The G20 and the HIRCs Oscar Ugarteche

A group of seven highly indebted rich countries (HIRC) of the world have organized a meeting of twenty nations in London in order to discuss the future of the world’s finances. They have called to the table some creditor developing countries like Brazil, Argentina, Mexico, some Arab countries, China and India but have left aside all the other surplus countries in the world, creditors to the US and Europe. After all, the accumulation of export surpluses over a twenty year period is what has allowed deficit countries to overborrow to a total stock to the tune of about 200% of GDP average and growing fast. For good measure Gordon Brown invited two more European nations into the talks, feeling a bit weak. A few things come to mind; first, “who pays the piper calls the tune” and certainly now the piper is paid outside of Europe and the States. Secondly, the world order we knew since 1944 has finished and the new world order would have to take the new G7 into account for quick decisions. This means China, India Brazil and Russia are in and some European countries are out. Whatever the discussions held by 20 countries+2 will be irrelevant as this needs to be a global discussion given who the new creditors and debtors are. Third, the significant new role of Asia as a whole in both international trade and international finance calls for a reconsideration of the IMF/WB Board reflecting this major change and diminishing the European and US role. Fourth, this leads to the elimination of US veto power established in 1944 and to the mechanism by which each institution has a director from Europe and the States, respectively. This is hardly relevant these days, aside from being undemocratic, opaque and not reflecting current economic and financial realities.

Finally, a system where economic policy leads to massive surpluses that help finance massive deficits created by the model itself cannot work forever, as this crisis has come to show.

What has emerged is a group of leading nations that are now the major world debtors. These are highly indebted rich countries that have sustained trade and fiscal deficits for more than a decade and accumulated major debts, thereby draining credits to developing nations. These are countries that have over consumed systematically and in some cases done so with a very lax domestic credit policy. The argument was that the consumer in the West was better off with cheaply manufactured goods from Asia, Central America and Africa. The fact that no nation can borrow indefinitely for consumption did not come to mind. Initially surplus countries bought US Treasury Bills and kept their reserves partly in those instruments, then it was extended to British and European Government bonds. It was not clear that buying Government bonds in large quantities was going to lead to overborrowing on the other side. The table below shows the picture of the former G7 countries that hold roughly one third the reserves of the new leading emerging nations. If Japan is removed, the group of leading nations holds one sixth the reserves of the seven largest emerging nations, most of which are from Asia. The external debtor position, both private and public in other currencies is very high for Great Britain, France and Germany in the 150%-450% of GDP range, followed by the US which is in the 90-100% of GDP range. Public debt, in local currency is highest for Japan, Italy and the US. The very high level of Japan’s public debt (in the 70-170% of GDP range) is a result of the banking crisis of the 1990’s. If added up the sum is in the over 200% of GDP range. The growth perspectives of those countries are negative for all.

Is it reasonable for lenders to continue lending to contracting economies? What happens to debt payments when the economies that have overborrowed stop growing? Will they enter a depressive cycle because they have to adjust consumption downward in order to live within their means? Is it reasonable or fair that developing nations finance rich nations openly?

The role of the IMF was to be a watchdog for all countries and to be a whistleblower. It was designed to this end but it lost its track and ended up looking at emerging nations instead of looking at its constituency. The Financial Stability Reports are a case in point of what they are not looking at. The crisis began to unfold after October 2007 I the US but the FSR looked elsewhere. The first support programmes between the FED and the European Central Bank happened in late 2007 and the IMF kept very silent. It did not blow the whistle and hence did not prevent the crisis from unfolding. True, it does not have the capacity to do so any longer as derivatives have reached amounts twelve times the global GDP. No one can prevent a major crisis unless we all agree to new rules that forbid some financial instruments from being used, return reserves to banks and forego hedging risk.

In this context, then, with a major leading role for Asia in the new international financial architecture and a new enhanced role for Latin America and the Middle East, Russia and its neighbours, in world financial and economic affairs, it seems odd that Mr Brown wants to lead the discussions on the changes. Debtors are in no position to determine rules of the game, as debtor nations learnt in the 1980s.

It may well be that the export led model needs to be buried and a new one put forward at the same time that we end with floating rates. We went through this same problem in the 1930s and agreed then to have fixed exchange rates and industrialization policies together with welfare policies. This was the background to the Bretton Woods system. This had both a fiscal and an external angle, supervised by the then newly created IMF. It seems these days the IMF does not look into HIRCs accounts, or does not care about them, or HIRCs don’t care much about IMF opinion. All of this must come to an end and be addressed by all UN member countries as no country should be outside the scope of international supervision and no new lending should go to shrinking overborrowed economies however developed they may be, unless they reorganise their economies and bring financial order to their nations. At the World Social Forum in Belem do Pará this January we agreed that this means much more than changing IMF governance. A new world order is possible.