One of the most significant developments at Copenhagen was the emergence of the BASIC coalition – Brazil, South Africa, India and China – which negotiated the final details of the Copenhagen Accord with the United States.

My understanding is that BASIC was formed at China’s instigation. China agreed a Memorandum of Understanding with India in October 2009, committing the two countries to working closely together at Copenhagen. It then invited Brazil and South Africa to join the party, at a meeting in Beijing a week before Copenhagen started. Sudan was also invited to represent the G77.

According to Jairam Ramesh, India’s environment minister, the four countries decided that they’d walk out of Copenhagen together if necessary:

We will not exit in isolation. We will co-ordinate our exit if any of our non-negotiable terms is violated. Our entry and exit will be collective.

During Copenhagen, China worked extremely closely with India, with the two delegations meeting up to six times a day. It also engaged intensively with the other members of BASIC. In the final meeting with the Americans, China agreed to accept a limited international monitoring of its targets (India claims to have pushed China on this point).

The decision was also taken to drop language, setting a deadline for turning the Copenhagen Accord into a legally binding agreement. South Africa and Brazil both appear to have been unhappy with this decision.

Since Copenhagen, the BASIC countries have met once and have agreed to continue to get together on a regular basis. They want the Copenhagen Accord to set the stage for a ‘twin track’ agreement – with tough and binding targets for developed countries through Kyoto #2 and voluntary commitments for themselves under a new agreement.

No-one really knows how the US would fit into this picture. It is also increasingly clear that they and the US left Copenhagen with quite different impressions of what will happen next. The US believes that large emerging economies now have “very explicit activities and obligations”. I don’t think they believe they are committed to anything significant, beyond what they agreed at Bali or put on the table on a voluntary basis before Copenhagen started. (more…)

As David just noted, this morning’s Lex column in the FT is relatively upbeat about the dangers of protectionism, arguing that “the disaggregation of global supply chains, the source of the huge efficiencies that companies pass on to consumers, will not be easily undone.”

Whether or not that’s right (and like Willem Buiter, Martin Wolf is also a good deal more downcast than the Lex team), it’s interesting to compare today’s Lex column with what they had to say about capital flows to emerging markets just a couple of days ago.  Here’s the bit that made me sit up:

Take Brazil and India, the globe’s ninth and 12th biggest economies, according to the International Monetary Fund’s latest estimates. While the developed world is expected to shrink by 2 per cent this year, the IMF reckons Brazil will grow by 2 per cent, and India by 5 per cent. Why? One answer is that they have stable banks, relatively closed economies, and large internal markets. This has insulated them from much of the global turmoil.

The contrast with East Asia is stark. Singapore’s economy shrank at an annualised 17 per cent rate at the end of last year, South Korea by some 20 per cent. Yet this is not for lack of capital. Asian economies, after all, are global creditors. Their economies have shrunk instead because they are heavily oriented towards collapsing international trade. Meanwhile, their local markets are undeveloped and weak. Asia’s challenge is how to best deploy its accumulated surpluses to boost domestic demand.

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Image Author: mike_is_scrumptious

Assume a robust global deal on climate and the world’s cities will have to transform their infrastructure, economies and societies in little more than a generation.

Assume uncontrolled emissions growth and they face growing impact from a less hospitable and more volatile climate.

Either way – big changes are on the way. Few cities’ leaders grasp the scale of the challenge, especially in developing countries, where towns and cities will have an additional 1.5bn residents to cope with by 2030.

This new think piece has been prepared as part of the British Council’s Climate and Cities programme. Download the pdf (which has full references) or read the full text below the jump.

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Courtesy Flickr user massdistraction

The IMF today predicted a grim economic outlook for 2009, with some green shoots in 2010.

The news is especially grim for the UK and Eurozone countries, with a 2.8% and 2% fall in output in 2009 and barely any growth in 2010. The US is predicted to do quite a lot better – a 1.6% fall this year, but 1.6% of growth next. That should cue a pleasant new wave of American triumphalism.

China floats through the crisis more or less unscathed. Growth slips to 6.7% in 2009, but bounces back to 8% in 2010. India does a little worse, Brazil suffers pretty badly, while the Mexican economy really tanks.

