Canadians used to think of themselves as global citizens, par excellence. Recently, though, this image has taken a battering.

Canada is now so obstructive in climate negotiations that even the Chinese government has had enough of its ‘conniving’ ways. In the midst of global economic turmoil, Canada’s main priority for the recent G7 summit was to force feed finance ministers seal meat.

And, at the Winter Olympics, it is so desperate to Own the Podium that it has  long planned to keep practise sessions for other countries to an absolute minimum in order to ensure its athletes get maximum home advantage. ”Skeleton racer Mellisa Hollingsworth will be flying down the fastest track in the world at Whistler with the benefit of 200-plus more practice runs than her rivals,” boasted one of its papers last week.

Canada was told that this policy could be disastrous, especially for the luge and for skeleton (a kind of tobogganing) where the Canadians have built a faster track than any in the world, making practise essential.  ”The speeds are going to be high up in the 100s,” warned the British performance manager. ” Therefore accidents are going happen and do happen in sports such as these. We’ve seen broken legs or even worse before for example.”

Sure enough the worst did happen, with Georgian luger, Nodar Kumaritashvili killed just hours before the opening ceremony. Charmingly, the Canadians have quickly wrapped up an investigation that blames the dead guy for the accident.

On Thursday, a BBC survey showed that Canada’s international image is beginning to take a battering:

Several countries saw sharp falls in positive ratings of Canada—in the USA the proportion rating Canadian influence as positive fell from 82 per cent to 67 per cent, in the UK from 74 per cent to 62 per cent, in Australia from 77 per cent to 72 per cent, and in China from 75 per cent to 54 per cent.  Overall, comparing views in 15 of the countries that were surveyed last year, the proportion rating Canadian influence in the world as mainly positive has fallen on average from 57 per cent to 53 per cent.

Even Canadians, the survey shows, believe the country has a less positive global influence than before. One wonders: do they care?

Researchers at Chatham House, a think-tank, found that a recent fall in the price of butter, milk and bread was likely to be only a “temporary reprieve”.

The price hikes would hit the price of beef, pork and lamb harder because they are reared on proportionately more grain than “white meat” like chicken.

Alex Evans, the report’s author, said the likely effect would be to make Britons less reliant on beef as a core part of the nation’s diet.

“It will become more expensive,” said Mr Evans. “We are not saying people won’t be able to have a Sunday roast but we will be eating less red meat in future.”

Now, there are some kill-joys who might point out that Alex’s report doesn’t actually mention the Sunday Roast once, but Global Dashboard has an established track-record of commentary in defense of fine British food: check out Evans and Gowan on Bubble, Squeak and eels last July.  But the fact that pork prices are set to sky-rocket may explain an American internet phenomenon noted by the NYT today: a BBQ recipe going viral.

This recipe is the Bacon Explosion, modestly called by its inventors “the BBQ Sausage Recipe of all Recipes.” The instructions for constructing this massive torpedo-shaped amalgamation of two pounds of bacon woven through and around two pounds of sausage and slathered in barbecue sauce first appeared last month on the Web site of a team of Kansas City competition barbecuers. They say a diverse collection of well over 16,000 Web sites have linked to the recipe, celebrating, or sometimes scolding, its excessiveness. A fresh audience could be ready to discover it on Super Bowl Sunday.

Where once homegrown recipes were disseminated in Ann Landers columns or Junior League cookbooks, new media have changed — and greatly accelerated — the path to popularity. Few recipes have cruised down this path as fast or as far as the Bacon Explosion, and this turns out to be no accident. One of its inventors works as an Internet marketer, and had a sophisticated understanding of how the latest tools of promotion could be applied to a four-pound roll of pork.

Leaving aside the new media aspect of all this, I’d argue that Americans are wisely stuffing down bacon and sausage before the prices head back up.  If you want to make your own Bacon Explosion, the recipe’s here.  My own urge to start layering the bacon wrapping was reduced by the discovery that the outcome looks like, well, you know…

For those more interested in making a quick buck than a Bacon Copralite (google it yourself), switch over to Porkworld, Latin America’s leading swine-trade website, which naturally features quotations from one Alex Evans…

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).

Who’ll bail out the IMF?

In January 2008, the IMF’s managing director, Dominique Strauss-Kahn, sent out a confidential document to the fund’s 2,400 full-time staff, telling them to get ready for the axe.

The memo said the staff should prepare for the “trauma” of sizeable downsizing, with around a sixth of the staff to be fired, and the staff budget of the fund to be reduced by US$100mn. “This is not a good time for staff”, the memo read. “Their expectation of a full career at the fund in exchange for their unflinching dedication and loyalty is in question.”

The fund had lost the great influence and power it had enjoyed during the 1990s, when it leant billions of dollars to crisis-hit Asian economies. Its power, then, was symbolised in the famous photo of then IMF director Michel Camdessus standing with his arms crossed like a strict schoolmaster, while the elderly Indonesian President Suharto bent over a desk to sign a humiliatingly-punitive IMF bail-out.

Emerging market governments learnt the lesson of that time. Many of them built up huge foreign exchange (FX) reserves, and bought back much of their existing public debt, so that they would never have to genuflect before the IMF. It gradually faded from the headlines and from the markets. “Some of my younger staff don’t even know what the words IMF stand for,” says Richard Luddington, vice-chairman of general capital markets at UBS.

Ousmene Mandeng, head of public sector investment advisory at Ashmore Investment Management, says: “I used to work at the IMF until October. When I left, I had the impression the fund would never play the role it once had in 1998. In hindsight, it seems absurd.”

