chinese economy driven by more domestic spending would no longer generate the excess savings or export receipts to finance such US budget deficits. But that requires China to liberalise its economy as it bases its growth more on consumer and infrastructure spending. Its banking system has to be geared more to small business and entrepreneurs than state-owned heavy industry.
It also will require a big currency realignment. The US dollar needs to fall to promote American exports in place of domestic spending. The yuan needs to be allowed to rise to encourage Chinese domestic-led growth.
It is today's version of the G7 Plaza Accord, reached 24 years ago this week in New York, to depreciate the US dollar against the yen and the deutsche mark. A weaker greenback aimed to generate export-led growth out of the early 1980s recession and help struggling cities such as Pittsburgh.
This time there's a complication: the heavy weight of US Treasury bonds within China's $US2.1 trillion foreign exchange reserves. China would initially lose from a weaker US dollar.
As well, the 1985 Plaza accord didn't prompt Japan - Australia's other big export market - to restructure in favour of domestic-led growth. And, now efficient manufacturing exporter Germany bristles at suggestions that it should rein in its external surplus.
But the biggest question may be whether Obama's America will provide the global leadership that Rudd this week maintained it would.
Contrary to Rudd's hopes, Obama has provided no leadership on international trade. The World Trade Organisation's Doha round remains stalled. And Obama slapped a protectionist 35per cent import tariffs on Chinese-made tyres a fortnight before the Pittsburgh summit. He bought trade union support for his healthcare policy at the risk of a trade war with Beijing! This will increase Chinese suspicions that the US will welsh on its part of Obama's global recovery plan.
Rather than more health spending, Australia needs the US to attack its budget deficit and avoid the easy route of using inflation to "monetise" its mounting government debt burden. It doesn't matter much to us whether China's growth is based on domestic spending or exports; it will still buy our iron ore, coal and gas.
This underlines the Australian oddity, as Rudd seeks out G20 alliances with Obama, Britain's Gordon Brown, Germany's Angela Merkel, South Korea's Lee Myung-bak and even Italy's Silvio Berlusconi. We're a rich commodity exporter, the only developed economy to have grown during the past year. Our banks and banking supervision are so strong that G20 financial reforms won't require us to do that much. We will lead the developed world in exiting emergency low central bank interest rates.
And as Henry noted last month, Australia will probably attract more foreign capital to finance our Asian-oriented mining and energy development. As the rest of the world tries to shrink global "imbalances", Australia could run bigger current account deficits as our investment in new capacity exceeds our domestic savings base.
Australia's challenge is to put our external imbalance to productive use so it doesn't all end in tears. That's Rudd's day job.
http://www.theaustralian.news.com.au...017771,00.html