But I really don’t know why I even bothered to read the stats. Nine months ago at the Progressive Governance Summit, Dominique Strauss-Kahn told everyone that Europe and the US would experience a slowdown, but not a loss of growth (with the European economy expected to outperform the American one).

Even since it last ran its models in November (just three months ago!), the IMF has knocked 1.7 percentage points off world growth, and a staggering 6 points from its prediction for what were once known as the Asian tigers.

The IMF itself is forced to admit that “the uncertainty surrounding the outlook is unusually large.” Doesn’t that translate as “our models weren’t built for these crazy conditions, but we’ll run them anyway and PR them heavily to the 1000 or so media outlets that’ll reprint our speculation as fact”?

Or am I missing something here?

Nick Stern isn’t going to like this, but there’s a new Stern on the climate block: Todd Stern , who is set to be announced as the US’s new climate envoy.

(Todd) Stern has set out a fairly clear road map for US engagement in the climate process (nb. these are his personal pre-appointment views, not those of Obama or Clinton). He thinks the US should:

• Start with domestic policy - get the National Academcy of Sciences to recommend (and review on regular basis) a stablization target; legislate cap and trade, not a carbon tax; supplement with regulation on energy efficiency and tex incentives for R&D.
• Use domestic policy as a lever in the international arena – negotiating first with a core group of countries (the ‘E8′ – Brazil, China, EU, India, Japan, Russia, South Africa and the US); then building a post-Kyoto framework on the back of their agreement, with binding long-term targets for all developed and ‘as many advanced developing countries as possible,’ and a built-in mechanism to ratchet those targets up over time (and as scientific findings dictate).

Stern is fairly tough on China. The country needs to accept targets (calculated on what basis is a question he does not address), but he makes lots of positive noises. Joint action on a climate can form the basis of a new strategic partnership between the 800-pound gorillas, but only if it is elevated from “traditional place in the second tier of mutual concerns.”

Throughout, of course, he has an eye on the US Senate and ratification. Bottom up targets and sectoral agreements should be deployed if they can suck more countries into a climate deal, as this will shut up antsy Senators. Access to carbon markets should be used as another tool that creates an incentive for developing country participation.

But there needs to be a stick too, Stern believes – and that stick is trade. Unilateral tarrifs on carbon-intensive goods would be ‘profoundly alienating’ and ‘a prescription for mutual recrimination, not progress’, especially after the US has spent so many years in the climate wilderness. But:

Considered in a mutilateral context…the idea…is more interesting. Today, the carbon content of goods is not captured in their price…If the premise of a climate regime were that countries must capture those social costs by putting a price on carbon, whether by means of a cap-and-trade program, a carbon tax, or equivalent policies to cut emissions, tarrifs could then be imposed on the exported products of any country that lacked such policies.

The Europeans will welcome Stern’s appointment with open arms – the Brits in particular.  John Ashton, the UK’s climate envoy, gets name checked by his new US counterpart – and it wouldn’t surprise me to see the two working hand in hand…

David Cameron yesterday warned that the UK could be forced to go cap in hand to the IMF, as it did in 1976 under chancellor Denis Healey. (This, by the way, at the launch of a new programme at Demos about ‘progressive conservatism’. Et tu, Demos?)

The question is, would the IMF have the cash. Click on more to read a story I recently wrote for my mag, www.emeafinance.com, which looks at the risk of the IMF running out of money in the next 18 months, and asks what the chances are of it receiving more funds from cash-rich G20 governments (answer: slim).

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I’ve been in Japan today, speaking at ‘Reforming International Institutions – Meeting the Challenges of the 21st Century’,  a seminar organized by the United Nations University and the British Embassy in Japan.

You can download my talk here (with pictures, references etc) – or the text only is available below the jump. There’s a webcast too.