Busiest month ever
A lot can change in a year.  November was the busiest ever month for the IMF. It lent US$41.8bn in bail-outs for Hungary, Ukraine, Iceland and Pakistan, and is in talks to provide further big loans to Turkey, Belarus, Latvia and Serbia, with other countries, such as Bulgaria, Romania, Estonia, Lithuania and Poland also potential clients in the coming months.

At the end of October, the fund also launched a new US$200bn short-term facility, to help countries that have “a very strong track record but are nevertheless facing pressure on its balance of payments”, in the words of Strauss-Kahn. The facility would allow such countries to draw down 500% of their IMF quota (ie, the amount they contribute to the IMF annually) up to three times a year.

Having been criticised in the past for being too slow to respond to crises, and for imposing excessively harsh conditions on its loans, the IMF has drawn some praise for the speed and size of its November bail-outs.

At the beginning of the month, it provided €12.3bn to Hungary to help it cope with an FX crisis provoked by the government’s high levels of debt, high fiscal deficit and high current account deficit. The loan was part of a €24bn coordinated package with the World Bank and the EU. It was the first IMF bail-out of a stet country since the UK borrowed £2.3bn from the IMF in 1976.

Nigel Rendell, senior emerging markets analyst at RBC Capital Markets, says: “It was a huge amount of money, way above Hungary’s quota. Hungary probably didn’t need that much, but it was better too much than too little. I think both the Fund and the EU wanted to send a signal to speculators that they were ready to stand by other vulnerable markets in the region.”

The conditions were that the government further reduce its deficit, which it was trying to do anyway, via a wage freeze for public sector employees and an elimination of a bonus for pensioners. The bail-out also commits the government to recapitalising its banking sector.

This has already helped give some support to the forint, and has lowered the CDS spreads on Hungary’s sovereign debt by around 100 basis points to 380bp, from a high of over 600.

However, the cuts on public spending, and an expected steep drop in bank lending next year, mean the country is heading for a severe recession, with analysts predicting that GDP will contract by between 1 and 5% next year. Workers marched on the parliament in the last weekend of November protesting against the pay-cuts. And the banking system is likely to come under greater pressure if the forint devalues further.

The IMF’s US$16.4bn bail-out for Ukraine was, if anything, even more generous considering the size of Ukraine’s economy. The conditions were relatively relaxed, demanding that the National Bank has a more flexible currency strategy, which many analysts had been saying was necessary for some time.

This time, the IMF acted without the EU, which caused concern among some investors in Ukraine that the country would find itself on the wrong side of what Ukrainian prime minister, Yulia Timoshenko, called “a new financial Iron Curtain”.

Still, the IMF on its own acted very quickly to intervene and support Ukraine. And the government is, according to reports, relying heavily on the fund’s advice to guide its own rather slow responses to the crisis.

Ousmene Mandeng of Ashmore says: “I was surprised by the size of the Ukraine package. Why didn’t the government use its own reserves? Maybe it hadn’t been able to formulate its own policy measures. It might give the IMF some credibility, to be called in like that, but it undermines the authority of the Ukraine government, which could have coped with the crisis on its own.”

The stigma of IMF help
In some ways, calling in the IMF can be a political as well as an economic life-saver for struggling governments. Peter Elam Hakansson, the founder of East Capital, which is one of the biggest portfolio investors in the CEE region, says: “It allows governments to blame the fund for difficult policy measures like freezing wages and cutting government spending. And indeed, governments in Hungary, Ukraine, Latvia and elsewhere have been doing just that.”

But blaming the IMF for policy measures ultimately weakens a government’s own authority. It is, in effect, admitting that a country does not have the strength to be responsible for itself, that it is a colony rather than an autonomous sovereignty. This is a great blow to the prestige of some emerging markets, who a year ago were boasting about how much they had matured since the 1998 crisis.

Some emerging market governments can legitimately boast about no longer needing the IMF’s help. Several CEE countries are in good shape, such as Slovakia and the Czech Republic. Russia is also is excellent fiscal shape, thanks to its prudent build-up of petro-dollars during the boom years. Kazakhstan is also sufficiently wealthy to be able to clear up its financial system on its own.

What this means is a two-tier system is growing up within emerging markets – those countries which are capable of governing themselves, and those which need external assistance. And there is a definite stigma to being in the second group.
Mohammad El-Erian, co-CEO of Pimco and a former director at the IMF, says: “Some countries have self-insurance, and others have none. So emerging markets have gone from a homogenous bloc to one which has become very country-specific. It might not even make sense to talk about ‘emerging markets’ as an asset class that includes both China and Seychelles”

The two-tier system within emerging markets will be exacerbated by the fact that some governments, such as China, the US, UK, Russia and UAE, can afford multi-billion-dollar fiscal stimulus plans, while those countries that seek IMF assistance will be forced to cut public spending just as their countries head into recession.

Dennis Leech, an economics professor at the UK’s Warwick University who covers the IMF, says: “The IMF has told Hungary, Ukraine, Pakistan and Iceland to balance their budgets and cut expenditure. Meanwhile the US, the country with the most voting power in the IMF, is desperately trying to spend its way out of recession. There’s a clear double standard.”

The stigma of seeking help from the IMF is perhaps what has prevented any country so far from drawing some funds from the short-term lending facility. Mandeng says: “There’s a first mover issue there – who wants to be first to take advantage of the facility, and what kind of group will you be in if you participate? What kind of signal does that send to investors?”

