From Notting Hill Editions
There is only the closely-enmeshed interdependence of national economies, writes Tom Kremer, the founder of Notting Hill Editions. And that's not at all the same thing as a global economy.
Nowadays, the word 'global' trips too easily off the tongue. There are lots of 'globals': global warming, global companies, global trade, global communications, global health risks and, of course, what concerns us here, the global economic and financial crisis.
As the use of words helps to determine our thinking, we have to be a little careful about the exact meaning of our terms. We have a mental image of an unhindered flow of whatever substance is discussed: virus, climate, trade, information or the crisis. Like all powerful images, this one has a substantial element of veracity as well as a potential to mislead and confuse.
True, global warming presents a danger to us all but its effects could vary enormously from one geographic location to another. Half Bangladesh may be submerged under the Indian Ocean whilst Greenland becomes a brand new Riviera. The bird flu virus could have, theoretically, spread throughout all continents but regional measures curtailed its progress. Digital transmission is now undoubtedly capable of reaching every corner of the world but the culture and information disseminated will not be the same all over the world - simply because governments and media will selectively restrict its flow and subjectively interpret its content. International trade has breached most borders but the failed Doha round of negotiations serves to emphasise divergent national and regional interests.
Politicians currently in power, especially those with many years of tenure, are keen to insist that this economic and financial crisis is global, that we are all in this together, and that we have to act in synchronised concert if we are to restore our individual economies to their customary state of good health.
That there is a large international economic interdependence no one can deny. This does not mean that the roots and manifestations of the crisis, and therefore its appropriate antidote, are the same everywhere. This obsessive insistence, exemplified perfectly by our prime minister, reeks of a desperate need to disclaim any responsibility for the crisis itself. The whole world is in a mess, so the mess here has nothing to do with me, I cannot possibly be blamed, I have nothing to apologise for, we were doing just fine for 10 years, until a worldwide financial tsunami devastated our flourishing economy. So, the use of the term 'global' in this context merely serves to mislead and provide a fancy cloak for an abysmal failure.
I do not wish to dwell on the apportioning of blame for the crisis; the historical perspective will do that. It is important, however, that you understand just how global the crisis is and what its global aspect really means. It may be more helpful to talk of economic and financial interdependence, leaving 'global' out of it, since interdependence highlights differences as well as similarities. All economies are suffering, at least to some degree, from contraction, but not all are short of cash, not all are in debt up to their neck.
To grasp the meaning of this interdependence, it is as well to contrast it with self-sufficiency. In today's world, very few economies, perhaps none, are virtually self-sufficient. Of the major countries, India comes closest with an estimated figure of 80%, even though it is now significantly expanding its international economic links. Although China is heavily into supplying the world with inexpensive consumer goods, its sheer size alone could potentially allow her to thrive entirely within her own boundaries, were it not for her voracious appetite for energy resources. Until the 1970s, the US had the capacity and resources to operate effectively within her own domain. In fact, throughout the 1950s and 1960s, it was a net exporter running a trade surplus of about one percent of GDP. Since then, her rampant consumerism fostered a growing dependence on foreign manufacture. The inevitable consequence has been a seemingly unbridgeable trade deficit and a severe reliance on foreign loans funding a mountain of American debt.
The architects of the European Community envisaged a self-sustaining continental monolith on the complementary model of French agriculture and German industry, culminating in a single market looking inward. That regional dream of a single, inward-looking market is nowadays confined to the realms of sleep. In terms of energy resources, Germany depends on Russian gas, Britain on Gulf oil, France on nuclear fuel. German high-tec exports need world markets and the UK finance industry is sustained by sources well beyond Europe, while EU Mediterranean countries require barriers against food imports from the rest of the world.
Although countries with primitive economies have tended to be self-sufficient, the general trend has been moving fast in the opposite direction. And not only in terms of material trade, but, as significantly, in terms of skills, movement of money, information and culture. Any innovative piece of technology originating in one country will find its way, within a remarkably short time, into the rest of the world. Well-capitalised, successful companies, like Wal-Mart or Tesco, are ambitious enough to establish their business on all continents. The internet, no respecter of borders, transmits events as they are happening, and instant comments on them, simultaneously to all corners of the world. It has become difficult to guard privacy or keep secrets. As for culture pursuits, be they TV soap operas, reality shows, popular music, fashion, sport or the Jihad, they all migrate, cross-fertilise and mutate with bewildering momentum, impacting economies everywhere.
So the picture, from self-sufficiency to various forms and degrees of interdependence, is enormously complex. This is not saying anything new, or controversial. I rehearse it here because we are all drowned in meetings of august bodies, communiqués and pronouncements that have but one purpose: to make us believe that the governments of the G8, or G20, or the apparatus of the EU, or the IMF, or the World Bank, all know what is happening, are in control and are agreed on a common course of action to resolve the crisis.