Headlines:

• It’s going to be a tough year. The financial meltdown has a long way to go, and the downturn is risking turning into a global depression.
• Trade is a bell wether. Protectionist pressures are already on the rise. If they gain traction, take that as a warning of a wider loss of confidence in global institutions.
• The unravelling of global economic imbalances could prove corrosive to the international order. If countries start to devalue to protect exports, expect a tit-for-tat dynamic to kick in.
• Scarcity issues (energy, water, land, food, atmospheric space for emissions) remain the key medium term driver of global change. Commodity prices will spike again as soon as there’s recovery.
• The downturn has stemmed the uncontrolled growth of emissions, but also lessened the chance of a robust global deal on climate.
• Economic bad times could well drive increased conflict. A major new security threat might be the fabled black swan – hitting just when the global immune system is already overloaded.
• If we experience a long crisis (or a chain of interlinked crises), we are likely to see either a significant loss of trust in the system (globalization retreats), or a significant increase in trust (interdependence increases). 
• You need to stretch time horizons to get the latter – shared awareness (joint analysis of risks and challenges), as a basis for shared platforms (loose coalitions of leaders), which can lobby for a shared operating system (a new international institutional architecture).
• 2009 sets a challenging agenda for the G20 (financial reform and economic recovery – but framed by a broader vision on climate, resources, security etc.)…
• …the G8 (caucus of rich countries able to tee up Copenhagen and kick start development assistance if developing countries begin to teeter)…
• …the UN (especially Ban Ki-Moon’s proposed high level ‘friend’s group’ on climate, but also as a fora for getting to grips with scarcity issues)…
• and the Bretton Woods institutions and the WTO (first of all ensuring they keep their heads above water, then looking to ’save globalization from itself’).
• Oh and be ready for the backlash – people are angry and rightfully so, but that may well lead us down some populist blind alleys.

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As oil continues its crazy gyrations (yesterday’s price – $48), news is proliferating that investment in new exploration and production is falling off a cliff.  Monday’s NYT, for example, had this:

From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets.

Oil markets have had their sharpest-ever spikes and their steepest drops this year, all within a few months. Now, with a global recession at hand and oil consumption falling, the market’s extreme volatility is making it harder for energy executives to plan ahead. As a result, exploration spending, which had risen to a record this year, is being slashed.

The precipitous drop in oil prices since the summer, coming on the heels of a dizzying seven-year rise, was a reminder that the oil business, like those of most commodities, is cyclical. When demand drops and prices fall, companies curb their investments, leading to lower supplies. When demand recovers, prices rise again and companies start to invest in new production, starting another cycle.

Now for Dan Drezner, all this poses a question:

So, let me see if I have this right:

If oil prices are sky-high, the energy sector explains that it will be slow to develop new fields, because exploration requires massive fixed investments and no one knows what the price of energy will be 5-10 years from now;

If oil prices are low, the energy sector explains that it is unprofitable to develop new fields because… energy prices are low.

Well, actually that is more or less the long and the short of it; as I argued back in July, the oil price is set to continue its recent yo-yoing for as long as we continue without a clear ’signal from the future’ about the long term demand outlook for oil. After all, if you were an investor considering ploughing money into oil fields that were only profitable above $60 or $70 a barrel, and which would take many years to recoup the capital cost, wouldn’t you apply a pretty big risk premium if you saw prices collapsing to below $50 from a high of $147 less than six months earlier, with the potential in the background for future climate policy to cause demand to plummet?

Problem is, though, that without that new investment, we’re on track for a serious price crunch at some stage, as both the IEA and Chatham House have argued.  So how to square the circle?  Well, Nick Butler – who was John Browne’s chief of staff at BP and now heads the chairman of the Centre for Energy Studies at Cambridge’s Judge Business School -has a proposal in the FT yesterday. He writes:

If the energy ministers want to stabilise the market they should begin by commissioning a detailed, independent analysis of what went wrong. They should then develop the stabilising mechanisms that would limit the possibility of any repetition of 2008.

The most effective mechanism would be agreement on a broad target range for prices – say, between $50 and $75 a barrel – backed by a strategic stock holding to be augmented or deployed when prices diverged from the range. To support such an agreement trading would be limited to those with a direct physical interest in the market.

From a new base of relative stability ministers could consider the longer-term issues that will shape the energy market: the huge need for infrastructure investment ($350bn a year according to the International Energy Agency) and climate change.

