Mexico, like many places around the world, has numerous immensely imaginative one-liners to characterize corruption. Here is a sample:

• “El que no transa, no avanza” (“Whoever doesn’t trick or cheat, gets nowhere”)
• “No roba, pero se le pega el dinero” (“He doesn’t steal, but money sticks to him”
• “Fulano de tal es honesto, pero honesto, honesto, honesto, ¿quién sabe?” (“So-and-so is honest; but honest, honest, honest, who knows?”
• “Político pobre, pobre político” (“A politician in poverty is a poor politician”)
• “No les pido que me den, sólo que me pongan donde hay” (“I am not asking for money, just to be appointed where I can get some”)
• “Vivir fuera del presupuesto es vivir en el error” (“To live outside the federal budget is to live in error”)
• “Amistad que no se refleja en la nómina no es amistad” (“A friendship that is not reflected in the payroll is no friendship at all”)
• “Con dinero baila el perro, si está amaestrado” (“Properly paid and trained, a dog will dance”)
• “No les cambies las ideas, cambiales los ingresos” (Don’t bother to change their ideas, just change their incomes”)

Source: Manana Forever?: Mexico and the Mexicans

The world’s leading narco state will, unnoticed, dissolve into total chaos destabilising the surrounding region.

In a early January 2009 John Robb suggested that Mexico would be an essential security threat to the United States:

The narco-insurgency in the northern provinces morphs into a national open source insurgency with thousands of small groups all willing to fight/corrupt/intimidate the government. Many, if not most, of these groups will be able to power themselves forward financially due to massive flows of money from black globalization. The result will be a diaspora north to the US to avoid the violence.

Since the beginning of 2009 more than 1,000 people have been killed in drug violence. In 2008 6,290 people were killed, double the 2007 death toll.

Since 1993 the City has been known for the violent deaths of hundreds of women – ‘las muertas de Juárez’ (The dead women of Juárez). According to Amnesty International , since February 2005 more than 370 bodies have been found, and over 400 women were still missing. Most of the cases remain unsolved.

In the next three weeks the Mexican Government is sending up to 5,000 new troops and federal police to the country’s most violent city, Ciudad Juárez , where law and order is on the brink of collapse.

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.

2009 – A Year for International Reform
Talk to the Reforming International Institutions – Meeting the Challenges of the 21st Century conference
David Steven, 21 January 2009 

Introduction

In the run up to November’s G20, I published A Bretton Woods II worthy of the name, a paper co-authored with my colleague, New York University’s Alex Evans.

In a nutshell, our argument was that leaders needed to respond to extreme global stress by:

• Becoming more ambitious in their attempts to reform the international system, despite temptations to focus narrowly on fire fighting a growing number of immediate problems.
• Focusing on the long-term in order to increase the basis for co-operation, thinking in decades where national interests tend to converge, rather than in years where often they will not.
• Working towards integrated solutions, and not imagining that a ‘global deal’ on finance could be divorced from the other big deals that must be struck on trade, security, climate and other resource issues.

This paper, prepared for presentation to the United Nation’s University and UK Foreign Office conference on International Institutions Reform in Tokyo, expands these points.

It has been written at the beginning of a critical year for the international system – a year of great peril, but also of some promise. Threats are building up globally, many of which are poorly understood and will strain our capacity for collective action. International institutions, as currently constituted, risk being overwhelmed. We could end the year confronted by a ‘new isolationism’.

But there are also opportunities to carve out an effective response. After all, a crisis always provides the conditions in which desperately needed reforms can best be achieved.

But policy-makers will find it much easier to work together if they focus on the big picture, or what Wittgenstein called ‘the single great problem’. Without ambition, long-term goals, and integration across issues, 2009 will go down in history as a year of lost opportunities – and possibly mark the point that a short-term international crisis turned into a much more deep-seated decline.

The financial crisis

So how can we expect 2009 to unfold?

First, it is a given that the financial crisis will continue to unravel, revealing some devastating economic consequences.