IMF funds ‘inadequate’, but G20 governments unwilling to help
There is also the issue of how much help the IMF can give in 2009. The fund has reserves of US$200bn, but if the fund keeps spending like it did in November, this won’t last six months.

In November, Strauss-Kahn sent a letter to the members of the G20 saying that the IMF’s resources were “inadequate” to cope with the crisis, and calling for more funds to be made available. He wrote: “there may be concerns in markets that the official resources needed to stabilize the situation are inadequate, which could exacerbates the problem as investors head for the exits.”

Strauss-Kahn later said the IMF needed at least another US$100bn to help countries through the next six months. Where would this money come from?

Western governments have been hoping that oil-rich Gulf countries would foot the bill. In November, UK prime minister, Gordon Brown, went on a tour of the Middle East, trying to convince Middle Eastern governments to bail out the world economy, via a huge capital injection into the IMF. He said: “The oil producing countries, who have generated over US$1tn from higher oil prices in recent years, are in a position to contribute” to an expanded fund.

Brown then organised a G20 meeting in Washington on November 15, which was heralded as a ‘new Bretton Woods’, comparable in significance to the first Bretton Woods conference in 1944 that created the IMF and World Bank. The meeting, Brown briefed journalists, would lead to a new, improved IMF, with a greater global role and increased capital. 

However, both the Middle East roadshow and the G20 meetings were complete flops. No emerging market country showed itself willing to commit any more capital to the IMF, and the ‘new Bretton Woods’ conference turned out to be a damp squib without the participation of the president-elect of the US, Barack Obama.

Ariel Buira, former executive director of the IMF, says: “The G20 meeting in November was not a big success. The Saudis said ‘thanks, but no thanks’. China asked what was in it for them. The Brazilians said they didn’t want merely to be invited to G7 meetings for coffee.”

Japan’s government did come forward and say it could commit a further US$100bn to the fund by issuing long-term bonds. But the announcement immediately led to a rise in Japan’s government bond spreads, and with the country heading into recession, the government might think twice about its generosity. 

Reforming the IMF
There is a feeling among the more powerful and wealthy emerging market governments that if western governments really want them to bail out the IMF, then the IMF has to be radically overhauled.

In early November, the Bric countries – Brazil, Russia, India and China – held their own summit of finance ministers before the G20, at which Brazil’s finance minister, Guido Mantega, declared: “The Brics and the G4 (South Africa, Brazil, China and India) …have been managed by institutions from the 1940s and 1950s, when the US and the European countries represented the bulk of the global economy. Today the emerging nations represent 75% of global growth, but we have minority representation” in the G7 and the IMF.

Mantega said Bric countries were ready to add money to the fund, but only in return for a greater say in its governance: “None of the Brics said they are not prepared to put funds in, they have money, they have reserves. They only want greater participation. It is currently the fund that does not want to give us a greater share.”

Most analysts agree that the IMF has what El-Erian of Pimco calls “a massive legitimacy problem”. He says: “The voter representation is a reflection of the world 40 years ago. Why does Belgium have the same voter power as China?”
At the moment, the US has 16.8% of the vote on IMF governance, which is far more than any other country, followed by 2-5% votes for Japan, Germany, France, UK, China, Italy, Canada, Russia, Saudi Arabia, Belgium, India and Switzerland. The head of the IMF has traditionally been from western Europe.

Mandeng says: “The idea has been that the managing director has to come from estern Europe in order to have the ear of the G7. Still, all these European heads of the IMF, enough is enough.”

In April 2008, the IMF did announce, with much fanfare, a new quota formula to give emerging market countries a greater vote in the IMF’s governance. However, Leech of Warwick University says: “It was just hype. The changes make almost no difference to the distribution of voting power. It reduces the US vote from 16.8% to 16.7%.”

Ariel Buira, Director of the G24 Secretariat in Washington DC, says: “The results of quota reform were very disappointing. The inclination of the EU and US is to maintain the status quo as much as they can. But the system is broken, and the G8 alone is not able to fix it.

The US’s domination of the IMF’s governing structure may have caused what many experts believe to be the fund’s great failure of the last decade – the failure of its surveillance function over the US and Chinese economies.

Buira says: “The IMF is charged by Article IV of its constitution to exercise surveillance over the economies of both China and the US. But there was no effective surveillance. There was instead a major failure of the IMF to perform its duty. The overwhelming power of the US over the IMF prevented the fund from making proper criticisms of US policy.”

Many analysts agree that the IMF has an important role to play in its surveillance and advisory functions. But some question if the IMF’s expertise at the moment is in the right area. El-Erian says: “The expertise of the IMF has to change. It’s a macro shop at the moment, full of macroeconomists. But they don’t know much about finance. There’s now a recognition that the IMF needs expertise in finance as well as economics. The fund has homework to do.”

These issues are likely to make reform of the IMF a slow and acrimonious process. In the meantime, investors will have to keep their fingers crossed that the fund doesn’t run out of money in the next 12 months.

Statement by Secretary Condoleezza Rice
Washington, DC
January 9, 2009

January 11 marks the 100th anniversary of the Boundary Waters Treaty of 1909. We note with pride the century of cooperation with Canada in managing water quality, quantity, and environmental health along our 5,525-mile border. The Treaty also established the International Joint Commission, which has played a vital role as an independent steward of these shared resources. Comprised of Commissioners from both countries, the Commission has been an outstanding example of collaborative governance and stewardship *, facilitating cooperation, preventing and resolving water-related disputes, and approving and overseeing operation of several major dams and hydropower stations along the border.