This idea of a price band is clearly starting to gain ground in the energy think tank world – I heard a very similar idea mooted by an attendee at a Shell / Economist energy breakfast in London last month. But I’m not so sure.  While Nick Butler’s clearly right to refer to the need to integrate energy security with climate change, why not go one step further – and use a comprehensive climate framework to provide the long term oil price stability that’s needed to bring the right amount of new investment on stream?

Think about it.  Imagine a climate regime in which the emission targets are sufficiently long term (i.e. multi-decade rather than in 5-yearly increments as under Kyoto), and which is based on a quantified stabilisation target, which therefore means that all major emitters have binding caps. (You can argue about political feasibility in the current political climate, but the fact remains that a global deal on climate that actually solves the problem will have to satisfy these conditions anyway – and sooner rather than later if we’re to limit warming to two degrees C.)

What such a regime would also achieve, with no extra work needed, is to provide long term predictability on how much fossil fuel will be being consumed – for decades ahead.  True, it wouldn’t tell you exactly which fossil fuels – coal versus oil, for instance – but since they’re used in different markets (oil mainly for transport, coal and gas mainly for power generation and heat), you could make a pretty good guess.

And now imagine again that you’re the potential energy investor we met earlier.  All of a sudden, you can invest with much more confidence – and what’s more, knowing the level of demand will enable you to watch what other investors are doing too, so that more or less the right amount of new oil is brought on stream to meet projected demand, within the context of a global deal for climate.

Oh, and there’s one other advantage: given that a global deal on emissions is primarily an agreement between energy consumers, you can worry just a little bit less about OPEC’s congenital inability to stop itself from cheating…

Update: meanwhile, “OPEC oil ministers meet on Wednesday to remove a record 2 million barrels per day from oil markets as they race to balance supply with the world’s collapsing demand for fuel … Saudi Arabia, the world’s biggest oil exporter, has led by example — reducing supplies to customers even before a cut has been agreed to help push prices back toward the $75 level Saudi King Abdullah has identified as “fair.”"

Relatively little media coverage so far on the UN climate talks currently underway in Poznan – but that’s not to say that nothing interesting is happening there.

Item 1 is that China and India have come out arguing that Obama’s proposed 2020 emissions reduction (namely, to get US emissions back to 1990 levels by that date – more details here) is insufficient.  He Jiankun, a Chinese delegate, was quoted in Reuters as saying that “It’s more ambitious than President Bush but it is not enough to achieve the urgent, long-term goal of greenhouse gas reductions”.

Given that the IPCC says that stabilising at 450 parts per million of CO2 equivalent (the maximum level on which we still have a better than even chance of limiting warming to 2 degrees C) probably requires developed countries to reduce their emissions by 25-40% below 1990 levels by 2020, you can see where the Chinese and the Indians are coming from.

But as David pointed out when he and I were debating this a couple of weeks ago, the US’s emissions have gone through the roof under Bush: even the very modest target proposed by Obama is going to be a massive stretch for them.  Expect this one to run and run.

Item 2: Brazil is reportedly sidling up to per capita convergence as the formula for sharing out a global emissions budget, at least if you believe this report in Business Green yesterday, which says:

Brazil reportedly put the finishing touches to proposals apparently based on the contraction and convergence principle that would see countries agree to per-capita emission reduction targets. Under the proposals, emission targets would be set on a per-head-of population basis, meaning that developing economies with low-carbon emissions per capita such as China would face less-demanding targets, while those countries with the highest level of emissions per person would have to deliver the deepest cuts.

Fascinating if true, but they don’t cite their source, so I’m regarding as tentative until I hear it from another source or two. 

Item 3, meanwhile, is that in a workshop on “shared visions”  for the future on Tuesday, China made some tentative steps towards setting out its stall on how it would want an emissions budget to be shared out.  This is very interesting, as China’s the most important of the handful of developing countries for whom straight per capita convergence wouldn’t be advantageous – as its per capita emissions have (just in the last few months) gone over the global average per capita level, meaning that even immediate convergence at equal per capita shares to the atmosphere would leave them with no surplus permits to sell. What then is China proposing?  The Worldwatch Institute wrote it up like this:

China, citing the equity language of Article 3, mentioned the need for eventual “global per-capita emissions convergence” – the idea that, at some point in the future, all countries in the world should have similar per-capita emissions as a matter of climate equity. But this concept did not pick up momentum, at least not in the workshop.

