Hamish McRae: As a new world order dawns, the big institutions will have to wake up
Sunday 04 October 2009
Last weekend it was the Group of Twenty in Pittsburgh, this weekend the International Monetary Fund and World Bank in Istanbul. If international meetings could revive the world economy we would be swinging along by now.
But of course they don't. It was, as argued here last week, policies taken by individual countries last autumn and winter that have stopped the rot – though maybe had the monetary authorities saved Lehman Brothers from going under the rot would have been less dire. The result has been the start of a modest upturn in the developed countries and a marked upturn among the emerging ones. The IMF forecasters have caught up with this and have upgraded their forecasts for the world economy.
That is not to say that the IMF/ World Bank meetings are a waste of Airmiles. At a bureaucratic level the big change over the past 10 days has been the elevation of the G20 as the main body coordinating global economic policies but a lot of the detail work will, in practice, be carried out by the IMF, while the World Bank and its affiliates will continue providing development finance. They are complex institutions, "owned" by the governments of the world and they need supervision. Annual meetings are a tried and tested method of providing that. In any case there are lots of detail associated with the G20 to follow up. It is just that it is unrealistic to expect anything overly significant – certainly not as significant as the elevation of the G20.
It takes a while sometimes to appreciate the scale of any change. I have been able to grasp the extent to which the downturn has speeded up the transfer of economic might to Asia and begun to think about the social and political consequences of that – indeed readers of these columns may feel I write about little else. But there is one thing that I had not fully grasped. It is that the emerging nations are not only coming out of the downturn much more strongly than the developed world; they are also coming out much sooner.
You can catch a feeling for this from the chart. It comes from HSBC, whose forecasts have been rather better than those of the IMF. As you can see three of the BRICs (Russia being the dramatic exception) are pulling through this year in much better shape than the rest of us. But next year the contrast will be just as great. All of them are expected to leap forward, while the developed world will struggle to pick up any pace at all.
It gets worse, or at least worse from the perspective of North America, Europe and Japan. For several years the developed world will be hobbled with the aftermath of its failures, financial and fiscal. Meanwhile the emerging nations will be relatively unrestrained, or at least most of them will. Stephen King, head of research at HSBC, who writes on Mondays in our sister paper, calls this moment a "tipping point" in his latest economic assessment. It is that big.
This makes all the guff coming out of Istanbul seem more than a little off-key. It is as though the twin institutions are still locked in the post Second World War world in which they were founded and when the developed countries still ran the show.
So we have Robert Zoellick, the World Bank's president, saying that he did not see a change in the status of the dollar as a safe haven in the near term. Well, yes, maybe in the short term, though the proportion of central bank reserves held in dollars is falling. But the short term does not matter. In the spring the Chinese called for an international currency to replace the dollar. If that is what they want, that is what they will eventually get. Mr Zoellick acknowledged the benefits having the dollar as a reserve currency brought to the US.
"The American public and American political leaders take for granted the unique status of having a reserve currency, which makes it a lot easier if you need to print money or raise debt," he said. "If they take that for granted and continue to run large budget deficits and if spending gets out of control ... we could lose what is an incredible thing to have."
But actually whatever successive US administrations do won't alter the fact that eventually that reserve status will go if that is what the emerging nations want.
Or take some remarks by the managing director of the IMF, Dominique Strauss-Kahn. He noted that the IMF had a mandate to become the lender of last resort for the world's central banks, and wanted the institution to help countries pool their resources to quell foreign exchange speculation.
"It's not a new mandate," he said. "We're just going back to our original mandate and try to do what has been asked of us 60 years ago." The role of the fund, he added, would consist in coordinating the pooling together of reserves from countries running surpluses so as to hamper speculative movements on foreign exchange markets.
That is quite right. The whole concept of the IMF was to create a fund that would stop countries in short-term balance of payments pressure from having to bring in import controls and hamper the general trend towards freer international trade. But it did not work ideally, as the surplus countries were never under as much pressure to correct their surpluses as the deficit countries were to correct their deficits. You could argue now that China has been under insufficient pressure to correct its surpluses, just as Germany was in the 1960s and Japan in the 1970s and 1980s.
He also explicitly criticised China's currency policy. The IMF would not stop what he called its "ruthless truth telling" even if it made it unpopular. He said: "The IMF view still is the renminbi is undervalued."
But the idea that the IMF could have some role in using the reserves of the surplus countries to do anything is for the birds. Germany and Japan never allowed that, so why should China? The idea that China will listen to truth-telling, however ruthless, is for the birds too. In any case to hark back to the foundation of the IMF is to take a nostalgic view of a world that is long gone. Every year that passes means that power shifts to the new players and away from the old – and officials in the old world just don't get it.
It is hard for us to appreciate how far this downturn has increased the economic self-confidence of emerging nations, particularly China. Two years ago, at the height of the boom, a lot of us still believed that China was dependent on the US for its markets. It could not go on growing swiftly if Americans did not buy its stuff. Well, that has been proved wrong, hasn't it? Not only has it come through without losing much growth but, as noted above, it and the other emerging nations are bouncing back ahead of the developed world. Of course there are fragile features in the emerging countries' boom but they have done a sight better than we have.
Rio is the place for a party – and the Games will help boost its brand
So is this good news for Rio de Janeiro and bad for the other contenders, most notably Chicago? Or the other way round?
There is the conventional story to be told, which runs like this. If you look at the experience of past winners, gaining the Olympics brings at best a modest economic benefit and, if badly handled, may become a financial disaster.
The most notable disaster was Montreal in 1976, which has only just finished paying off the debts and has underused sports facilities. The most obvious recent success was Sydney in 2000. It put in much-needed infrastructure and has done well to use the facilities to give greater access for a wide range of people to various sports. The others are somewhere in between.
Running a good Games does not necessarily lead to good use of facilities afterwards because the investments you make for a two-week party are inevitable different from the ones you would make for a city's long-term development. Besides you may over-invest. Atlanta did a mediocre Games but made a profit on the event. Barcelona ran a great party but has been paying the price ever since.
There are two further considerations. One requires looking at the opportunity cost – the things you can't do because you allocate resources elsewhere. In the London case the cost of the Olympics will be other investment projects that have had to be delayed because there is no taxpayer money for them.
The other consideration is branding. Does a high-profile event such as the Olympics bring benefits by "putting the city on the map"? If the Games are well done and if sport fits a city's image they can certainly advance the brand. Otherwise there is no advantage. So there were benefits to Sydney and Barcelona but not to Atlanta or Los Angeles.
And this contest? For Tokyo, Madrid and Chicago it is all pretty neutral. All are great cities anyway so there is no huge loss. But Rio? Great place for a party – the brand fits. So maybe the judges made the right decision after all.
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