Hamish McRae: The shift of global power from West to East needs careful management
The Group of Twenty meeting in Seoul is important – but not because anything important is likely to come out of it.
It matters because it is arguably the first global economic summit where power is with the emerging world, not the developed world. So it sets the tone of debate for the next 20 years or more: we are moving to a more balanced global economy, or to put it more crudely, a world where we matter less and they matter more.
Intellectually, most of us accept this. You can debate whether China is likely to pass the US to become the world's biggest economy some time in the 2020s, as Goldman Sachs has projected in its Brics economic growth model. Or you can expect it to happen on rather different calculations, taking in currencies' purchasing power, in just two years' time, as one story said last week. But the date does not matter. It is going to happen. Add in the growth of India, which may also pass the US within a generation, and that of other large emerging economies such as Brazil and Indonesia, and the course is clear.
But there is a big gap between accepting that something is likely to happen and understanding its consequences. Even 18 months ago, at the London economic summit, it seemed that the West was setting the agenda. No longer.
The main reason for this is that the emerging world has come through the downturn far better than the developed world. In much of the former, there was no recession at all. Debt levels are much lower. Growth prospects, partly as a result of that, are much better. US and European banks remain hobbled and some have survived only thanks to government support.
Disarray is evident at a policy level, too. The US is a mess, with the former Federal Reserve head, Alan Greenspan, and the present Treasury Secretary, Tim Geithner, at loggerheads as to whether the administration is trying to devalue the dollar.
Europe is also in a mess, with Angela Merkel resisting the idea that Germany will have to bail out not just Greece but also Portugal, Ireland, Spain, Italy. Aargh! And the UK is in a mess, having managed to clock up the biggest fiscal deficit relative to GDP of any large economy in the world.
Why, given all this, should the leaders of China, India, and so on, pay any attention to us? The fact is, I fear, that our ideas about economic governance are regarded at best with indifference and at worst with contempt.
But that attitude is disturbing and counterproductive for two reasons. One is that, for the time being at least, the developed-world economies, taken as a whole, are much larger than the emerging-world ones. It is roughly a two-thirds, one-third split. So the emerging world needs the markets of the developed world, quite aside from the technology, intellectual property and other resources.
The other is that on one issue, the principal one before the G20 meeting, the West is right and the East is wrong. It is that, as a general rule, there needs to be a revaluation of many emerging-market currencies vis-à-vis the developed-world ones. The countries with undervalued exchange rates – and China is, of course, the most important example – will have to accept further revaluations. Indeed, it is in their interests to do so.
As you can see from the graph, most, though not all, of the emerging-market currencies are undervalued against the dollar, while some of those of the developed world – notably of resource-rich places such as Australia – are overvalued. The pound and the euro are, on these calculations, OK.
It's easy to appreciate why China and other Asian countries have sought to maintain an undervalued exchange rate. They want their exports to remain competitive, even super-competitive. But trade has to be seen to benefit both partners, and China, in particular, faces growing resistance in the US, its biggest export market. In any case, it hardly makes fiduciary sense for China to lend more and more money to finance the US government, only to see the paper it receives in return devalued.
To say that Asian countries are wrong on this is not to justify the policies of the West, policies that have been widely criticised by the emerging nations. We have been grossly irresponsible, stoking up consumer demand with an unsustainable borrowing binge. If the emerging world has aggressively followed what it sees as its self-interest, the developed world has been self-indulgent and worse.
The fact that both sides have made policy errors should provide the basis for a deal: currency realignments in exchange for more responsible fiscal and monetary policies.
It is not realistic to expect anything so explicit to come out of Seoul, nor does there need to be anything quite so stark. There are strong arguments for making any changes to global economic governance slowly and carefully, step by step, so that if we make a mistake we can step backwards.
In practical terms, while China should, and actually will, accept a gradual revaluation of the yuan, it would be deeply disruptive to have any sudden jump. And, equally, while the West needs to tackle its indebtedness at every level, there is a powerful case for doing this gradually, too. We need to maintain demand.
Don't pay any attention to the G20 communique, or the comments about it. We won't know the true outcome for some weeks because the real impact of any set of meetings takes time to feed through. But my hope is that, at the very least, the G20 does no harm. At best, it should make policymakers in both the old and new worlds appreciate how interdependent their economies have become, and how easy it would be to damage them all.
See this as at the start of a 20-year process, where economic power will gradually be shared more widely. As the weight shifts, the ideas of the newly powerful will carry more clout. But that clout has to be used with care: power inevitably brings responsibility, too.