That had me sitting bolt upright in my chair and reaching for the phone to ask people in Poznan if it was really true.  The answer back: not quite.  In fact, what China seems to have been proposing is a system of per capita convergence in cumulative emissions – i.e. taking into account historical responsibility for past emissions, as well as current emissions – which would clearly be much more advantageous to it, given how much later China industrialised than (say) Britain (for whom historical responsibility based allocations of emissions permits would be rather, ahem, challenging).

But the real significance here is less the specific formula that China proposed (more details needed – if you were in the workshop, please drop me an email), and more the fact that China may now be starting to engage in a conversation about the formula that might be used to share out a global emissions budget.  Up to now, discussion of stabilisation targets for greenhouse gas levels in the air has been off the table - in large part due to Chinese unwillingness to talk about how the emission budget implied would then be shared out.  If that’s changing, then the future just got a little more hopeful.

If you need emergency information, try the Mumbai Help blog – it has a consolidated list of contact numbers. British nationals in Mumbai should call +91 11 2419 2288.  In the UK, call +44 207 008 0000.

Mumbai has been rocked by a series of shootings and explosions. The violence has the hallmarks of a coordinated attack. For the breaking news go to Twitter, then go to the BBC or CNN.

Below is an example of the feed from Twitter user @BreakingNewsOn, as news of the crisis initially emerged.

Update – Alex adds: See this Wikipedia page on the bombings, which is being updated in real time. (Same happened on 7/7 – see Charlie’s post on this a few months back.) Also a Google Map of locations under attack here, and a Flickr photostream here. But the #Mumbai feed on Twitter remains the key place to look for news (plus @mumbaiattack for a more filtered version).

Update, 7:43 am (David): The news keeps getting worse. Indian TV reports a fresh explosion at the Trident just a few minutes ago. It was deeply shocking this morning to hear the BBC interview a man who was barricaded inside the hotel. A few minutes later the presenters had moved onto a joke item about Christmas carols. Pathetic.

Update, 8:28 am (Alex): Summary of how mobile and social networking channels are covering the crisis – together with discussion of some of the dilemmas this throws up – here. The biggest dilemma of all: widespread concern that the attackers themselves are making use of media and social network coverage in order to anticipate what the authorities are up to.  In such circumstances, much can hang on individual users’ sense of personal responsibility on what to report – and what not to.  No such thing as a DA Notice on Twitter…

Update, 8:44 am (Alex): Coverage is starting to converge on agreement that the attackers came to Mumbai by sea, leading to much speculation and rumour about where they may have come from.  Plenty of people on Twitter, the blogosphere and (more gradually) the mainstream media (e.g. Indian Express here) are speculating that the attackers came from Karachi (in Pakistan).  This is not confirmed, though; other reports suggest that they came from Gujurat (in India). As Gideon Rachman notes, the answer to this question will be highly significant:

The development of a terror campaign with truly domestic roots would be a really ominous development. On the other hand, if the terror attacks originated on Pakistani soil, then regional tensions would spiral. How unpleasantly ironic that all this should happen, just days after the Pakistani prime minister, issued a bold appeal for peace between his country and India. One might almost believe that these attacks were designed to scupper the Zardari peace initiative – were it not for the fact that it must take longer than a couple of days to put something like this into action.

Update, 11:32 am (David): The siege of Mumbai is now into its twentieth hour. Terrorists are reported to be being interviewed live on Indian TV. IBN is claiming we’re into the endgame. Let’s hope so before night falls. The live IBN stream is here…

Update, 11:54 am (Alex): The BBC is reporting that the Indian government has asked for all live Twitter updates from the scene to cease immediately.  A tweet reading as follows is proliferating on Twitter as users re-post it on their feeds: “ALL LIVE UPDATES – PLEASE STOP TWEETING about #Mumbai police and military operations”. Various twitterers reply indignantly that if they’re to stop posting the details, the broadcast media should do the same.  As I write, the IBN video stream that David links to above is issuing real-time updates on which floors of the Oberoi Hotel have been cleared by security forces.

