As the leaders of the world's most powerful countries gathered for what all agreed was a critical international conference, the global economy was in the midst of its deepest slump in decades; a financial crisis in the developed world had led to sharp increases in unemployment, and the joblessness seemed stubbornly resistant to the frantic policy efforts enacted to bring it down.
National finances in the U.S. and Europe were a mess and their populations growing more and more restive. International trade relations were increasingly fraught. Countries that ran trade deficits demanded policy changes of those who ran chronic surpluses calls that were mostly snubbed. To some, the entire international monetary order the very underpinning of international trade seemed at risk. It was June, 1933, and Franklin Roosevelt led the U.S. delegation at a world economic summit held in London.
The G20 meeting commenced Thursday afternoon in Seoul against a backdrop not entirely dissimilar to that depression-era gathering in 1933, which economic historian Barry Eichengreen called "a last-ditch effort to arrange an internationally coordinated response to the Great Depression." And while the world is not facing a second Great Depression today, the original hope for the G20 in Seoul was, precisely, to formulate a coordinated international response to the still formidable issues that confront the global economy, two years after the financial crisis started in the U.S.
It won't necessarily buck up President Barack Obama to point out that that depression-era conference was, as Eichengreen also wrote, "a complete and utter failure." Some analysts have already pronounced that Seoul, too, will be a bust, mainly because the U.S. and its largest trading partners China and Germany in particular remain far apart on how to resolve massive international trade imbalances. The momentum of a few weeks ago toward an agreement that would have countries work in conjunction to keep current account deficits or surpluses within a range of 4% of national GDP has faded. It's been replaced by recriminations about the U.S. Federal Reserve's launch of another round of so-called quantitative easing, which will further ease monetary policy in the U.S. This has served to annoy pretty much everyone. Countries like Germany and Japan with already strong currencies relative to the U.S. dollar, believe the dollar will now weaken further, along with their exports. Emerging countries most prominently China believe (with good reason) that the creation of additional dollars by the Fed will increase the amount of "hot money" seeking better returns than are available in a low interest rate environment in the U.S. That in turn could fuel asset bubbles like the one China is arguably trying to deal with in its real estate market.
U.S. Treasury Secretary Tim Geithner said before the meeting opened that the talk of differences between the U.S. and much of the rest of G20 was "exaggerated." He was "very confident," he told an audience of businessmen in New Delhi, "that you're going to see very strong consensus" in Seoul on the need for both surplus and deficit nations to reduce their imbalances.
In fact, there's not likely to be much more than rhetorical consensus on reducing imbalances. And the remainder of the G20 agenda, which includes trying to codify capital requirements for banks in order to avoid financial panics like the last one, is incremental and decidedly not a reordering of the international financial system (including resolving exchange rate tensions), which is what was on the table in London during the depression.
But as governments tomorrow try to spin the communiqué that emerges from Seoul as hugely significant and the press and analysts express justifiable skepticism keep in mind one important fact: whether Seoul is ultimately judged to be a failure or a success, it can be far more important what happens domestically in the biggest economies in the world, acting on their own, for their own reasons.
Here the depression-era London meeting is instructive. "Domestic political constraints were ultimately responsible for the conference's failure," Eichengreen writes. "Yet it was not an unmitigated economic disaster." Behind the shelter of a floating pound, Britain was "free to pursue cheap money policies designed to stimulate domestic economic activity." (Sound familiar?) Similarly, dollar devaluation allowed the U.S. to pursue policies "designed to stabilize her economy, although it was not until 1934 that those policies found reflection in the financial markets, and U.S. economic recovery finally got under way." (They didn't call it QE II in those days, but they could have!)
And it's not just policy intentions in the U.S. that matter. China, the world's second largest economy, is now unveiling its latest five-year plan, setting the contours for its economic policy through 2016. In a recent, rare interview with Caixin, a leading Chinese financial magazine, Liu He, a key author of the plan and one the most powerful economic officials in the country, described at length the economic transformation China now intends to make. The sound bite that should make hearts leap at the U.S. Treasury Department was this: "People's lives will not improve, social development will not proceed, and the entire transformation of the economic development model cannot be implemented unless consumption expands."
Tim Geithner couldn't have put it better himself. But as Liu says, China's not planning on moving toward greater consumption and more efficient investment under international duress. It's doing so because it's close to having wrung every last drop from the low-wage, export-driven model that's propelled it for the last 30 years.
International economic cooperation, make no mistake, is a good thing. Excessive antagonism can lead to trade wars, and then everyone loses. But much-hyped international economic summits that aim high amidst dreadful conditions and fail are not necessarily disastrous. Things can still get better. It has happened before, and just may again.
With Stephen Kim in Seoul