G-20 - Not the world's finest hour
Obama's swing through world capitals may have been a stylistic success but it deflected attention from the fact that the G-20 did little to address the financial crisis.
WASHINGTON (Fortune) -- As Barack Obama headed back from his first diplomatic venture, two distinct views of his performance are emerging in Washington.
Republicans argue the G-20 summit produced a national humiliation for the United States. Democrats argue the President single-handedly undid the damage to America's reputation inflicted by George W. Bush's go-it-alone swagger and heavy-handedness. Both sides are missing the point.
True, it did seem a bit odd as Obama's GOP critics argue, that the President bowed to the Queen of England while later acting subservient to the king of Saudi Arabia. Then the President seemed to accept the Russian President's patronizing tone and his being dubbed "comrade." Even the official photo - with Obama pushed off center on the second row - seemed intentional, a demonstration that the era of American economic leadership (the so-called "Washington consensus") is over. Obama was presented as smiling from ear to ear in contrast to the rest of the world leaders who looked as if the world economy is coming unglued (which it potentially is).
By the same token, Democrats are right to argue that the President built up some personal and diplomatic chits that may prove to be extraordinarily useful in coming years. His later comments in Turkey regarding U.S.-Muslim relations can't help but have a positive effect in the long run. In London, the President's speeches were adroitly effective in calling the major world leaders to come together to work in unity.
The only problem is that those world leaders intend to be anything but unified. While the summit may have been stylistically successful, it was disappointing if not potentially disastrous from the standpoint of substance. Last weekend was clearly not the world's finest hour.
Let me put things in perspective. Over the last 18 months, more than $40 trillion of the world's wealth has gone poof in the night (with the U.S. alone losing more than $12 trillion). As a result of this disillusioning loss, global demand has collapsed. Not surprisingly, worldwide trade is expected to decline by nearly 10% for 2009, according to the World Trade Organization which is notoriously optimistic about such matters. If you look back at the period from 1929 to 1932, the first years of the Great Depression, global trade on an annualized basis declined by the same amount.
Today satellite photos of the main harbor anchorage areas around Singapore show a massive armada of empty cargo ships anchored with no place to go. This is a dangerous period for the world economy precisely because this 10% collapse in global trade is economically driven. The numbers do not yet reflect the coming rising tide of protectionist sentiment worldwide, which is almost certain to worsen the trade picture.
Recognizing the seriousness of this situation, President Obama arrived at the G-20 summit with a proposal for the world to agree to a global stimulus plan. Each nation would commit to a fiscal stimulus of at least 2% of GDP. The Europeans, led by the French and German, gave our new president the back of their hands. Perhaps German Chancellor Angela Merkel was Obama's rudest critic when she announced (1) We have no interest in stimulating our economy further, and (2) We're not going to change our policy of heavy reliance on exports, including to the United States.
Chinese officials arrived at the summit with the same message. Zhou Xiaochuan, who runs the Chinese central bank, and is a professed Marxist, ironically used a Confucian argument to defend the status quo policies of heavy dependence on exports with the goal of building up piles of excess savings: "Tradition, cultural, family structure, and Democratic structure and stage of economic development are the major reasons for high savings ratio in East Asia." Translation: Americans should save more and consume less but not at this time.
While this drama was unfolding, back in Beijing the privately issued CLSA Asia-Pacific market's PMI index for Chinese manufacturing, which accounts for 40% of GDP, contracted at an accelerating rate. Exports have collapsed as well and they represent 33% of GDP. Yet the Chinese officials in London, with a straight face, announced that their economy is still on target to achieve a whopping 8% GDP growth for this year. Based on this delusional conclusion, the Beijing officials quickly adopted a swagger as they projected an air of superiority, particularly toward their U.S. counterparts.
Meanwhile, after belittling America's proposal for global stimulus, the rest of the world leaders, led by the Chinese, engaged in a derogatory discussion over whether the U.S. dollar needed to be replaced with some new international currency. Why? Because of America's irresponsible policies. What was remarkable was that no one in the American delegation felt confident enough to point out that the emerging markets and certain other parts of the industrialized world were engaged in their own irresponsible, export-dependent policies that need to be corrected.
To cover up this tragic failure to arrive at a global growth consensus, the G-20 patted itself on the back when it offered the International Monetary Fund (IMF) $1.1 trillion in new taxpayer financing. If you looked at the headlines, you would have thought that this magnanimous gesture was intended to reduce the pain and heal the wounds from the global collapse on the poorest emerging markets. Think again. The unspoken mission of this summit was the effort by the Europeans (who run the IMF) to save the collective skin of the European banks.
Of the total $1.1 trillion of the IMF package, $750 billion will go to bail out the European mega banks which lent massively to developing economies, particularly in eastern and central Europe. Another $100 billion will go to bail out bad European bank credits in Africa and Asia. The rest - about $250 billion of "export credits" - will go to support the export franchises of the Asian economies. Put another way, the IMF's capital will revive the very export markets that have made the United States an international debt laughing stock.
So despite all the nice rhetoric and stunning photo opportunities, the G-20 Summit will be remembered years from now as an abject failure. This was a moment when the major economic leaders of the world needed to rethink the model under which the world has operated the last several decades. That model has crash landed and the danger, as policymakers muddle through the current situation, is that they stumble into an era of rising protectionism and beggar-thy-neighbor attempts at currency manipulation.
In many ways, the G-20 Summit is reminiscent of a similar gathering which took place in 1933. During that gathering, officials offered each other pleasant platitudes even as they were preparing to ramp up 'go-it-alone' economic, trade and currency policies that proved to be the world economy's undoing.