This idea is even more dangerous than the crisis itself. It is dangerous for a number of reasons. It is far removed from reality. The actions taken and proposed, under the canopy of such a benign idea, have been panic measures by frightened men with a short-term scope. Actions are made to appear commonly agreed and closely co-ordinated whereas they vary with individual economies and are tailored to individual interests. Insofar as they could be said to be unified, they are all meant to build confidence: confidence to induce the private sector of the economy, business and household, to return to the fray in the hope that it will be all right on some undefined future day.
Building confidence is not the same as building an economy. It requires more than pouring in tons of freshly-printed money to prop up dodgy banks. Engaging in manifold government projects may or may not, eventually, pay for itself. But taking such measures, with universal abandon, by economies the world over, does not alter the odds of success.
The complexities of international interdependence are such that any overarching agreement in principle reached by world leaders is meaningless. It is all very well to announce a common international accord that all economies should be stimulated, that all banks should be governed by the same rules, that all tax havens should be eradicated, that protectionism is damaging every one, that environmental issues should remain in the forefront, that the poor throughout the world should be shielded from the effects of the crisis. But how do all these fine words translate into action in the real world?
Falling oil and gas prices help drive activity in energy-importing markets but have the opposite effect on developing gas fields in Russia and oil production in OPEC countries. Supporting car industries simultaneously in Japan, Korea, the US, Germany and France would aggravate market conditions, already suffering a massive oversupply. Measures to help the ailing housing market in Britain and the US may just have a temporary local effect without contributing a great deal to the global economy. Encouraging Americans to spend more would benefit exports from the Far East but widen even further a trade imbalance that is one of the root causes of our crisis. The notion that a freshly-created financial architecture, governed by a newly created international authority, whose rule would run effectively from Vladivostok to Rio de Janeiro, is a figment of political imagination.
Eradicating tax havens is a highly popular target but it is easier said than done. They are widely popular; and funds sheltered in tax havens are not stored in safe boxes under the Caribbean Sea. They are kept out of the hand of government but are actively invested in various national economies and so contribute to overall activity. Abolishing them, were it possible, would make precious little difference to the general situation. In the meanwhile, the most likely scenario is that those with substantial wealth will always evolve techniques to keep their assets one step ahead of pursuing tax collectors.
Quoting the now biblical reference to the 30s depression, the general belief is that protection of domestic economies prolongs the downturn. Such a belief may be justified but quantification of the global effect of protectionist measures is a tricky exercise. Moreover, we are not even clear as to exactly what constitutes protectionism.
Speaking on international platforms, politicians sermonise about protectionist vices but ,when faced with their own electorate, it is British jobs for British workers, American jobs for projects funded by the American taxpayer, and French jobs for the French auto industry.
I am sure you prefer to look at what governments do, not what they say. Thus far into the recession, every single action actually taken by every government has been based on one consideration only: a hoped-for benefit to their own economy. The World Bank published a report on March 2, 2009, which shows that 17 of the 19 developing and industrial nations plus the EU have introduced restrictive trade practices since their mid-November pledge to forego protectionism. Every country with an endangered banking sector, where financial support was ultimately provided by the taxpayer, has indulged in financial protectionism. The Irish moved without any consultation to try to safeguard their banks in September 2008; the Germans did the same shortly after. The British have bailed out virtually their entire finance industry since trouble started in 2007; the French have underwritten their own car industry. The Chinese are directing vast financial resources to develop their own domestic market and the Americans do what the sheer size of their economy permits them to do. Everyone does everything in their very own interest.
There is nothing wrong with all that - it is precisely how individuals, companies and nations are expected to behave. And this orientation has a tendency to become more pronounced when times are bad and danger is closer to home. Now, some of the measures taken in self-interest also happen to be to the benefit of trading partners and even competitors, but that is not the primary purpose of the move. The first sign of a change in willingness to improve international co-operation would be the speedy and satisfactory conclusion to the Doha round of talks aimed at removing trade barriers. This has not happened and it has not been on the agenda of the latest G20 or any other eagerly awaited summit meeting. So do not hold your breath.
As examples of international activities taken under the global umbrella, let's have a look at fighting climate change and world poverty. No other topics have attracted a greater number of international conferences, expressions of commitment, agreements and resolutions in recent years. You are familiar with the Kyoto Protocol agreed in 1997, establishing greenhouse gas emission targets and a market for trading permits of pollution. 12 years down the road, after endless talk and substantial resources spent on fostering renewable energy, global carbon emissions are up, not down.