Update, 14:38, (David): Switch from the Twitter feed to Al Jazeera’s comments thread and you’ll find that sympathy for those caught up in the attacks is not universal, while some suspect that the culprit will not turn out to be an Islamist group:

Maria Costa, Governador Valadares, Brazil: “While few enjoy the sight of “innocent” victims being caught up in the struggle against the imperialists and their collaborators, nobody should ever forget that these desperate acts of martyrdom are the direct result of the actions of the imperialists and their lackeys. If India wants to avoid future tragic incidents, they need to re-think their actions in Occupied Kashmir and their nuclear alliance with the Yankees.

mewrite, Banglore, India: the killing of Hemant Karkare(chief of Mumbai’s anti-terrorism squad) gives a clue who might be behind this heinous crime. Karkare was spearheading the investigations into Malegaon blasts and was instrumental in unveiling the Hindu terror network. Initially, as usual, Muslims were blamed for those blasts, & many were punished on false charges. But the recent investigations done by Mr Karkare revealed that it was actually the handiwork of Hindu terrorists belonging to Shiv Sena who with the help of some army persons conducted blasts in many Indian cities during the last few years.

proudpathan, Batley, United Kingdom: The US, Uk, Israel and laterally the Indians all lie in the same bed. These countries are upto something. What it is I don’t know. I hope the Indians don’t associate themselves too closely with these countries, otherwise the rest of the world will see them as they see the US, the UK, and Israel as being imperialistic, oppressors and occupiers and the murderers of innocent Muslims. 

Do we need to call ‘time out’ on global risk analysis?  The NIC report on global trends 2025 is one of a plethora of recent publications on global risks and security challenges from think tanks, Government departments, the defence community, NGOs, business, academia, and the media. Do we really need any more?

3 questions spring to mind:

1. Are we suffocating under the weight of all this analysis?
2. Should we consider having a period of consolidation and reflection?
3. Do we need a transformational shift from analysis to action?

How many times do we need to be told that:

• Since the end of the Cold War, the international landscape has been transformed.
• During the next 30 years, every aspect of human life will change at an unprecedented rate, throwing up new features, challenges and opportunities.
• The unprecedented transfer of wealth roughly from West to East now under way will continue for the foreseeable future.
• The formidable acceleration of information exchanges, the increased trade in goods and as well as the rapid circulation of individuals, have transformed our economic, social and political environment
• New players—Brazil, Russia, India and China will bring new stakes and rules of the game to the international high table.
• Increase in global population will put pressure on resources—particularly land, energy, food, and water—raising the spectre of scarcities emerging as demand outstrips supply.
• There are a set of interconnected set of threats and risks, including international terrorism, weapons of mass destruction, conflicts and failed states, pandemics, and trans-national crime.

Surely it is time to complement existing analytical work with some ideas for action or even, as someone suggested earlier, divert our focus to analysing potential ’solutions’ rather than identifying the same ‘problems’ time and again. Given the vast number of reports and papers in the system, surely now is the time to consider what improvements and upgrades can and need to be made to the global system in response to the myriad of issues the international community faces.

In order to do this we need to move away from the comfortable exercise of scene setting, describing the world around us and instead take a different approach. One simple way would be to look East and see what Indian & Chinese thinkers and academics are developing. Analysis obviously plays a crucial role in thinking through issues and in policy-making but the very process of analysis can be seductive; providing us with breathing space when we actually need to be pushing on and debilitating by creating ever greater complexity which can often lead to inaction.

In the words of the King:

A little less conversation, a little more action please
All this aggravation ain’t satisfactioning me
A little more bite and a little less bark
A little less fight and a little more spark

Ahead of this weekend’s G20 summit, David and I have published a short paper entitled A Bretton Woods II worthy of the name.  Key points:

- The summit is unlikely to be able to live up to its billing.  Leaders do not yet understand the nature of the problem well enough to be able to implement viable solutions.  However, the problem is more fundamental than a simple lack of shared awareness. 