Millions of Americans and Canadians depend on the Great Lakes-St. Lawrence River system for drinking water, trade, jobs, recreation, and more. Through the Great Lakes Water Quality Agreement and the International Joint Commission, our two nations are working diligently to restore and maintain the chemical, physical, and biological integrity of the Great Lakes Basin ecosystem.**

The Boundary Waters Treaty remains vibrant as it enters its second century. Recent International Joint Commission initiatives such as International Watershed Boards provide opportunities for local stakeholders to build networks that can prevent or resolve problems at the community level. The Treaty continues to be a model for managing shared resources***and a tribute to the enduring friendship between the United States and Canada.****

* The reference to “governance and stewardship” may signify a career State drafter trying out a few liberal, internationalist phrases so as to be ready for the next administration. Had this been drafted in 2003, it’d probably have referred to “the joint commitment of freedom-loving nations to God’s aquatic gift to mankind”.

** I’ve read this a number of times, but it does indeed appear to be a positive reference to international environmental regulation by the Bush administration. I assume they think Dick’s too busy burning stuff to get pissed about this one.

*** Well yes, it’d be easier to resolve resource conflicts if the opponent was always Canada.

**** This is most likely a coded reference to the fact that the Canadian Conservative government is one of the few regimes on earth that may actually be sorry to see the Republicans go…

Let’s start with chickens (to the initiated, “broilers”).  For the first nine months of last year, production was growing strongly.  But as food prices slumped over the last few months, so did the number of “chick placements” – which I assume is code for “fattening the little critters up in a big shed until they can’t walk”:

Over the last 5 weeks (8 November to 6 December, 2008), the number of chicks placed for growout averaged 7.4 per cent lower than for the same period in 2007. With uncertainties about the domestic and world economies, the trend of year-over-year declines in chick placement is expected to continue well into 2009. With smaller chick placements forecast, the estimates of broiler meat production have been adjusted downward in fourth-quarter 2008 and in the first three quarters of 2009.

Who are we going to blame for this? Foreigners. Unless they like brown meat:

All the uncertainties in the global economy have combined to sharply reduce the demand for broiler exports . . . but declining exports may be slightly mitigated by lower prices for leg quarters, the primary export.

So expect the chicken farming lobby to turn inwards. Their disinterest in foreign affairs will only be compounded by increasing imbalances in the egg market:

Shipments of all shell eggs and egg products in October totaled 17.9 million dozen, down 13 per cent from the previous year. Much of the decline is due to lower shipments to Mexico and Hong Kong.

But it’s all very different on the turkey front. There’s a glut of the damn things – more and more are being put into cold storage – and production is expected to slow  as a result. With supply higher than demand, the U.S. needs to offload large quantities of its national bird. Fortunately, there are proven markets available:

Turkey exports remained very strong in October, totaling 71.8 million pounds, up 36 per cent from the previous year. Much of the increase in October’s turkey exports was due to higher shipments to the largest markets — exports to Mexico, Canada, and the combined China/Hong Kong markets were all up considerably from the previous year.

So that’s good news… but wait a minute! Not only is China propping up the U.S. economy by buying vast quantities of American bonds, but now we discover that it will start underwriting the turkey industry? What if Beijing stopped buying? Even Mexico slapped a temporary ban on birds from some U.S. plants just before Christmas on health grounds.  And last Tuesday Russia demonstrated its resurgent nationalism by slashing its total poultry import quota from the U.S. by 1.25 million metric tons to 952,000 metric tons.  So here’s my first big question for 2009: can the U.S. poultry industry adapt to a multi-polar world?

Next week: a post in which I explain the new world order by tracking trends in the price of tea-leaves.

I’m taking part in a roundtable on community resilience, 4&5GW and the decline of the state. The aim of the roundtable is to bring together individuals from a range of backgrounds to challenge current thinking and assumptions in our present political and societal systems.  Two presentations which I’ll be live blogging on will be Chet Richards on Mindsets and Character and John Robb on Community Resilience. There is no set agenda for the conference. This afternoon we will be running a series of open sessions… one of which is likley to be on community resilience.

If you have a question for Chet or John send me a tweet. Update: Thanks for the questions – answers will be tweeted soon. 

Update: Notes from John Robbs’ presentation after the jump + MP3 of Chet.

Chet Richards‘ OODA Loop refresher is valuable. Listen here (mp3)

John Robb on Resilient Communities

What we all fear: Soup Kitchens in 2011

• Current financial policies are creating a more complex system – instead of reducing instability they are creating more uncertainty in both the short and medium term. Put simply – we don’t understand the system we are operating in.
• Supersystem: Global market place rests on tightly coupled systems (think: buying food off the shelf in Tesco’s alerts its system to place an order for product in China).
• This global system is weakening and hollowing out the nation state. The nation state’s responsibility for finance, borders, and food security is weakened and in some cases has been lost. The reasons for this is because:
• It’s too big: Even working in concert, nation states will not be able to stabilise the system.
• It’s too complex: There are too many moving parts and too many connections between the parts to grasp the problems. We live on bad assumptions. Example – the whole economics profession were wrong about the global financial system.
• It’s too quick: Governments are incapable of responding to the rapid pace of change. Crises morph over time leaving nation states which aren’t able to synthesis the information and act on it behind the power curve
• Black Swans will happen more often.
• Radical slow down in economic activity has had an effect on lowering oil prices. It is likely we will become complacent and will therefore not diversify.
• Disruption: Most noticeably in the unavailability of goods: As in Iceland as well as black and brown outs in South Africa.
• Superempowerment: Moore’s Law – small groups are riding this curve – (CE note: see Clay Shirky’s book Here Comes Everybody – p215)

Net Result: Catastrophe.