Japan knows better than most how pernicious a banking shock can be – and how long lasting. Her experience, however, is far from unique. On average, banking crises take around four to five years to unravel in a developed country, and cost around 12% of GDP to resolve – emerging economies tend to feel more pain, but get through the crisis slightly faster.

Their economic impact is also considerable. In a review of the fallout from past crises, Carmen Rheinhart and Kenneth Rogoff find that on average:

• 35% is lost from house prices and 55% from equities.
• Unemployment rises by 7% and output falls by 9%.
• Government debt increases by 86%.

The past does not predict the future, of course, but it should make us wary. The pattern, as Japan found, is for policy-makers to underestimate the seriousness of the problem and for financial institutions to spend years refusing to confront their predicament head on. The required psychological shift is a profound one.

Throwing money at the problem is, in many ways, the easy bit. Much more demanding is the process of unpicking and revaluing the poorly-understood risks that are at the heart of the financial sector’s difficulties. This is a process that has barely begun.

Back in April last year, I presented on multilateral reform to heads of state at the Progressive Governance summit. Then, bold action was promised to sort out the ‘bad’ from the ‘good’ banks, but nine months’ later that is only beginning to happen.

Instead, many countries have pumped money into their financial institutions, without having the tools to force these institutions to identify, value and dispose of toxic liabilities.

This mistake is likely to prove costly. As Ben Bernanke admitted last week, large quantities of “troubled, hard-to-value assets” have now become the primary obstacle to the financial system’s recovery. The UK and US are both now working on new mechanisms to tackle these toxic assets.

Meanwhile, the US Treasury’s Troubled Asset Relief Program (TARP) has been subjected to some fierce criticism. The Congressional Oversight Panel, for example, identified:

• ‘Significant gaps in Treasury’s monitoring of the use of taxpayer’s money’
•  A lack of clarity in asset evaluation, making it unclear whether the Treasury is able to distinguish between ‘healthy’ and ‘unhealthy’ banks, and
• ‘Shifting explanations’ of the fund’s purposes, leading the Panel to the conclusion that the Treasury does not have a clear strategy for spending the funds.

The situation in the US is not atypical; its system is simply unusually willing to wash dirty linen in public. Stimulus packages also pose risks, as they must be assembled and dispersed at high speed. Finding productive investment opportunities is a significant challenge.

We have already seen a massive market failure. The danger is that a similarly sized policy failure will now be layered on top.

The trade challenge

The trade system is also well worth keeping a close focus on.

It offers the best early warning system we have for any widespread loss of confidence in global integration. Protectionist pressures are already on the rise, as happens in every serious downturn. In 2009, will they overwhelm the will of governments to contain them?

If they do so, we may rue the opportunities that were missed on trade in 2008. In April, at the Progressive Governance Summit, there was genuine enthusiasm for returning to, and completing, the Doha Development Agenda. But the talks still collapsed in July, in a row between India, China and the US.

China thought the rich countries had been ‘selfish and short-sighted’, while Japan attacked the emerging economies for failing to recognise their new responsibilities. They had failed to think about the world economy as a whole, while pursuing narrow national self-interest.

At the G20 in November, Doha was back on the agenda, with heads of state promising a framework agreement by the end of the year. By mid December, however, Pascal Lamy had decided it would be dangerous even for ministers to meet, believing that an acrimonious failure could threaten not just the round, but the WTO system itself.

And the bad news spread beyond Doha. Russia, India, Indonesia, Brazil and Argentina – all G20 members, and key swing voters in the multilateral system – had announced restrictive trade measures within weeks of the G20, despite a promise to “refrain from raising new barriers to investment or to trade in goods and services.”

Doha, then, has become the ‘zombie’ trade round, staggering on, but never quite dying. Few expect that it can now be revived. But who knows? Given its resemblance to a B-movie, perhaps it will lurch back into life at the very moment when all hope appears to have been lost.

