Stephen King: Don't let the G20 follow the League of Nations into the dustbin of history

Outlook: The biggest threat to the success of the G20 comes from the obvious point that the 'new powers' are pushing the 'old powers' to one side

'It had weak links spreading everywhere and no grip anywhere." Lloyd George's devastating critique of the League of Nations could just as easily be applied to today's G20. Admittedly, the League of Nations had far greater ambitions – bringing 19th-century empires to an end, the establishment of self-determination, guarantees of collective security – all of which crumbled as the false optimism of the 1920s gave way to the economic, political and military upheavals of the 1930s.

The G20's members only really concern themselves with economic issues, either because the political and military challenges are too controversial or are, instead, dealt with elsewhere (most obviously, the UN and Nato). Also, the G20 has the advantage of including all of the world's key modern-day powers. In the League of Nations, the US was conspicuous by its absence, a decision made by an isolationist Senate that had no appetite for world affairs.

Like the League, however, the G20 has both weak links and no grip. Its membership reflects both the old powers – the US and Europe – together with many of the "new" powers – China, India and Brazil (although the Chinese would rightly laugh at the idea that they represent a "new" power). Each of these powers is jostling for position in a world of ultimately scarce resources. While the G20's sentiments are surely right – one of the key messages from Friday's Leaders' Declaration is that "uncoordinated policy actions will only lead to worse outcomes for all" – that's a bit like saying that Italy's adventures in Abyssinia were unhelpful: the right message but, as Lloyd George would have emphasised, irrelevant in the absence of any "grip".

The G20 rose to prominence in the depths of the financial crisis. With the economic ship in danger of capsizing, everyone had the incentive to man the lifeboats. But with recovery now patchily underway in the Western world and running at full throttle in the emerging world, it's no longer clear that the members of the G20 all want to navigate the global economy in the same direction.

Indeed, the Declaration was full of potential inconsistencies. Apparently, the G20 should be "enhancing exchange rate flexibility to reflect underlying economic fundamentals, and refraining from competitive devaluation of currencies". Can you easily have one without the other? The Americans would dearly love to see a stronger Chinese renminbi but the most obvious way to achieve that is for the Americans themselves to print money to deliver a weaker dollar. The G20, however, is less than enthusiastic about so-called quantitative easing.

Many emerging nations consider it to be no more than the devil's work: "advanced economies, including those with reserve currencies, will be vigilant against excess volatility and disorderly movements in exchange rates".

The biggest threat to the success of the G20, however, comes not from the rather sterile debate concerning global imbalances and the consequences for exchange rates, but from the rather more obvious point that the "new powers" are pushing the "old powers" to one side. China and India remain relatively poor countries but their growth rates are simply extraordinary. China happily expands at a rate of 9 or 10 per cent, year-in, year-out with India not far behind. In a good year, developed nations might manage to expand at about one-third that pace but, at the moment, most are still floundering at the bottom of a cliff, thanks to the credit crunch and huge amounts of debt.

China and India are not the first economies to expand at these kinds of rates. Japan and South Korea pulled off much the same trick in earlier decades. But the challenge to the rest of the world in making room for Chinese and Indian economic success is much greater. The combined population of Japan and South Korea is around 200 million. The combined population of China and India amounts to more than 2 billion, approaching one-third of the world's total. Feeding all these hungry mouths is not going to be easy.

There's no doubt that the world economic pie is getting bigger. Everyone, in theory, can be made better off via globalisation and, more specifically, the re-integration into the world economic system of China, India and other emerging nations. In practice, however, not everyone is being made better off. Globalisation doesn't only trigger changes in the volume of economic activity. It also leads to price changes that provide gains for some and losses for others.

With Western economic activity still so depressed and with unemployment in the US incredibly high, why are oil prices so elevated? The answer relates partly to China's enduring economic success. Not hamstrung by excessive debts, the Chinese economy has responded with great vigour to domestic and global policy stimulus. Its demand for oil is huge: indeed, it is the world's biggest marginal consumer. China's success, however, means that the West's energy bill continues to rise even as its own economies struggle with the arthritic pains associated with earlier excess.

Food prices are also higher than you might expect. Why? Again, there's a big emerging nation theme. As per capita incomes rise, people tend to shift from grain-based to meat-based diets. Feeding humans via animals is an expensive business: a lot more grain is required. Prices, therefore, tend to rise. For Western consumers, that implies higher prices at the supermarket.

And then there's the impact on labour markets. Outsourcing and off-shoring have become buzzwords for our times. They capture the great economic revolution of the last three or four decades, namely the huge increase in the cross-border mobility of capital. Capital can now more easily hunt out higher returns in countries with relatively low-cost labour, thanks to thawing political relations and advances in information technology. The consequence of all this is a superior allocation of capital (notwithstanding the crisis in recent years), higher levels of global economic activity but, for many Western workers, lower wages, squeezed pensions and redundancy.

It would be easy to dismiss these changes as no more than "growing pains": in the long run, we will all be better off. But, as John Maynard Keynes once famously wrote, "The long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again."

If the G20 is to be successful, it needs to grapple full on with the struggle between the "old powers" and the "new powers". It needs to find ways of alleviating the tensions and recognising that, in some cases, there are tough choices to be made. It also needs to recognise that the baton of economic power is heading eastwards. For the West, this will be no easy task. It's now confronted with the economics of debt and the politics of envy. And, in the absence of any grip, the G20 is in danger of heading in the same direction as the League of Nations: namely into the dustbin of history.

Stephen King is managing director of economics at HSBC