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…)
While everyone else is amusing themselves speculating about Obama’s picks for his Cabinet, here in New York everyone’s focused on a different question: what it all means for senior posts in multilateral agencies.
Start with the one thing we know for sure (as of yesterday): Kemal Dervis is leaving his post at the helm of the UN Development Programme, citing personal and family reasons. By and large most people think this really is why he’s leaving (his family is based in DC, so an NY-based job probably isn’t much fun). But at the same time, it also hasn’t escaped notice that Dervis might also be well placed to win another senior multilateral post, should one open up. He’s an intellectual heavyweight, not least on global governance reform (at a time when the G20’s evolving role makes that especially topical) – and he has impeccable economic credentials too.
So is another multilateral post likely to open up? With Strauss Kahn now clearly out of the woods at the IMF, speculation is revolving around two posts in particular: UN Deputy Secretary-General, and World Bank President.
The DSG post is currently held by Asha-Rose Migiro of Tanzania, the third holder of the post since it was instituted in 1997. Theoretically the DSG is supposed to have a key role in bringing coherence to the UN’s development activities, but in practice the current postholder is generally regarded as having underwhelmed. With everyone wondering just how robust Obama’s commitment to multilateralism will prove to be in office, some are speculating that this would be a good moment for Ban Ki-moon to shake up his top team – and with Migiro’s post soon due up for renewal anyway, a new face in the DSG’s office might be just the ticket.
Bob Zoellick, meanwhile, has been terrific for the World Bank. He’s been outstanding on the food price crisis (not least thanks to his alliance with WFP head Josette Sheeran, another former State Dept minister under Condi Rice), incredibly thoughtful on multilateral reform and he has brought calm to the institution after all of the Wolfowitz shock therapy. So why might he leave?
In a nutshell, because of the new Administration. To be sure, Zoellick is greatly respected by Republicans and Democrats alike; and there’s no precedent that a World Bank President (to date, always an American, though this convention may be crumbling) must leave when an Administration of a different political stripe arrives. But another precedent, one that may worry Zoellick, is that a World Bank President in such a situation can find himself eclipsed to some degree by the arrival of a new and powerful US Executive Director on the Board. There’s no sign of any whispering campaign against Zoellick – but he may decide that it’s a good time to move on anyway.
Kemal Dervis would be a credible candidate for either of these positions, of course – so who knows, perhaps some of this analysis features in his thinking. But there’s another angle to the story too: the UK dimension. From a British perspective, the departure of the UNDP Administrator and potentially of the DSG as well must have people at the Foreign Office and DFID thinking hard.
Historically, the UK has always had two USG posts at the UN. Until Mark Malloch Brown moved over to the SG’s office (first as chief of staff, and then as DSG), the two Brit posts were at the top jobs at UNDP and at the UN Department of Political Affairs. But when Mark became DSG, muttering about British over-representation started to be heard – and so the Foreign Office allowed an American to become head of DPA when Kieran Prendergast retired.
Today, the UK is more modestly represented. It still has two USGs, yes – John Holmes at OCHA and David Veness at Safety and Security. But these posts are rather more junior than DSG or DPA – and in any case, David Veness is leaving. (He resigned over the bombing of UN offices in Algeria – a deeply honourable action, taken simply on the basis that it happened on his watch, when in fact there’s universal agreement in the UN that Veness has been a truly outstanding head of security, who has delivered a quantum leap in the quality of UN security around the world. Ban Ki-moon was crazy to accept Veness’s resignation, but there it is.)
So with a vacancy open at UNDP, and another potentially opening up in the DSG’s office, the question in London must be wheter this is a chance to make up lost ground. Lists of senior Brits with international development experience are doubtless being compiled even now…
Here in Britain, one Christmas present arrives a few days late each year: the declassification of Cabinet papers that are then made available to the National Archive under the ‘Thirty Year Rule‘. This year, the newly released documents are from 1978: the twilight period of Labour’s ill-fated Callaghan administration, famous for the ‘winter of discontent‘, when a torrent of industrial action meant that the rubbish went uncollected and the dead unburied.