We will see a lot of dead ends. In terms of security we may see a ratcheting up of the police state as people resort to low level criminality slowing the system down.

This requires a new form of resilience:

1. Emergence of a transition culture: See Rob Hopkins work on Transition towns

2. Platforms: The necessity of cooperative structures. Imagine a Bow tie – the left bow are the suppliers, the knot are the core services and the right hand bow are Users. The knot, the platform of the system needs to be fair, connected, and two way. In terms of Resilient Communities the problem is that we have given up the platforms at the community level and are resting on a global system which is becoming too complex to manage and therefore unstable. We need to identify solutions that rebuild local level systems. In terms of community resilience we can think of the following:

Local Power: We are currently in an ‘energy gap’ oil is running out but solar technology is still immature. One approach is to adopt microgrids based on military surety grids:

Local food: As the food crisis last year demonstrated food is rapidly disappearing. People will need to begin to grow their own food. In suburban in the UK for instance, the number of allotments is increasing . Entrepreneurs will begin to buy land from owners to grow their own food and sell it to local markets.

Local money: Money will become increasingly scarce through hoarding. But will local currencies make a come back? Some examples of this in action: Lewes Pound

Local Security: Number of good examples including Hurricane Katrina and The Bridge to Gretna:

When Hurricane Katrina blew through New Orleans three months ago, thousands of people left in the city were trapped with no food, no water and no shelter. They were desperate to escape the devastation. The bridge that spans the Mississippi River from New Orleans to Gretna was one of the few ways out, until police from Gretna used force to stop pedestrians from crossing it.

You read that correctly.The Gretna local police stopped residents of New Orleans escaping over the Bridge and what’s more:

Since most of the police officers were white and most of the evacuees were black, the incident quickly took on racial overtones.

- 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.

Introduction

With “Bretton Woods II” now imminent, it’s a good moment to take stock of preparations for the summit – and to ask what chances it has of matching the achievements of its illustrious predecessor.

The summit will be held in Washington on 15 November 2008, with G20 leaders, the UN Secretary General, and the heads of the IMF, World Bank and Financial Stability Forum in attendance.[i] Its aim is to:

Review progress being made to address the current financial crisis, advance a common understanding of its causes, and, in order to avoid a repetition, agree on a common set of principles for reform of the regulatory and institutional regimes for the world’s financial sectors.[ii]

It’s a clear remit. The worst of the crisis is seen as already past (as Hank Paulson puts it: “we have taken the necessary steps to prevent a broad systemic event”).[iii] The clean-up now proceeds apace. Leaders should thus turn their attention to the bigger picture, learn tough lessons from what has gone wrong, and rejig the world’s financial architecture to ensure that we never again tread so close to disaster.

Many are relishing the challenge. Nicolas Sarkozy and Gordon Brown, in particular, are having the time of their lives, as they oscillate between playing as a team and jostling over the limelight.[iv] For Brown, this is vindication of a long interest in international financial reform – and a chance to slip back into the role of economic sage that he enjoyed so much while Chancellor of the Exchequer.

Sarkozy’s enthusiasm is more recent, but this has not stopped him from ramping up the rhetoric. He has been busy dancing on the grave of laissez-faire, and calling for ‘whole swathes of financial activity’ to be brought under state control. The chance to trample all over George Bush – now more unpopular at home than Nixon after Watergate – was an added bonus.[v] “Europe wants the summit before the end of the year,” the French President told the media as he set off to meet his American counterpart. “Europe wants it. Europe demands it. Europe will get it.”[vi]

But now the Europeans have got their way, can the summit live up to its billing? Are leaders correct to assume that the worst news is now in the past? And do they understand the problem well enough to be able to implement viable solutions?

Be careful what you wish for

The answer to all three of these questions is ‘no’, we believe.

US support for the summit is grudging at best. Its officials are refusing to play along with the Bretton Woods II moniker, and instead stick resolutely to referring to it as a G20 summit. They’re of course keen to hit ‘pause’ while waiting for the Obama team to make its intentions known. The President-elect, meanwhile, is keeping a low profile, with little to gain by meddling before he has the power to ensure his interventions count.

The IMF is equally cautious. Written off by many, it is now back in the ascendant and has a growing queue of countries looking for bailout finance. But its head, Dominique Strauss-Kahn, has been busy dampening expectations of what the summit can achieve:

Expectations should not be oversold. Things are not going to change overnight. Bretton Woods took two years to prepare. A lot of people are talking about Bretton Woods II. The words sound nice but we are not going to create a new international treaty.[vii]

The US and the IMF both argue that the summit is just the beginning of a process, and that leaders should use the get-together to set up a programme of work that can roll out over the next year or two. This, of course, is closer to the model provided by the original Bretton Woods. John Maynard Keynes (whose reputation is one of few commodities to thrive in a bear market) was hard at work thinking about the shape of a future global settlement more than a decade before anyone travelled to New Hampshire.

