Thursday, October 28, 2010

The G20, gruel, and low-hanging fruit

The G20 is meeting in Seoul to deliberate and the buzz is that they are going to focus on exchange rates and trade, among other things. Expectations are high among some people that this body will help resolve current trade issues. There were similar high expectations when the members of the World Trade Organization started the Doha Round. And there was good reason for optimism.  Globalization has shrunk the world. We are all more highly related in terms of business and economic policy. The global recession called for a coordinated approach to the slowdown and the financial problems that caused the worst economic collapse since the Great Depression.  Yet little has come of the Doha Round, coordinated financial reform, solutions to trade imbalances or currency competition. While it is true that protectionism has not raised its ugly face as much as it could have, there seems to be more than the usual amount of finger-pointing and populist face saving.  Deficit countries complain about surplus countries and vice versa. Germany wags its boney finger at the US for its inability to let go of its warm blanket – stimulus. Others worry that Germany, Great Britain and Canada maybe over-doing austerity.

Wazzup? Nothing more than common sense. While most of us love the benefits we get from clubs and teams we are not ready to give up who we are just for the sake of camaraderie. You love golf and are willing to shell out the monthly dues for the country club, but you aren’t about to throw out your favorite golf shirt just because other members are offended by it. Or you love the friends you met in your new bicycle club but you draw the line at 50 mile rides at 7 am on Sunday morning. And what is this – say again – I have to drive across town to meet with my Chocolate Martini Club because some of the members don’t have cars and prefer a location closer to their apartments? In short, we like the benefits from integration but there are limits to how much we really want.

The same can be said for international integration. While 16 countries of Europe decided to tie their sails to the euro, that doesn’t mean that the French will give up their snails or the Germans will welcome you in the morning with a bon jour. Politicians in each country are elected by their citizens. If globalization brings benefits to Spaniards, then they will applaud further integration. But when they believe that a particular new attempt at further integration will bring negatives to Italy, then Italians will throw their pastas in the face of any Italian politician who dares to sign the new free trade agreement.

In a paper I wrote some years ago, I talked about low-hanging fruit. Starting in the 1980s it seemed that globalization brought easy benefits to most countries. As tariffs came down in leaps and bounds, countries found that freer trade was like a tide that raised most boats. But as we approach 2011 and countries seem to have more equal strength and say-so than ever, the new  agreements seem more like zero-sum games. So each side fights tooth and nail. Each politician would rather say NO and go home and be honored, than make an  agreement that has some potential to harm his or her citizens.

The low-hanging fruit is gone. The WTO and other formats require consensus. How do you get such consensus with 20 diverse countries much less 160 of them? What you should expect – in the real world – is discussion and more discussion.  Clearly as the value of the dollar continues to fall, export-oriented countries whose well-beings are tied to strong exports will want to push harder to stop the dollar’s trajectory. Already we read more and more about weaknesses showing up in Germany, Korea, and several other countries. And many countries are not happy with the US for flooding their economies with dollars. But it is not in the immediate interest of US policymakers to have a stronger dollar or a more responsible monetary policy. Wam bam – there is no warm hug there.  With respect to trade problems in general – we cannot expect much fun in the sun either. Even with a declining dollar the US trade deficit is not going to disappear until US savings increases or our foreign friends reduce their savings.  But national savings in any country do not easily change since they are tied to culture, institutions, and very long habits.

So what we can conclude about this G20 meeting in Korea is that there will be no home runs and no singing in the sauna. The leaders are smart enough to know that nothing will be gained by sharp rhetoric and mean disagreements. Instead we will receive flowery speeches and unintelligible communiqu├ęs.  Milk toast will be abundant.  We have two things going on. We have a very difficult world economy  with no easy solutions. But we also have leaders who want to appear like they are doing something for their people. Since they know the real solutions are just about impossible and may mean some real sacrifice, we will get gruel. No low hanging fruit means we eat gruel! Bon apetit


  1. AS we used to say in DC back in the '80s, "Gridlock is good."

  2. Well, if nothing material comes out of the meeting, at least the attendees can enjoy golf, saunas, massages, caviar and champagne at their taxpayers’ expense (geese, did I just describe D.C.?). Maybe the best thing is for each country to focus on increasing domestic consumption, fegitabout exporting since no one is buying due to weak demand, bloated deficits, and credit ratings in the terlit. Since the pressure would be off to export and to manage currencies, everyone could kick back and tune into reruns of Leave It To Beaver, I Love Lucy, Gilligan’s Island, and Hazel.

  3. It ain't so easy Tuna when some of these countries exports are 50% or more of GDP. But I like your idea that we all sit around drinking PBR and watching 1950s TV.

  4. Usually I am the one who says you are too optimistic, but in this case I think you are too pessimistic. I can still remember growing up in the 1950s in Miami and hearing my rich Uncle Bud telling me "I made money when the Republicans were in power and I made money when the Democrats were in power". Even in the Great Depression he was doing better than others.

    I also remember watching Star Trek and learning the Ferengi Rules of Acquisition, especially the thirty-fourth rule "War is good for business," followed by the thirty-fifth rule "Peace is good for business".

    Part of economics is dealing with both good and bad economic conditions.

  5. It seems like no one is going to make any concessions until there are really very serious problems right? I guess policy change really depends on who has the most bargaining chips, and which other G's are sympathetic to their issues? Who are they Larry?

  6. With the worst of the global recession behind us, the alarm bells are no longer ringing. There is little impetus for the time being to do coordinated policies. Right now each country is experiencing its own slow growth. Each will try to solve its own problems. Coordination will have to wait.

  7. Just what has the G20 ever accomplished? The play golf, they drink copious amounts of martinis. That's about all they do. Great stuff if you don't belong to a country club.

  8. Even better when the people pay for your martinis, golf, etc.