An alternative view is that the content of Doha doesn’t matter that much. As Paul Krugman has argued, “World trade is already so free, we’re really talking about stuff at the margins.”

But Doha has, at the very least, great symbolic importance. It is a yardstick for our ability to strike complex global deals; shows the extent of the world’s commitment (or otherwise) to developing countries; and – above all – acts as a bellwether for global confidence in free trade itself.

Global imbalances

If the global trade system is to come under a sustained attack in 2009, this will happen as global imbalances – built up over the past decade – unravel, revealing divergent interests between producer and consumer countries, and particularly between China and the United States.

Currency may well be the main battleground, with countries tempted by competitive devaluations as export markets shrink and domestic producers beg for protection.

Since the mid-1990s, we have seen:

• A ‘savings glut’ in Japan and old Europe, and more recently in China and the oil producing countries.
• A ‘money glut’ in the United States and a few other countries.

Effectively, US consumption was fuelled by a potent combination of cheap imports and cheap money, leading to a surge in consumption and debt. The causes for this were to be found both in the US and globally.

Within the US, monetary policy was lax (in part, as a response to previous economic shocks). From overseas came an avalanche of dollars, as China and other countries recycled their surpluses back into the US economy in order to stop their currencies from appreciating.

The debate as to who should be blamed for the imbalances – savers or borrowers – is a fruitless one. The arrangement was symbiotic, or to borrow language from those who treat addiction, an example of co-dependence.

More pertinent were two questions. Were the imbalances sustainable? And if not, could they be unwound in an orderly fashion? The answer to the first was ‘clearly not’. Much now depends on whether a gradual and controlled rebalancing is possible.

China is entering a critical period. The country has massive surplus capacity now the American consumer has stopped spending. Its exports have fallen fast and have much further to go. It is vulnerable to falls in the dollar, which will worsen its terms of trade while devaluing its massive dollar holdings ($1.94 trillion at the end of 2008).

Finally, there are signs that so-called ‘hot money’ may be beginning to flow out of the country, with analysts estimating that $120-140bn of capital left the country in the last quarter of 2008. China’s own banking system has significant weaknesses, despite recent efforts to address non-performing loans.

Some of the tensions can be seen in a fascinating interview in last month’s Atlantic magazine with Gao Xiqing, Chief Investment Officer at the China Investment Corporation, the sovereign wealth fund that manages the riskier part of China’s foreign exchange reserves.

Gao had harsh words for the Americans (“the simple truth today is that your economy is built on…the gratuitous support of a lot of countries”). He also provided an insight into how unpopular Chinese investment in the US can be at home. China’s citizens ‘hate’ its support of rich Americans (“people eating shark fins” at the expense of “poor [Chinese] people eating porridge,” he claims).

It seems unlikely that the Chinese can boost domestic consumption rapidly enough to soak up declining exports – though they must do what they can. A worrying prospect is that the Chinese government will devalue to prop these exports up. That would mean that Western stimulus dollars, euros and pounds were flowing to Chinese producers. It is hard to imagine anything more politically explosive in the current climate.

The US would almost certainly react to protect its producers, with Europe tempted to follow suit. The worst case would be the emergence of a nasty zero sum dynamic in the international arena – a series of tit-for-tat measures that are politically compelling in the short term, but lead to a marked, and even disastrous, loss of collective welfare over longer time scales.

The politics of scarcity

2009 will also see the world continue to grapple with the impact of a set of scarcity issues that are perhaps the most important long-term drivers of global change.

These issues have enormous geopolitical relevance (oil), are growing causes of poverty and conflict (food, water, land), and/or demand unprecedented levels of international collective action (climate change).

Neither can they be seen in isolation, as was shown by last year’s short, but pronounced, commodity boom. In the spring of 2008, oil prices spiked, reaching $147 dollars per barrel in July. Food prices also increased alarmingly, sparked to a large degree by the price of oil. Inputs such as fertilisers had risen in price, while biofuels were an increasingly strong competitor for productive land.