Can we say that we’re at the same stage today? Of course not. At present, we not only lack a clear consensus on what Bretton Woods II should try to achieve; we don’t even have consensus on the major areas of disagreement, and where we should look for trade off and compromise.

Serpent in paradise

Perhaps, though, the problem is more fundamental than a lack of shared awareness.

The success of the original Bretton Woods was built on what the geopolitical blogger, Fabius Maximus, has described as the “exhaustion and steely resolve of the world’s people following the twin disasters of the Great Depression and WWII.”[viii]

The observation that institutional or social renewal usually follows moments of breakdown (indeed, may actually depend on them) isn’t new. Thomas Homer-Dixon made the same point last year about the emergence of the Federal Reserve system following the San Francisco quake of 1907.[ix] But it should force us to ask a simple question: have we suffered a sufficiently arduous trial by fire to force us to think the unthinkable?

At this stage, it would seem not. A few weeks back, during the shock and awe that followed the Lehman breakdown, the unthinkable was certainly being thought. Now, though, we have entered a period of phoney warfare, in which we know that dire economic impacts are on the way, but the pain hasn’t yet been felt. Neither exhaustion nor steely resolve are terms that spring to mind to describe the mood of the global body politic.

So perhaps we are indulging in wishful thinking when we imagine that we have arrived, once again, in 1944. Maybe we are still stuck in a grimmer period of global history -1914, when the first phase of globalization was drawing to a painful close.

As Keynes himself later remembered, the ‘internationalization’ of social and economic life was then regarded as:

Normal, certain and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper.[x]

Perhaps the serpent is still at play in our paradise – in which case, the challenge becomes a more fundamental one. Not ‘how do we pull off BW II in one fell swoop?’ – rather, ‘how do we get from 1914 to 1944 without the disasters that disfigured and disgraced the first half of the twentieth century?’

Shifting plates

Let’s consider some reasons for believing that we are yet to hit rock bottom.

First, there’s the fact that the extent and depth of the crisis has been persistently underestimated. Six months ago, many experts assumed the worst was over and predicted recovery by 2009 – with hindsight, an incredibly rosy assumption.[xi] History suggests that optimism may be similarly misplaced today. On average, past banking crises in developed countries have taken four to five years to unravel, have cost around 12% of GDP to resolve, and have led to a cumulative loss in output of almost a quarter of GDP.[xii] In Japan, it was around eight years before policy makers even found the right policy levers.[xiii]

Given that we now face what Gordon Brown has described as “the first truly global financial crisis of the modern world”, our bet would be that it takes as long as a decade to bring it fully under control.[xiv]

At the same time, it is important to pay close attention to the broader power shifts that are likely to coincide with, and be embodied in, any major renewal of the global international architecture. At the heart of BW I was the eclipse of the UK by the US. While Keynes chaired the summit, it was the Americans who called the shots – as the balance of quota votes in the IMF attests.

Today, the tectonic plates are on the move again. Their destination is as yet unknown, but presumably we are headed towards some kind of more or less fractious multipolarity. Yet for all the talk of a global settlement at BW II, emerging economies are only beginning to come to the forefront (whether as victim of the crisis or knight in shining armour). Admittedly, China’s stimulus already dwarves that applied by the West, at 16% of GDP compared to the US’s 1% – but China has made it clear that it interprets its international role primarily in terms of boosting growth, not as a leading player in fashioning or implementing a collective response.[xv]

China’s dramatic action shows that only one of the legacies of the debt binge has come home to roost: the toxic liabilities that have clogged up formal and the ‘shadow’ banking system. Another, though, has yet to do so: the global imbalances between debtor and creditor nations that have most notably led to China sitting on dollar reserves that, at last count, came to nearly two trillion (leading to a fresh burst of worry about whether China might exercise its economic ‘nuclear option’ if she were to come under hard pressure from the US to revalue the yuan).[xvi] 

Concern over these imbalances has led Paulson to call for BW II to take on much more than the banking crisis. Fail to tackle them now, he warns, and the pressure “will simply build up again until it finds another outlet.”

The bigger picture

Paulson is right to signal the need to widen the BW II agenda. This, of course, was a lesson from the first Bretton Woods summit, whose focus spanned the whole international economic waterfront, taking into account banking supervision, foreign exchange and currency valuations, trade, countries’ balances of payments and other areas besides. Moreover, Keynes sought explicitly to integrate these various considerations in his elegant proposal for an International Clearing Union (subsequently blocked at BW I by the head of the US delegation, Harry Dexter White).[xvii]

Today, integration needs to go much further than it did in 1944. In an interconnected world, the boundaries between issues are as blurred as those between countries. Leaders will make a big mistake if they attempt to tackle finance in isolation from the other big challenges of our age.

The first thing they should be alert to are non-financial shocks – the wild cards that could conspire to make the financial crisis much worse. The United States is already entangled in two expensive overseas conflicts. What would be the impact of a further deterioration in global security, as Pakistan finally implodes, Iran and Israel tire of shadow boxing, or Al-Qaeda pulls out another spectacular? Or there’s the long-heralded avian flu epidemic, which (even if it proves on the mild side of estimates) will bring economic chaos as countries rush to shut their borders. These examples are indicative of course; any ‘black swan’ would suffice. As the IMF’s Jaime Caruana has put it, “it is obviously also the case that when financial systems are more fragile and they are under stress, other shocks can have a higher effect.”[xviii]

Resource scarcity, meanwhile, will have an inevitable impact over the next twenty years, as population shoots up by 20% or so, and we find it ever harder to meet the expectations of the world’s burgeoning middle classes.[xix] The choke points are land, water, food, energy, and, of course, the right to emit greenhouse gases. The International Energy Agency appears to be the latest convert to peak oil, while Chatham House predicts a $200 oil price may be nearer than we think.[xx] Oil now drives the food price, as was shown by the spike that peaked earlier this year, and both are major threats to security, especially in fragile states.[xxi]

Over the coming years therefore, competition for resources between major powers is likely to become a dominant driver of change in the international system, as concerns over security of supply grow. Poor countries, meanwhile, risk being destabilised, either through the ‘resource curse’ in the case of exporters, or as they are priced out of the market in the case of import-dependent countries. Either way, this will increase pressure in some of the least stable parts of the world.