We obviously do have to worry about global warming, and measures need to be applied across the world. The question is whether these high-level gatherings and international undertakings on paper are the best way to go about it. Since whatever kind of action taken has to be within the workings of national economies, it seems natural to let their private sectors, encouraged by its own government, take the initiative. Local pressure driving the exercise is more powerful than an ever more complex set of targets and regulations imposed from the top. The incentive to invest in new technologies on a national level is their potential future worldwide application. There are signs, in practice, that this is already happening. California plans to substantially reduce its own carbon emission without waiting for further intergovernmental agreements. Israel is building the infrastructure network needed to make electricity-powered cars a more viable alternative.
The gesture to extend a helping hand to developing countries is a noble one. It has been on the agenda of virtually every international gathering of the great and the good. So far as I am aware, the vast resources channelled through governmental and international bodies to Africa has either made no correspondingly substantial difference or, in many instances, held back organic local advancement. Certainly, a significant portion of such impersonal subsidies ended in Swiss private bank accounts.
In contrast, private initiatives backed by charitable bodies and implemented by inspired individuals on the ground, did produce some tangible, meaningful results. The commonsense view is that the greatest help Africa could use is the removal of tariff barriers by the developed countries. This is precisely what is not happening because of the self-interest of European and American agriculture. China, although acting in their national interest, is in the business of forging strong commercial links with the African continent. They need the mineral resources of Africa and envisage it as a viable market for its military and consumer products.
You must forgive me for rehearsing these uncontroversial facts, well known to you all. I do so because it may help us understand how misleading it is to think of the crisis as global and how futile to seek a global solution. You will find that none of the measures in response to the crisis was taken as a consequence of international agreements.
Naturally, actions in one economy have had a bearing on those taken in some of the others, but there is nothing new or unprecedented in that. Economic and financial interdependence is greater than ever but the fundamental dynamic between the individual entities remains the same. Each one acts in response to its own imperatives whilst taking into account what happens all around. Relationships in some areas may have become formalised and persist over a long period of time.
For example, OPEC, the North American Free Trade Agreement and the Single Market under construction in Europe. Other relationships thrive on a deal by deal basis, as the continuing massive purchase of US debt by Oriental sovereign funds demonstrates. The overall pattern is one of an intricate mosaic that cannot be reconstructed by a single overarching algorithm invented, on the spur of a moment, by any illustrious conference.
Just consider these facts: Japan ran its economy with virtually zero interest rate for more than a decade, the US collapsed its nominal interest rate to 2% at least a year, before vaguely similar moves were made by the Bank of England and the European Central Bank. Rescuing or not rescuing banks has happened haphazardly, market-by-market, case by case, as the crisis developed. Crisis-triggered taxation changes vary significantly from one economy to the next. Increase in government debt is conditioned by the pre-crisis status quo and the degree of recklessness of each central authority. Printing money in quantities is not to everyone's taste or pocket. Variations in the degree of currency dilution are bound to cause additional turbulence in a faltering international trade. The US is proposing to go ahead with a radical reform of the regulatory system of its own finance industry in the hope that it will be adopted globally. There is no reason to believe that Europe, Japan, China or India will, or could, follow suit.
The German government decided to pay 2,500 Euros to each owner of a car that was at least nine-years- old, provided it is destroyed and replaced by a brand new one. I am not sure that this measure will make a big dent in the serried ranks of unsold cars filling deserted airfields but at least it is a brave try. If it works, other governments may well adopt the same strategy. The US government is proposing to buy up those mortgages that are in arrears to help revive the property market. Again, this may or may not make a difference and other governments may or may not try something similar. But whatever happens, it will not be as the result of any international agreement but as a national government's own experiment.
We have to keep in mind that there is not one global crisis. Instead, there are many interdependent national crises, as there is not one capitalism, but many variations. All this hullabaloo about a global crisis and the need of global solutions is not harmless. With the endless hammering home of the need for new international bodies, funds, regulations, undertakings and agreements signed in the glare of world publicity, the grave danger is that we lose sight of the responsibility borne by national governments for the crisis and their undoubted potential to make the situation worse. I am wary of all committees, be they within corporate, administrative or government circles, simply because the buck is circulating all around and has nowhere to stop.
If the crisis is global and its resolution has to be globally agreed, we cannot be expected to get ourselves out of the crisis. And this is the opposite of what is wanted.
Each national economy must confront its own truth, allow for profound, organic self-correction to take place, in the hope of other economies doing the same. There is no single authority or, any combination of authorities, that comprehends what is going on, or where we all are, and what we should be doing. Beware of opposing claims. Trust your common sense and translate all statements into terms that apply to your own business, your own household. If the two are in conflict, your simple analysis will be right nine times out of 10.
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