There are many challenges facing the G20 as it tries to come to grips with the stalled world economy and the near bankrupt financial system, but few are more important for the long term than what to do about the global imbalances in trade and capital that lie at the heart of the present crisis.
Economists have been warning for as long as I can remember that these imbalances were bound to end badly, and indeed they did. In comments this week, Hank Paulson, the outgoing US Treasury Secretary, has again cited the surplus of savings coming out of Asia and the oil exporting countries as one of the primary causes of the banking implosion.
This might seem like an attempt to deflect blame for Western failures in policy, regulation and management on to the developing world, and this may be partly true, but there's also something in Mr Paulson's contention.
Rapid, export-led industrialisation in the developing world helped bring about both a prolonged period of low inflation and a great outpouring of surplus capital into the world's financial markets. As returns fell, this in turn prompted a "search for yield" and the consequent collapse in trad-itional standards of risk assessment.
At the same time, Western central bankers were obliged to run low interest rate policies to support agg-regate demand in their own countries and prevent a deflationary recession. The longer the imbalances persisted, the more unsafe and reliant on the capital flows the system became.
It is by no means clear that China and the oil exporting nations yet fully understand or accept the role that these imbalances played in bringing about the crisis. Both are still prone to blame Western mismanagement and inadequate regulation instead.
The G20 has been billed by many as capable of creating a new Bretton Woods for the 21st century. So let's have the same debate as took place in the mid-1940s when the British economist John Maynard Keynes proposed, unsuccessfully, that obligations administered through a global authority be imposed on creditor and debtor nations alike to enact policies that would deal with trade and capital imbalances.
The burden cannot fall exclusively on deficit nations. If trade is to work to everyone's advantage, the system must be broadly in balance, which means surplus nations must do more to stimulate demand. For China, that means crucially allowing its exchange rate to appreciate.
Now, as then, the problem is the same. It's hard, if not impossible, to agree a common measure, rule and standard which is, as Keynes put it in 1944, "acceptable to each and not irksome to any". Yet try we must.Reuse content