At the same time, we face the challenge of climate stabilization, which will require a complete retooling of the global economy to be underway within the next decade. Global emissions will need to drop by at least 50% by mid century (and by much more than 80% in developed countries, assuming an equitable deal), even as population and living standards grow too.[xxii] This is primarily an economic and institutional challenge, much of which will have to be confronted internationally. It is simply impossible to imagine a new global financial architecture that does not take into account this change – a change that McKinsey has compared to the Industrial Revolution, but at three times the pace.

Recalibrating globalization

The biggest challenge, though, will be to take a new look at what we expect from globalization. Recent debate has been sterile – split between those who are ‘for’ and ‘against’ further global integration. Reality, on the other hand, has been much more nuanced – some things have become very global, while others have stayed national or even become more local.

To illustrate the point, imagine a globalization ‘graphic equalizer’ with different slides for different variables:

• The ‘capital’ slide would in recent years have shifted all the way up to 9 or 10; the slide for ‘labour mobility’, by contrast, would be down at 4 or 5.
• ‘Trade in high value added manufactures’ would be up at 7 or 8; ‘trade in agricultural goods’, on the other hand, would be more like a 5 or a 6, given developed country protectionism and the fact that most trade in food is regional rather than global.
• Emissions trading is today probably only a 2 or a 3 (limited as it is to just one major region, the EU) – but a successful global deal at Copenhagen could push it up to a 7 or an 8 in one go, and even higher if developing countries start to take on emission targets.

In each of these examples and numerous others, the question is: is this an area in which globalization has gone too far, too fast? Or, conversely, is it an area in which it’s more, not less, globalization that we really need? 

These are exactly the questions that were preoccupying Keynes in 1933, as he wrote his essay on ‘National Self-Sufficiency’.[xxiii] He believed that the interdependence of the first half of the 20^th century was as much a cause for worry as for celebration.

I sympathize … with those who would minimize, rather than with those who would maximize, economic entanglement among nations. Ideas, knowledge, science, hospitality, travel – these are the things which should of their nature be international. But let goods be homespun whenever it is reasonably and conveniently possible, and, above all, let finance be primarily national.

A wholesale retreat into nationalism, or even worse localism, is simply not possible – not if we want to support 6, 7, 8 and 9 billion people. But at the same time, we are building a fiendishly complex global system whose workings we do not understand, and which thus has the potential to occasionally career out of control (how far we never know, until it’s over). For that reason, BW II – seen as a long-run process of renewal, rather than a meeting or two – can only make an impact once we have had a serious debate about subsidiarity. What function is best discharged at what level? And which checks and balances are needed to keep it healthy?

The chances are that leaders will duck these questions in Washington and in the meetings that follow. If they do, then it will be worth recalling Milton Friedman’s advice to his fellow monetarists during their long wait in the wilderness:

[This], I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.[xxiv]

Extend horizons

All this should discourage us from holding out too much hope for quick solutions. This weekend’s summit may start a useful process, but it will surely disappoint those who have elevated expectations.

Leaders must therefore extend their horizons in (at least) five directions.

• First, they need to look further ahead. The challenge is not to patch things up sufficiently to get leaders through their next domestic election, but to work towards an international architecture that will last for a generation at least. This will take time, vision and the patience to develop a common understanding of both problems and solutions.
• Second, they need to look far beyond financial regulation. Economic imbalances probably cannot be ignored. But resource scarcity may be put aside for another day, especially with short-term declines in prices as the economy suffers. That would be a mistake. Eventually, these highly volatile bulls will demand attention. Leaders would be wise to focus on the problem before it spurs a stampede away from multilateral co-operation.
• This should encourage them to reach into other international processes. It is staggering to realise that there are two tribes, each hoping for a far-reaching global deal in 2009 – one on finance, the other on climate. The prospects for achieving either are slim, but non-existent if we persist in believing that either can be treated in isolation from the other.
• Fourth, leaders need to widen the circle and get much more serious about the rising powers. Rich countries currently have an unhealthy obsession about being displaced by China and the rest. If only they would devote even half the energy to listening to what emerging economies want from multilateralism, and then using that intelligence to strike the ‘grand bargains’ that can secure long-term mutual interests.
• Finally, of course, governments need to look beyond other governments. Robust deals are no longer struck in the ‘bubble’ where diplomats meet their peers (though both climate and financial insiders act as if they are). What matters are the political conditions that each government faces at home and, increasingly, the flow of ideas and sentiment across borders. BW I relied heavily on one man’s thinking. BW II, on the other hand, will only succeed if built on a platform that brings consensus to a network that stretches across countries and sectors.

