by David Steven | Jan 21, 2009 | Climate and resource scarcity, Economics and development, Global Dashboard, Global system, London Summit
I’ve been in Japan today, speaking at ‘Reforming International Institutions – Meeting the Challenges of the 21st Century’, a seminar organized by the United Nations University and the British Embassy in Japan.
You can download my talk here (with pictures, references etc) – or the text only is available below the jump. There’s a webcast too.
Headlines:
- It’s going to be a tough year. The financial meltdown has a long way to go, and the downturn is risking turning into a global depression.
- Trade is a bell wether. Protectionist pressures are already on the rise. If they gain traction, take that as a warning of a wider loss of confidence in global institutions.
- The unravelling of global economic imbalances could prove corrosive to the international order. If countries start to devalue to protect exports, expect a tit-for-tat dynamic to kick in.
- Scarcity issues (energy, water, land, food, atmospheric space for emissions) remain the key medium term driver of global change. Commodity prices will spike again as soon as there’s recovery.
- The downturn has stemmed the uncontrolled growth of emissions, but also lessened the chance of a robust global deal on climate.
- Economic bad times could well drive increased conflict. A major new security threat might be the fabled black swan – hitting just when the global immune system is already overloaded.
- If we experience a long crisis (or a chain of interlinked crises), we are likely to see either a significant loss of trust in the system (globalization retreats), or a significant increase in trust (interdependence increases).
- You need to stretch time horizons to get the latter – shared awareness (joint analysis of risks and challenges), as a basis for shared platforms (loose coalitions of leaders), which can lobby for a shared operating system (a new international institutional architecture).
- 2009 sets a challenging agenda for the G20 (financial reform and economic recovery – but framed by a broader vision on climate, resources, security etc.)…
- …the G8 (caucus of rich countries able to tee up Copenhagen and kick start development assistance if developing countries begin to teeter)…
- …the UN (especially Ban Ki-Moon’s proposed high level ‘friend’s group’ on climate, but also as a fora for getting to grips with scarcity issues)…
- and the Bretton Woods institutions and the WTO (first of all ensuring they keep their heads above water, then looking to ‘save globalization from itself’).
- Oh and be ready for the backlash – people are angry and rightfully so, but that may well lead us down some populist blind alleys.
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by David Steven | Jan 11, 2009 | Climate and resource scarcity, East Asia and Pacific, Global Dashboard, Global system, London Summit, North America
[youtube]http://www.youtube.com/watch?v=iRzr1QU6K1o[/youtube]
In last month’s New Atlantic, James Fallows had a fascinating interview with Gao Xiqing, Chief Investment Officer at China’s sovereign investment fund, and the man responsible for a significant chunk of China’s huge holdings of American dollars.
Gao – who Fallows dubs one of the US’s new banking overlords – thinks Americans need to learn some humility and fast.
“The simple truth today is that your economy is built on the global economy,” he says, “and it’s built on the support, the gratuitous support, of a lot of countries. So why don’t you come over and … I won’t say kowtow [with a laugh], but at least, be nice to the countries that lend you money.”
The US should disentangle itself from expensive overseas conflicts, Gao believes, raise its diplomatic game, and – above all – tell its citizens to get saving as part of a “long-term, sustainable financial policy.”
It’s all well and good, but maybe Fallows should have pushed Gao a little harder on whether China’s own financial policy is sustainable. After all, despite recent appreciation, the yuan remains substantially under-valued against both the dollar and the euro – the main reason why the Chinese has ended up holding so much Western debt.
Gao’s comments on the dollar are somewhat contradictory (and reflect all the ambiguity of China’s own dollar position). On the one hand, it defends its status as a reserve currency. The US is still the most viable and predictable market, he says. But on the other, Chinese investment in the dollar is widely unpopular at home. According to Gao, China’s citizens ‘hate’ its support of rich Americans (“people eating shark fins”) at the expense of “poor [Chinese] people eating porridge.”
More significant than public pressure, perhaps, is Gao’s belief that the dollar is highly likely to lose value over the short to medium term (with a corresponding appreciation for the yuan). This will wipe billions of Chinese reserves (reserves that have only been built up through consumption foregone) – while challenging China’s export-led growth model:
We are not quite at the bottom yet. Because we don’t really know what’s going to happen next. Everyone is saying, “Oh, look, the dollar is getting stronger!” [As it was at the time of the interview.] I say, that’s really temporary. It’s simply because a lot of people need to cash in, they need U.S. dollars in order to pay back their creditors.
But after a short while, the dollar may be going down again. I’d like to bet on that! The overall financial situation in the U.S. is changing, and that’s what we don’t know about. It’s going to be changed fundamentally in many ways.