In rich countries, recent analysis suggests that higher energy prices were a significant factor in turning an incipient slowdown into a deep and painful recession. In poorer countries, rising commodity prices had seriously destabilising effects, with food riots across Africa and Asia.

The response: a wave of resource nationalism, with over thirty countries introducing export restrictions. Even with lower prices, countries have continued to try and protect their security of supply. Middle income food importers have signed long-term land deal with other – usually poorer – countries, while producers are re-examining the merits of self-sufficiency.

In the medium term, the drivers for commodities remain upwards. Population growth, economic development, underinvestment in supply, a lack of water, competition for land, and climate change are all likely to increase prices and volatility.

We therefore find ourselves in a damaging triple-bind:

• On the one hand, resource price shocks are likely when times are good, acting as a repeated challenge to economic recovery.
• On the other, political progress may prove hard in both good and bad times. When prices are high, national responses will be favoured. When prices are low, economies will probably be suffering too. Other priorities will thus seem more important.

Recent experience with climate change illustrates the problem. In the boom years, global emissions shot up, rising 2.9% a year between 2000 and 2006, compared to a figure of less than 1% that was assumed in the models that formed the basis of the Stern Review. Surveying this trend, analysts from the Tyndall Centre argued that “it is difficult to envisage anything other than a planned economic recession being compatible with stabilization at or below 650ppm.”

Now, of course, we have that recession – though it wasn’t planned. The IEA expects demand for oil to fall by around 0.6% next year, though the drop could be much more dramatic than that. Emissions will decline roughly in line with energy demand (though probably not as rapidly given substitution by dirtier forms of fuel). In theory, this should make emissions restrictions easier to swallow.

But yet, as we saw in Poznan, the reverse is true, with many governments arguing that a tough climate deal should be delayed until the economy recovers. At the same, investment in low carbon technologies (at least from the private sector) is also suffering.

The logic is insidious and, if unchecked, will have catastrophic long-term consequences, as countries persuade each other that it’s never a good time for a robust climate deal.

The security threat

Finally, with the economy on all our front pages, it is easy to disregard the potential impact of security threats on the world in 2009, and on prospects for international co-operation.

That would be a mistake. The situation in the Middle East again seems unsustainable, at a time when oil producer countries are coping with what was, for them, a very unwelcome decline in the oil price. Iran’s nuclear ambitions are a threat not just to Israel, but to many of its competitors in the Arab world, and indicate the ongoing threat from proliferation.

Key middle income countries, meanwhile, are experiencing extreme distress. Pakistan, for example, has been battered by fall-out from its highly ambiguous role in the Bush administrations ‘war on terror’; by the commodity price crunch which pushed large numbers of Pakistanis back into poverty; and by the credit crunch, which left it needing an IMF bailout.

Many other countries are feeling similar impacts. Higher food prices in 2008 are estimated to have pushed an additional 130-155 million people into poverty. That shock had barely worked its way through the system, before the financial crisis hit. The World Bank estimates that developing country growth will slow to 4.5% in 2009, well below recent levels. Many analysts are significantly more bearish.

2009 could see a wave of countries get into serious trouble. If so, the IMF may well struggle to cope, given that its reserves are only around $200bn. It can probably respond to a handful more crises in smaller, poorer countries. If a larger emerging market were to get in trouble, it would need new money and fast. Trouble for a major developed country would quickly take us into unknown territory.

Weak growth in the developing world is likely to fuel conflict and state failure, with poor countries facing a ‘demographic disaster’ if they fail to provide economic opportunities for growing numbers of young adults. There is a compelling link between income and civil war, while sudden income losses weaken the legitimacy of the state and exacerbate competition between groups for scarce resources.

The results are countries that are a threat to themselves, to their neighbours, and – as havens for terrorists – to the rest of the world.

Now is a good time to remember that Nassim Nicholas Taleb has said that the financial crisis is not a black swan, because it was too predictable that it would happen.