[ii]  Statement by Press Secretary Dana Perino, 22 October 2008, http://tinyurl.com/6r82cm

[iii] Remarks by Secretary Henry J Paulson Jr. on Financial Rescue Package and Economic Update, 12 November 2008, http://tinyurl.com/5rq4nu

[iv] For example, http://tinyurl.com/6zkk9a

[v] A recent poll showed Bush with a 76% disapproval rating, compared to Nixon’s 66% on resignation, http://tinyurl.com/6xulga

[vi] Sarkoy calls for revamping of capitalist system, Washington Post 17 October 2008 http://tinyurl.com/5oyn9l

[vii] Bretton Woods II unlikely to emerge from G20 Summit, Financial Times, 13 November 2008, http://tinyurl.com/57ke6v  

[viii] A Look Ahead to the End of This Financial Crisis, 30 October 2008, http://tinyurl.com/63h95b

[ix] Summer Reading: the upside of down, GlobalDashboard.org, http://tinyurl.com/6gnptg

[x] John Maynard Keynes, ‘Chapter II Europe Before the War’, in The Economic Consequences of the Peace, 1920, http://tinyurl.com/5t33nk

[xi] See, for example, this press briefing by Dominique Strauss Kahn from April 2008 http://www.imf.org/external/np/tr/2008/tr080410.htm

[xii] PIMCO: see http://is.gd/7lt8

[xiii] Bank for International Settlements, The financial crisis in Japan during the 1990s: how the Bank of Japan responded and the lessons learnt, October 2001 http://tinyurl.com/6q7q4e

[xiv] PM concludes Progressive Governance Summit, 5 April 2008, http://tinyurl.com/5nhnsj

[xv] Caveats should of course be applied until we see how fast each country spends the money, and the extent to which expenditure is actually additional to that planned. See: http://tinyurl.com/5r9rsj

[xvi] China forex reserves exceed US$1.9 trillion, China Daily, 14 October 2007, http://tinyurl.com/5bula6; China threatens nuclear option of dollar sales, Telegraph, 10 August 2007, http://tinyurl.com/3r2w8t

[xvii] James M Boughton, Why White, Not Keynes? Inverting the Postwar International Monetary System, IMF Working Paper, March 2002, http://tinyurl.com/6yjb3b

[xviii] Transcript of a Press Conference on the Spring 2008 Global Financial Stability Report by Jaime Caruna, 8 April 2008, http://tinyurl.com/65t434

[xix] World Population Prospects: The 2006 Revision, World Population Database, http://esa.un.org/unpp/

[xx] Executive Summary, OECD/IEA, 2008, http://tinyurl.com/5l59ud; The Coming Oil Supply Crunch, Chatham House Report, August 2008, http://tinyurl.com/6gdslv

[xxi] Alex Evans, Rising Food Prices, Chatham House, April 2008 http://tinyurl.com/6y96bz

[xxii] Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change, Summary for Policymakers, IPCC, May 2007, http://tinyurl.com/33944o

[xxiii] John Maynard Keynes, ‘National Self-Sufficiency’, in Yale Review, Vol 22, no 4 (June 1933), pp. 755-769, http://tinyurl.com/5lhrsh

[xxiv] Milton Friedman, Capitalism and Freedom, University of Chicago Press, 2002

At the recent EU summit in Brussels there was widespread reluctance to meet pledges all EU governments made last year to cut CO2 emissions by 20% by 2020. Eight Eastern European countries – including Poland, Hungary, Romania, Bulgaria, Slovakia, Latvia, Lithuania and Estonia — released a joint statement urging the EU to balance the wish for cleaner air against “the need for sustainable economic growth” at a time of “serious economic and financial uncertainties.” Italy threw its weight behind these countries, threatening to veto the proposed EU plans.

Likewise in the US, top power industry executives seized the opportunity to lobby for delaying carbon emissions legislation, at the recent New York Utility Conference. More dramatically in Canada, the Liberals were dealt an electoral defeat on Wednesday largely on the basis of their strong advocacy in favour of a carbon tax (see story here).

All this backtracking is akin to forfeiting the forest for the tree. Financial crises are short-term phenomena, global warming on the other hand is with us for the long haul, and the window of opportunity for addressing it is fast narrowing. The prospect of economic recession does not in any way reduce the magnitude or the urgency of the climate problem, nor does it provide any compelling reason for delaying action. Or as EU President Barroso put it:

“Saving the planet is not an after-dinner drink, a digestif that you take or leave. Climate change does not disappear because of the financial crisis.

Moreover, as David Wheeler of the Center for Global Development argues, smart carbon regulation will be easiest, not hardest, to introduce during a recession, since a slowing economy emits less, and smart cap-and-trade regulation can “lock in” this head start on emissions reduction at almost no cost during the recession. His proposal for the US is to:

• Immediately pass a cap-and-trade bill that sets the initial total limit at the pre-recession emissions level, and schedule a progressive decline in the overall limit that will achieve the needed long-run goal.
• Establish an annual auction for 100% of the emissions permits.
• Set aside a healthy share of the auction proceeds to provide a compensating rebate for every American

In this way the consumer is shielded from cost increases, and the power provider incentivised to develop less carbon-intensive energy options for the future.

It is amply clear that big emitting developing countries such as China and India will not make significant commitments to curb their greenhouse gas emissions unless the US and EU lead by example. With only about a year to go before the new global deal to replace the Kyoto Protocol is due to be reached in Copenhagen conference, the US and EU have no room to falter. More than ever, political courage and leadership is needed to ensure global efforts to address climate change are not jeopardized.