Unravelling these imbalances seems certain to be ugly. Reading George Cooper’s book, The Origin of Financial Crises, on a plane the other day, I was struck by strong parallels between today’s economic woes, and a crisis we have heard little about recently – the ‘Nixon Shock’ that led to the end of the Bretton Woods system. (more…)
by Alex Evans | Dec 17, 2008 | Climate and resource scarcity, Global Dashboard
As oil continues its crazy gyrations (yesterday’s price – $48), news is proliferating that investment in new exploration and production is falling off a cliff. Monday’s NYT, for example, had this:
From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets.
Oil markets have had their sharpest-ever spikes and their steepest drops this year, all within a few months. Now, with a global recession at hand and oil consumption falling, the market’s extreme volatility is making it harder for energy executives to plan ahead. As a result, exploration spending, which had risen to a record this year, is being slashed.
The precipitous drop in oil prices since the summer, coming on the heels of a dizzying seven-year rise, was a reminder that the oil business, like those of most commodities, is cyclical. When demand drops and prices fall, companies curb their investments, leading to lower supplies. When demand recovers, prices rise again and companies start to invest in new production, starting another cycle.
Now for Dan Drezner, all this poses a question:
So, let me see if I have this right:
If oil prices are sky-high, the energy sector explains that it will be slow to develop new fields, because exploration requires massive fixed investments and no one knows what the price of energy will be 5-10 years from now;
If oil prices are low, the energy sector explains that it is unprofitable to develop new fields because… energy prices are low.
Well, actually that is more or less the long and the short of it; as I argued back in July, the oil price is set to continue its recent yo-yoing for as long as we continue without a clear ‘signal from the future’ about the long term demand outlook for oil. After all, if you were an investor considering ploughing money into oil fields that were only profitable above $60 or $70 a barrel, and which would take many years to recoup the capital cost, wouldn’t you apply a pretty big risk premium if you saw prices collapsing to below $50 from a high of $147 less than six months earlier, with the potential in the background for future climate policy to cause demand to plummet?
Problem is, though, that without that new investment, we’re on track for a serious price crunch at some stage, as both the IEA and Chatham House have argued. So how to square the circle? Well, Nick Butler – who was John Browne’s chief of staff at BP and now heads the chairman of the Centre for Energy Studies at Cambridge’s Judge Business School -has a proposal in the FT yesterday. He writes:
If the energy ministers want to stabilise the market they should begin by commissioning a detailed, independent analysis of what went wrong. They should then develop the stabilising mechanisms that would limit the possibility of any repetition of 2008.
The most effective mechanism would be agreement on a broad target range for prices – say, between $50 and $75 a barrel – backed by a strategic stock holding to be augmented or deployed when prices diverged from the range. To support such an agreement trading would be limited to those with a direct physical interest in the market.
From a new base of relative stability ministers could consider the longer-term issues that will shape the energy market: the huge need for infrastructure investment ($350bn a year according to the International Energy Agency) and climate change.
This idea of a price band is clearly starting to gain ground in the energy think tank world – I heard a very similar idea mooted by an attendee at a Shell / Economist energy breakfast in London last month. But I’m not so sure. While Nick Butler’s clearly right to refer to the need to integrate energy security with climate change, why not go one step further – and use a comprehensive climate framework to provide the long term oil price stability that’s needed to bring the right amount of new investment on stream?
Think about it. Imagine a climate regime in which the emission targets are sufficiently long term (i.e. multi-decade rather than in 5-yearly increments as under Kyoto), and which is based on a quantified stabilisation target, which therefore means that all major emitters have binding caps. (You can argue about political feasibility in the current political climate, but the fact remains that a global deal on climate that actually solves the problem will have to satisfy these conditions anyway – and sooner rather than later if we’re to limit warming to two degrees C.)
What such a regime would also achieve, with no extra work needed, is to provide long term predictability on how much fossil fuel will be being consumed – for decades ahead. True, it wouldn’t tell you exactly which fossil fuels – coal versus oil, for instance – but since they’re used in different markets (oil mainly for transport, coal and gas mainly for power generation and heat), you could make a pretty good guess.
And now imagine again that you’re the potential energy investor we met earlier. All of a sudden, you can invest with much more confidence – and what’s more, knowing the level of demand will enable you to watch what other investors are doing too, so that more or less the right amount of new oil is brought on stream to meet projected demand, within the context of a global deal for climate.