An unexpected security deterioration in one or more regions is precisely the kind of additional stress that could derail international efforts to tackle other problems. Terrorism is another potential threat that can be corrosive to international alliances, of course, while avian flu would see countries rush to close their borders, in a futile attempt to isolate themselves from the threat.

This, then, is not a time to lose focus on these risks. Instead, the question to ask is: how will global systems cope at a time when they are already compromised by a number of other serious stresses?

Lessons from Bretton Woods

Given the dramatic prospects we face in 2009, it’s tempting to look at past crises to see what historical precedents tell us about what is happening today.

In the run up to the G20 last year, a number of European governments became excited by the prospect of a grand redesign of the multilateral system. Gordon Brown and Nicolas Sarkozy were particularly enthusiastic about the prospects for Bretton Woods II – and have taken this energy into the G20 process.

The first Bretton Woods conference aimed, in the words of John Maynard Keynes, to find “a common measure, a common standard, a common rule” that would govern all parts of the economic system.

The impetus for agreement sprang from the exhaustion of the second world war; a decade of thinking and preparatory work by Keynes and others; and the ability of the United States – in its pre-Cold War period of undisputed hegemony – to impose agreement where necessary.

Today’s conditions are very different. Many policymakers are still in denial about the depth of the problems we face. There are few, if any, well-developed packages of solutions. And the United States is in no position to insist on a programme of global reform.

Perhaps then, a better example is the crisis that ended the Bretton Woods system – the so-called ‘Nixon Shock’ of 1971 when the US President broke the link between dollar and gold.

Although Nixon blamed speculators for his decision, in fact the problems were structural – global imbalances that are strikingly similar to today’s. Post-war European recovery had led to large US deficits and, with fixed exchange rates, the Europeans had little choice but to recycle dollars into US government debt, of which there was plenty, given America’s need to fund an expensive war in Vietnam.

The result was a series of runs on US gold reserves and growing pressure to devalue the dollar. Policy was made up on the hoof. Nixon’s shock decision to break the link with gold was taken with little preparation or forethought. The President spent less time on the policy itself, than he did on worrying whether he should interrupt a popular television programme to announce it to the American people, and the world.

So what happened? Predictably, the dollar went into a steep decline, losing around a quarter of its value against a basket of European currencies. And inflation was let loose, despite US attempts to control prices and wages. The resulting inflationary spiral was not tamed until the 1980s and only then through the ‘Volcker recession’.

Natural resources were also involved. The oil shock of 1973 can be seen, in part, as a response to the depreciation of the dollar, as Arab countries protected an oil price that, when denominated in gold, had seen a three-fold decline.

The Nixon shock illustrates the dangers of unilateral and reactive policy-making; and also the power of unintended consequences. In our response to a crisis, we often sew the seeds for the next breakdown, and can easily exacerbate not dampen volatility.

Stagnation in the thirties

For pessimists, however, comparison with the 1970s is not sufficiently dramatic. They prefer to reach for the stock market crash of 1929 and the subsequent ‘great depression.’

A few months’ ago, these were comparisons were regarded as distasteful, maybe even a little hysterical. In April last year, the IMF was predicting only a minor slowdown for Europe and a recovery in the US starting in 2009.

No longer. Now, rich countries are clearly all in a deep recession. The question is whether it will be U-shaped (deep but with a gradual recovery) or L-shaped (ongoing stagnation). As one economist quipped recently, it’s now too late to avoid 1929. Instead, we must focus on avoiding the mistakes of 1930, 1931 and 1932.

What were those mistakes? Deflation exacerbated by policy, of course. But also a tit-for-tit recourse to protectionism, as global trade came to a halt, and a series of sovereign debt defaults, leading to the collapse of the international financial system.

It is tempting to imagine that the period was a time of international policy paralysis, with policymakers simply unaware of the risks they were running. Far from it. There were plenty of attempts to tackle problems on an international level, culminating in a World Economic Conference in 1933 that brought 66 nations together.