 - History suggests that leaders will only think the unthinkable on institutional reform once the challenge they face has really hit rock bottom. But history also suggests that we are wrong to think that the worst of the crisis is now past, given that many past banking crises have taken five years or more to unravel.

 - Bretton Woods 1 looked across the whole international economic waterfront in 1944, while this weekend’s summit will be much more narrowly focused.  Leaders will make a big mistake if they try and tackle finance in isolation, given the growing impact of resource scarcity, and that 2009 is supposed to see another ambitious global deal – on climate.

 - We need to recalibrate what we expect from globalization through a serious debate about subsidiarity. Where has globalization gone too far, too fast? Where do we need more integration at a global level? These were exactly the questions that preoccupied Keynes in 1933, when he weighed the relative benefits of global versus local across a range of variables.  We need a similar debate today as a precursor to serious international economic reform.

 - Leaders need to extend their horizons in (at least) five directions: onto longer time scales; beyond financial regulation into wider resource scarcity challenges; into other international processes, especially climate; towards grand bargains with emerging powers; and beyond government, to non-governmental networks.

Full version after the jump, or better yet here’s the pdf.

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If you haven’t read it already, World Bank President Bob Zoellick’s speech on multilateral reform earlier this month is definitely worth a read.  One of best nuggets in it is his call for “a Facebook for multilateral economic diplomacy” – the rationale for which goes like this:

The G-7 is not working.  We need a better group for a different time. The G-20, though valuable, is too unwieldy in moving from discussion to action. We need a core group of Finance Ministers who will assume responsibility for anticipating issues, sharing information and insights, exploring mutual interests, mobilizing efforts to solve problems, and at least managing differences.

For financial and economic cooperation, we should consider a new Steering Group including Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, and the current G-7. Such a Steering Group would bring together over 70 percent of the world’s GDP, 56 percent of world population, 62 percent of its energy production, the major carbon emitters, the principal development donors, large regional actors, and the primary players in global capital, commodity, and exchange rate markets. 

But this Steering Group would not be a G-14.  We will not create a new world simply by remaking the old.  It should be numberless, flexible, and over time, it could evolve.   Others may be added, especially if their rising influence is matched by a willingness to help shoulder responsibilities.

This new Steering Group should meet and videoconference regularly to foster group responsibility.  The Deputies should have frequent and informal discussions.  An active network of bilateral consultations within and beyond the group will support it.  We need a Facebook for multilateral economic diplomacy.

It’s a timely reminder that there’s no hard and fast rule to say that multilateral cooperation has to revolve around formal multilateral organisations - and especially refreshing to hear this coming from the head of the World Bank.  (And yes, he does have a Facebook page, since you wonder.)

Responses to the financial crisis over the last few weeks seem to bear out Zoellick’s point.  Although multilateral cooperation has been central, multilateral organisations haven’t been: the IMF, for example, has been largely absent from the main action, and while the EU managed in the end to be at the forefront of marshalling a collective response, it was the Council of Ministers – not the Commission – that pulled it all together.

In this light, it’s perhaps ironic that while Gordon Brown has come to be seen as one of the main organisers of this non-organisationally-based but nevertheless fundamentally multilateral crisis response, his stated vision for multilateral reform is very organisationally focussed, what with emphasis on a new Bretton Woods, an enhanced early warning role for the IMF and so on.

Letters of Credit (LOCs) are the crucial lubricant without which the wheels of international trade cannot turn.  Here’s how John Mauldin explains them:

If you are a manufacturer of a product and want to sell to someone outside your borders, you typically require a letter of credit from the buyer before you load any cargo at a port. A letter of credit from a prime bank is considered to be proof of your ability to pay. It not only can be a source of ultimate payment, it can be a source of inventory financing while goods are in transit.

And if you are a business which is buying a product, you do not want to release money until you know the product is on the way. There are buyer’s and seller’s agents who make sure these things happen seamlessly, and world commerce had grown because of it.

Just one problem: it looks like LOCs may be no more immune from the credit crunch than any other form of credit. Here, for instance, is Canada’s Financial Post on Wednesday last week:

The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.

