There was one important new element in the package, one important statement of intent, and one important off-agenda event. A word about each, and then some thoughts as to how close we are to some sort of turning point in the cycle.
The important new element was the headline figure of $1.1 trn of new resources for the International Monetary Fund and other international bodies. Actually that money is not entirely new, in the sense that some of it was pledged already; some will be added over the next few years rather than right now; some (the Special Drawing Rights) is simply allowing the IMF to print more money; and some (most of the additional finds for trade finance) is supposed to come from the private sector and not from governments at all. But just putting the numbers together will give some support to countries facing a slump in their exports and enable them to avoid measures that would slash their imports and undermine world trade.
This goes back to the original purpose of the IMF (see below), which was to give countries temporary balance of payments loans so that they could carry on normal trading and did not, as in the 1930s, have to resort to measures that would damage everyone else. The world is facing a very sharp fall in world trade, the sharpest since the Second World War, and in a way it seems right that the IMF should be given the money to do what it was set up to do.
The important statement of intent was against trade protection. One of the two particular characteristics of this downturn has been this collapse in world trade – the other, of course, being the financial and banking disruption. Trade, which had generally been rising by 6-7 per cent a year, much faster than the growth of the world economy, now looks like falling by 8 per cent this year. For some countries the situation is much, much worse. Japan's exports in January halved. Part of that is an inventory adjustment, for US consumers, who until the autumn had still been buying strongly, suddenly went on strike. No one saw that coming, not least the manufacturers dependent on the US market. So the fall in car sales of about one-third led to an even sharper decline in shipments.
At a time like this there is inevitable pressure on governments to protect their own companies, all the more so if they are putting money directly into them. As a result the gradual "three steps forward, one step back" progress towards freer trade since the Second World War has come under huge pressure. Leaders could not say anything else than that they supported free trade. But the fact that they have done so loud and clear really matters.
The third important thing was off-stage. It was that President Hu Jintao of China met Barack Obama for the first time and under favourable circumstances. Of course, President Obama also met his opposite numbers from other countries, and in geopolitical terms his meeting with President Dmitry Medvedev is also important. They may have to deal with each other in the months ahead. But from an economic perspective the big one is the relationship between the US and China, the largest and probably the second largest economies in the world. It is not yet certain that the Chinese economy will pass that of Japan but it looks like it. On present trends China will pass the US in about 20 years, and managing that transition is going to be a huge test for both nations. At any stage over these next two decades there will be a danger that the relationship breaks down. If that were to happen, it would be much more serious than this present downturn.
And the downturn? The financial markets perked up on Thursday after the summit but had somewhat colder feet on Friday. That would be normal: markets get carried away and then reflect. If you step back and look at the data for the real economy, there is really not much to be cheerful about. In the US house prices are still falling faster than ever, and it was the fall in house prices that triggered the whole global crisis. And on Friday they had really bad unemployment figures. Unemployment at 8.5 per cent is at a 25-year high, and 10 per cent of Americans are relying on food stamps.
You can say that there are some signs of the economy bottoming out. Call that "green shoots" if you like, but the timescale is not going to be one of a bumper autumn harvest. We are not in the main seeing numbers come up; merely that they are falling more slowly. However, the very fact that things have gone down so fast means they will inevitably have some sort of bounce. The picture will vary from country to country, but a plausible profile would be for the world economy to pick up this autumn but for the real recovery be delayed until next year. As far as Britain is concerned, it is possible that we will do rather better than most other developed nations, largely thanks to the cheap pound. My best guess – deep breath – is still that this downturn will not be as bad for the UK as that of the early 1980s, though worse than that of the early 1990s.
The good news about the summit is that it might have damaged confidence but it seems to have done the reverse. But, "lest we forget", the summit does not restart the world economy. It merely creates a framework where the economy can restart itself.
Why the IMF may be about to come back into its own
A new world order? No, more a reassertion of the present order and in particular of one of the three key institutions that have helped to manage it, the International Monetary Fund. A little history explains why.
The IMF and the World Bank were two of the three institutions proposed at the Bretton Woods conference in 1944 to try to make sure that when the war was won, the world economy would not fall back into the depression of the 1930s. The central decision of the conference was a return to fixed exchange rates, with the dollar and sterling as the two reserve currencies against which other countries would peg their rates. This was to avoid the competitive devaluations of the 1930s. The IMF's job was to stop countries from having to take drastic measures by lending to them to tide them over. The bank's job was to pay for post-war reconstruction. The third body, the International Trade Organisation, was supposed to police world trade. However, agreement on its remit could not be reached so an interim body, the secretariat of the General Agreement on Tariffs and Trade, did the job. Gatt became the World Trade Organisation in 1994, thereby fulfilling the intent of Bretton Woods.
Meanwhile, the fixed exchange rate system had collapsed. Sterling had been devalued in 1949 and 1967, but the final blow was pressure on the dollar at the end of the 1960s. The Smithsonian Agreement of 1971 attempted to restore fixed rates, but lasted six months. The world moved to its present floating rate system.
Over the years the roles of the IMF and World Bank have shifted, with the IMF seeking to help smaller countries and the bank moving from post-war reconstruction to development aid. But the growth of private sector financial flows has diminished the relative importance of the two bodies. The huge global boom from the 1980s onwards rather passed them by. China, in particular, developed without any real help. That will not change in any radical way, but now that the private sector is hobbled by its own excesses, the Bretton Woods institutions do seem set for a new lease of life.
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