The summit was supposed to launch a global ‘new deal’ – or, at least, that was what the Europeans were hoping for. But there was no shared platform to bind Europe, the UK and the US together. Franklin Roosevelt – just elected in a landslide – was focused on problems at home.

To European fury (and the discomfit of his own delegation), the new President derailed the summit with the so-called ‘bombshell message’, sent from a yacht where he was enjoying a vacation. It was to be the last attempt to forge a global approach to reform before Bretton Woods.

Surveying the conference’s wreckage, Keynes’s conclusion was a sobering one. 66 countries could never be expected to agree, he thought. Only a ‘single power or a like-minded group of powers’ could prevail – and only then if they were equipped with a new understanding of the world’s systemic problems, and a new toolbox with which to tackle them.

The first globalization

The 1930s offers salutary lessons to policy makers. However, it does encourage them to believe that our current troubles are purely economic in their nature – and can be solved through some deft re-regulation and a generous dose of stimulus.

This creates a real danger that other pressing issues will be kicked into the long grass for how ever long a recovery takes. This would be a mistake, especially given the strong links between economic and other global challenges.

To underline this point, it is worth looking back beyond the thirties, to the period before the First World War, when the world had its first experience with globalization and enjoyed unprecedented mobility of capital, goods and people.

It was then that Norman Angell argued in The Great Illusion that major wars were now almost inconceivably because of “the delicate interdependence of our credit-built finance.”

For Keynes, looking back, globalization then appeared “normal, certain, and permanent, except in the direction of further improvement.” But yet the forces that were to lead to war were already building:

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, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.

Rapid social, technological and economic development had brought about a new paradigm of ‘industrial war’. Countries were enmeshed in a system of diplomacy that was intricate in its operation, but in which levels of mistrust had steadily grown.

The result, in 1914, was the destruction of the European world order and a period of chaos that took two world wars and the intervening depression to resolve.

Today, the second period of globalization faces similar challenges and contradictions.

Modern economies are dynamic but unstable, as we have found out. Technological diffusion is putting unconventional weaponry in the hands of a growing number of states. Inevitably, non-state actors will also find some way of getting in on the act.

Power, meanwhile, is shifting to countries where most people are still poor, at a time when resource constraints are beginning to bite. Economies must decarbonise at a speed that will make the industrial revolution look pedestrian. Even so, the chances of disruptive climate change are now worryingly high.

The challenge then is to use the current systemic shock as an impetus for fundamental reform. The danger is that, as in 1914, the basis for international co-operation will disappear, just when globalization most needs to be ‘saved from itself’.

Signals from the future

Last year, in a paper for the United Nations University, I argued that international co-operation on climate depends on ‘signals from the future’.

Alex Evans and I have developed this work further, in a project for the UK’s Department for International Development that explores the radically different institutional architecture that will be needed to deliver a low carbon future.

One of our central arguments is that action taken on climate today is fundamentally influenced by expectations of what will happen in the future:

• If countries, companies and citizens expect a slow transition to a low carbon economy, then they have a strong incentive to block any climate deal, and to free-ride on carbon reduction measures implemented by others.
• On the other hand, if they expect the transition to happen rapidly, their incentive is to lead the change (in order to avoid misallocated investment, and to lead emergent industries), while supporting strong action against free-riders.

An effective climate deal, then, is something of a self-fulfilling prophecy. With strong signals from the future, policy-makers are likely to behave in a way that makes a deal easier to achieve. In contrast, weak signals will lead to a vicious cycle and intense zero sum competition.

This argument can, I believe, be applied more generally to today’s international challenges. Let us characterise current international co-operation as medium trust, with considerable commitment to globalization, but relatively weak institutional arrangements for controlling the global system.

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). The status quo is not likely to be stable over the medium-term.

Which way we move depends, above all, on our time horizons. Do they shorten, as countries focus on immediate domestic political concerns? Or do they lengthen, as institutions are built that can last a generation or longer?

The three ‘shareds’

Lengthening time horizons requires countries to work from a comprehensive view of the risks and challenges the world faces, and its opportunities for solving them.