Oh, and there’s one other advantage: given that a global deal on emissions is primarily an agreement between energy consumers, you can worry just a little bit less about OPEC’s congenital inability to stop itself from cheating…
Update: meanwhile, “OPEC oil ministers meet on Wednesday to remove a record 2 million barrels per day from oil markets as they race to balance supply with the world’s collapsing demand for fuel … Saudi Arabia, the world’s biggest oil exporter, has led by example — reducing supplies to customers even before a cut has been agreed to help push prices back toward the $75 level Saudi King Abdullah has identified as “fair.””
by Alex Evans | Nov 25, 2008 | Cooperation and coherence, Europe and Central Asia, Influence and networks, London Summit
As Gideon Rachman notes, the fact that the G20 has now staged a summit at the level of leaders rather than finance ministers – which by my reckoning made it a de facto L20 – means that “the venerable old G8 has a real challenger on its hands”.
In addition to the advantages that Gideon counts off – the G20’s novelty, its inclusion of emerging economies, the fact that the G20 has the earlier summit (G20 in April vs. G8 in July), the Berlusconi factor – there’s also the fact that Gordon Brown (who’s chairing the April G20) is already gearing up for a big push to make a success of the G20 and get the ball rolling in earnest on a Bretton Woods II agenda (c.f. David and my paper on this if you missed it).
Even before you consider the G20, there are some big question marks over the G8. What has it really delivered over the past decade since it enlarged from G7 to G8? My count would go something like this: debt relief; the Proliferation Security Initiative; the Global Fund on AIDS, TB and Malaria; and the Financial Stability Forum. Four credible initiatives, yes – but not much of a tally for ten years’ worth of summits, and also notable that none of these areas really involved any serious domestic implementation commitments.
Part of the problem here is the limited bandwidth of the ‘sherpa’ system that prepares the summit agenda before heads meet in the summer. As I noted in a Guardian piece back in July, sherpas have pretty busy day jobs (like Permanent Secretary at the Foreign Office, or Private Secretary to the PM), which rather curtails their capacity to tee up major global deals as well. It’s a case in point of the problem with moving issues to the leaders’ level: yes, you get the big picture, but at the cost of moving issues to the most over-stretched parts of governments. Hardly surprising that you’re more likely to end up with a media-friendly ‘initiative’ rather than a comprehensive long-term framework.
And perhaps it’s here that we come to what may be the real ace up the G20’s sleeve: its roots in the world of finance ministers. Like leaders, finance ministers have the big picture. But unlike leaders, they also have big departments that already cover most of the global waterfront (apart from a few hard security areas like arms control) – and hence a great deal more analytical capacity for getting to grips with complex issues like climate change, trade and reform of the global financial system.
True, foreign ministries have big departments with lots of capacity too – but they have no way of forcing coherence on the rest of their governments when it comes to implementation. Finance ministries, on the other hand, have a decisive advantage: while herding cats may never be easy, it’s a whole lot more manageable if you control the catfood.
Admittedly, the G8 has a Finance Ministers’ variant too – which has arguably achieved more in recent years than the leaders’ G8. But co-ordination between the two G8 bodies hasn’t stood out as a strong point. With the G20, Gordon Brown has a chance to forge a different, more effective relationship between the finance ministers’ and leaders’ levels; indeed, it would be hard to imagine someone better qualified to do so, given that as well as spending a decade as Finance Minister, Brown was chair of the IMFC for so long.
by Alex Evans | Nov 13, 2008 | Climate and resource scarcity, Cooperation and coherence, Global system, London Summit
Ahead of this weekend’s G20 summit, David and I have published a short paper entitled A Bretton Woods II worthy of the name. Key points:
– The summit is unlikely to be able to live up to its billing. Leaders do not yet understand the nature of the problem well enough to be able to implement viable solutions. However, the problem is more fundamental than a simple lack of shared awareness.
– History suggests that leaders will only think the unthinkable on institutional reform once the challenge they face has really hit rock bottom. But history also suggests that we are wrong to think that the worst of the crisis is now past, given that many past banking crises have taken five years or more to unravel.
– Bretton Woods 1 looked across the whole international economic waterfront in 1944, while this weekend’s summit will be much more narrowly focused. Leaders will make a big mistake if they try and tackle finance in isolation, given the growing impact of resource scarcity, and that 2009 is supposed to see another ambitious global deal – on climate.
– We need to recalibrate what we expect from globalization through a serious debate about subsidiarity. Where has globalization gone too far, too fast? Where do we need more integration at a global level? These were exactly the questions that preoccupied Keynes in 1933, when he weighed the relative benefits of global versus local across a range of variables. We need a similar debate today as a precursor to serious international economic reform.
– Leaders need to extend their horizons in (at least) five directions: onto longer time scales; beyond financial regulation into wider resource scarcity challenges; into other international processes, especially climate; towards grand bargains with emerging powers; and beyond government, to non-governmental networks.
Full version after the jump, or better yet here’s the pdf.
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