You might suppose that it’s not the sort of anniversary that Gordon Brown will really want to be reminded of, not least given the obvious link back to Margaret Thatcher’s hugely successful election slogan of the time – ‘Labour isn’t working’ – and the fact that Callaghan’s administration had to go cap in hand to the IMF for a bailout.
But superficial similarities aside, the crucial difference between late 70s Britain and late 00s Britain is that during the former, the pendulum had swung all the way to the ‘state’ or ‘public’ end of the spectrum – whereas today, we find it right over at the ‘market’ or ‘private’ end. Robert Skidelsky, writing in Prospect this month, refers to Arthur Schlesinger Jr’s The Cycles of American History, which describes this cyclical dynamic in detail:
[Schlesinger] defined a political economy cycle as “a continuing shift in national involvement between public purpose and private interest.” The swing he identified was between “liberal” (what we would call social democratic) and “conservative” epochs. The idea of the “crisis” is central. Liberal periods succumb to the corruption of power, as idealists yield to time-servers, and conservative arguments against rent-seeking excesses win the day. But the conservative era then succumbs to a corruption of money, as financiers and businessmen use the freedom of de-regulation to rip off the public. A crisis of under-regulated markets presages the return to a liberal era.
As Skidelsky summarises, the 1870s saw the pendulum start to swing towards collectivism on the back of a global depression triggered by a collapse in food prices. Most industrialised countries began to raise tariffs; social protection systems were rapidly rolled out (although not in the US). The great depression of 1929-32 accelerated the process as Keynesian economics became orthodox. But by the 1970s, the pendulum was about to swing the other way, as governments pursued “free trade abroad and social democracy at home”:
The crisis of liberalism, or social democracy, unfolded with stagflation and ungovernability in the 1970s. It broadly fits Schlesinger’s notion of the “corruption of power.” The Keynesian/social democratic policymakers succumbed to hubris, an intellectual corruption which convinced them that they possessed the knowledge and the tools to manage and control the economy and society from the top. This was the malady against which Hayek inveighed in his classic The Road to Serfdom (1944). The attempt in the 1970s to control inflation by wage and price controls led directly to a “crisis of governability,” as trade unions, particularly in Britain, refused to accept them.
Large state subsidies to producer groups, both public and private, fed the typical corruptions of behaviour identified by the new right: rent-seeking, moral hazard, free-riding. Palpable evidence of government failure obliterated memories of market failure. The new generation of economists abandoned Keynes and, with the help of sophisticated mathematics, reinvented the classical economics of the self-correcting market. Battered by the crises of the 1970s, governments caved in to the “inevitability” of free market forces. The swing-back became worldwide with the collapse of communism.
But today, Skidelsky notes, the crisis is that of conservatism:
The financial crisis has brought to a head a growing dissatisfaction with the corruption of money. Neo-conservatism has sought to justify fabulous rewards to a financial plutocracy while median incomes stagnate or even fall; in the name of efficiency it has promoted the off-shoring of millions of jobs, the undermining of national communities, and the rape of nature. Such a system needs to be fabulously successful to command allegiance. Spectacular failure is bound to discredit it.
The situation we are in now thus puts into question the speed and direction of progress. Will there be a pause for thought, or will we continue much as before after a cascade of minor adjustments? The answer lies in the intellectual and moral sphere. Is economics capable of rethinking its core principles? What institutions, policies and rules are needed to make markets “well behaved”? Do we have the moral resources to challenge the dominance of money without reverting to the selfish nationalisms of the 1930s?
There’s no doubt that these are the right questions to be asking (David and I sketched out a first attempt to marshal some thoughts on this area in a paper we published just before the G20 summit in November). As Skidelsky notes, we could do worse than to aim for Keynes’s basic stance:
In terms of our pendulum analogy, he was someone who instinctively sought an equipoise: not in the timeless equilibrium of classical economics, but in a balance in political economy between freedom and control, national and international wellbeing, efficiency and morality. He was an Aristotelian, who believed that vices are virtues carried to excess. This is a good philosophy for today.
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.