This is why we need a new diplomacy – one that focuses its resources not on bilateral relationships, but on multipolar responses to global threats and challenges.

This is a diplomacy of ideas, not one of narrow self-interest, and it should take us a long way from the old geopolitics. In the new paradigm, countries need to co-operate to build a vision for the international institutions that we need, not just today, but over the next generation. They need to identify and further shared interests.

The goals of this diplomacy, then, are to build:

• Shared awareness – a joint analysis of future challenges, one that is sufficiently broad to bring together economic, security and scarcity issues, and that has buy-in not just from governments, but from non-state actors too.
•  Shared platforms – coalitions of countries that begin to harmonise their domestic policies and commitments (whether on banking reform, or climate change, or investment in agriculture), and use this as the basis for lobbying for more fundamental international reforms.
•  A shared operating system – new global frameworks and institutions, with a mandate to deliver security and sustainable growth over the long-term.

As Alex and I argued in our paper for the Progressive Governance summit, we need to drive through a programme a multilateral reform that focuses on delivering results, not restructuring organisations.

 This means building an international system that:

• Aims, over the long term, to manage risk and increase resilience.
• Embeds national sovereignty in a deeper context, in which the need for cooperative action between states is recognised and acted upon.
• Overcomes fragmentation between silos and distributes, as widely as possible, the responsibility for creating global public goods.
• Rebuilds international organizations, making them much more flexible, responsive, and able to interface with non-state global networks.

Building the platform

So what might this look like in practice?

The first priority is for the US, Japan and Europe to start acting as if they have a shared interest in a more stable, equitable and sustainable future. We have been through a period of US overreach and unilateralism, coupled with muddle and passivity from its key allies. That has to end.

The Obama administration will clearly be a breath of fresh air. It can be expected to:

• Develop the US’s piecemeal and reactive bailout into something that has greater coherence and strategy.
• Signal a more co-operative and less confrontational security stance.
• Begin the process of legislating on climate change, with the US potentially matching European commitment on the issue.

This will create considerable diplomatic space – across the UN system; at the G20, of course; but also at the G8, which will have a reduced, but important, role as a caucus for richer countries.

For the rich countries, the priority is to use domestic delivery to build a basis for international agreement. This is true for financial reform, trade, and action on climate and other resource issues.

But, assuming positive moves from the US, will Europe and Japan respond in kind? Or will they take a ‘wait and see’ approach to Obama’s overtures? The question is critical to the ongoing relevance of the post-1945 alliance.

Even united, the world’s traditional powerbrokers cannot act alone. They will need China, India and the other emerging powers not as reluctant negotiating partners, but as substantive contributors to a new global order.

Broader involvement becomes more, not less, important should the BRICs find themselves in serious economic trouble as the financial meltdown proceeds.

This will require more established powers to show considerable (and uncharacteristic) humility. In East Asia, memories of the financial crisis of the late 1990s are fresh. Bailout packages then came with stringent conditions and much lecturing from the international community. Countries were told there was no gain without much pain.

Things are very different today, now that rich countries are in trouble. Stimulus is all the rage, not austerity. The doctrine of deregulation has also been shattered, but it is as yet unclear what will take its place.

2009 will be a year that heads of state spend more time together than ever before. This time will be wasted unless the intellectual spadework is done to prepare for their discussions.

That means creating a vision for where globalization goes from here. Built into this vision, we need a renewed emphasis on the resilience and coherence of global systems. We cannot simply ‘redraw the organogram’ – the need for reform is much more fundamental than that.

Good signs

I want to end by sketching out some sense of what would constitute progress in 2009. This is not a comprehensive agenda for the year, just some positive signals that countries are choosing a long term, high trust and co-operative approach, not slipping into tit-for-tat, reactive and protectionist responses.