“There’s all kinds of stuff stacked up on docks right now that can’t be shipped because people can’t get letters of credit,” said Bill Gary, president of Commodity Information Systems in Oklahoma City. “The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy.”

As Alan Beattie reported in the FT on Saturday, Brazil has now offered a blanked guarantee for all trade credit involving its companies, which will commit fully a tenth of its foreign exchange reserves.  WTO Director-General Pascal Lamy, meanwhile, has announced that he’ll convene a summit on the issue next month: here’s an excerpt from his speaking points on Friday -

The financial crisis may also be having an impact on developing country access to financing of imports and exports. As you know we have held a number of meetings on this issue at the WTO with both multilateral institutions and private banks, the last one last April, to check availability of trade financing at affordable rates. Up until then, the situation seemed to be stable with volumes and rates at normal levels. But just this week Brazil brought this issue to the forefront.

Given the deterioration of the financial landscape, and despite the welcomed announcement yesterday by the World Bank IFC of an increase in its trade financing programme by $ 500 million, I have today convened major providers of trade finance to a meeting on 12 November to examine this issue and find ways to alleviate the situation if it was to deteriorate.

Bottom line? Naked Capitalism quotes an email from “a well connected international investor not prone to alarm”:

At the end of the day, if every counterparty is bad then you don’t have a market and you don’t have an economy. I spoke to another friend of mine this afternoon, whose father has been in the shipping business forever. Pristine credit rating, rock solid balance sheet. He says if he takes his BNP Paribas letter of credit to Citi today for short term funding for his vessels, they won’t give it to him. That means he can’t ship goods, which means that within the next 2 weeks, physical shortages of commodities begins to show up.

(more…)

So far, many observers and experts point out, developing countries seem to be holding out quite well amidst the global financial turmoil. In reality the current global financial crisis poses multiple and profound risks to development, which I will briefly outline.

Finance ministers from 24 developing countries (the Group of 24, or ‘G-24’) meeting last Friday at the IMF, noted that:

“many emerging markets and developing economies are not immune to the spillovers of the ongoing global financial crisis”

and that:

“preventing macroeconomic volatility from financial spillovers and sustaining continuous growth were key priorities for developing countries”

See the G-24 public communiqué here.

There are several ways in which the global financial crisis can impact on development. Impacts will be highly country-specific. Key factors include:

1. Cuts in international development aid – Jakaya Kikwete, President of Tanzania and Chairman of the African Union, expressed his ‘deep concern’ about the financial crisis dampening rich countries’ commitment to development aid (see news report here). And for good reason: development aid tends to be strongly pro-cyclical, in other words a nation’s generosity to other nations tends to be proportional to its own good fortunes.
2. Reduced access to international financial capital markets – The impact will likely be bigger for middle-income countries and some emerging markets (excluding China, given it is a super high saver). Much of sub-Saharan Africa had limited access to international private capital to start with, and will therefore not be strongly affected by this.
3. Possible reversals in capital inflows to developing countries – due to the global credit crunch and as investors’ appetite for risk abates.
4. The spread of stock market turbulence to emerging markets – in one day last week, markets in Brazil, Mexico, South Africa and Turkey plunged 10%.
5. Downturn in global demand for developing country exports.
6. Postponement of large investment projects. There is emerging evidence that large investment plans (e.g. in India’s power sector) are being delayed or cancelled as turbulence in capital markets undermine prospects for raising funds.
7. Remittances will be impacted by the economic downturn, as well as inflation and a weak dollar. See a recent news report on how remittances to the Caribbean are being hit.

It is of course unrealistic to expect that developing countries can be wholly insulated from the global financial crisis. However, the one very powerful instrument that rich countries do have at their disposal to help keep development on track is aid. A cutback in aid at this point can have severe impacts, as high food and oil prices justify increases in aid. Aid will be needed for countries with reduced sources of revenue and finance, as social expenditures are typically the first to get cut when fiscal resources tighten. Emergency support should be targeted to countries that are fiscally highly vulnerable (the IMF has identified 22 such countries).