We should expect the G20 to:

• Embed its work on finance and economy within a broader vision of global reform and not simply focus on technical issues.
• Make clear its expectations for a deal on climate at Copenhagen and set out some parameters for the ambition of that deal.
• Make a shared commitment to a green stimulus, with arrangements to quantify the impact of stimulus packages on carbon productivity.
• Mandate the IMF to monitor the re-pricing and allocation of toxic assets, improving cross-border visibility of the pace of financial restructuring.
• Agree that members should report, on a quarterly basis, steps they have taken to control the financial crisis.
• Begin to develop a ‘super sherpa’ system to improve the capacity of Heads of State to cope with their growing responsibility for global issues.

From the G8, meanwhile, we should expect:

• A clear signal from each member state as to what it is prepared to offer to ensure an effective climate deal.
• Equally clear signals from the ‘+5′ countries (Brazil, China, India, Mexico and South Africa) on how they plan to reduce emissions over the long term.
• A renewed pledge to meet development commitments, especially as poor countries suffer growing impacts from the financial crisis.
• Reporting on national delivery of key G8 commitments in area such as climate and trade.

From the United Nations, we require:

• Renewed leadership from the Secretary General on climate, especially through the SG’s high-level ‘Friends Group’.
• A concerted effort to explore the shape and content of a climate deal, using previous High Level Panels as a precedent.
• A process that explores the global institutions needed to deliver a post-2012 climate deal (this could build on the model provided by the Task Force on the Global Food Security Crisis).
• An exploration of how global stocks of food and other commodities can be increased, using the International Energy Agency’s co-ordination of strategic oil reserves as a model.
• An initiative by the Security Council to explore the security implications of financial instability and growing resource scarcity, as part of a renewed commitment to forging a new global security consensus.

This year could be an exceptionally tough one for the Bretton Woods’ institutions and the WTO. As a minimum, we should therefore look to:

• Strengthen the IMF and World Bank to ensure they can cope with the risk of a cascading series of national liquidity crises.
• Defend the current free trade system and maintain confidence in the WTO.

Looking forward, the Bretton Woods’ institutions must address their lack of legitimacy in large parts of the world, while developing:

• An enhanced global surveillance function (though this must incorporate a new openness about the limits of economic forecasting).
• Tough international norms for the regulation of financial institutions.
• A framework that allows debtor countries to restructure their debts in a controlled fashion.
• Enhanced arrangements for working with the rest of international system to improve resilience in the face of short and medium term challenges.

Finally from the WTO, we should look for:

• A renewed attempt to breathe life into Doha, perhaps as part of a broader ‘grand bargain’ on finance and climate.
• An analysis of the relationship between trade and scarcity issues, exploring action to discourage export barriers and related restraints to trade.
• An analysis of how the world trade system can best be integrated with a comprehensive framework for emissions control.

Human drivers

Finally, I want to close with a warning.

We will make a grave mistake in 2009 if we persist in treating the world’s challenges as primarily technical ones, and we neglect the underlying human drivers.

The world’s economic and financial problems have deep-seated psychological and behavioural dimensions. As Paul Krugman has argued, “the expectations, even the prejudices of investors, [have] become economic fundamentals – because believing makes it so.”

Our security challenges result from the fact that conflicts are now fought ‘among the people’ rather than just between nation states.

Scarcity issues, meanwhile, trigger powerful popular responses – and could easily lead to debilitating conflicts within and between countries over how limited resources can be fairly distributed.

But we live at a time when public trust in governments is being shattered.

In a recent international poll, only half of respondents believe their leaders are up to the task of designing a suitable response to the financial crisis. Confidence was lowest here in Japan, the country that has the longest experience of financial turmoil.

In this atmosphere, populist movements are certain to thrive. We ignore them at our peril, as they will rarely support international action and, even if they don’t attain power, they may exert a blocking vote.

That makes it vitally important that reforms are designed in the open, not cooked up behind closed doors. Whatever solutions we come up with, they must emerge from a new engagement with citizens and efforts to develop domestic political conditions that allow international commitments to be made.

That means a concerted attempt to:

• Reach out to influencers and opinion formers at a national level, to debate and make the case for a new multilateralism.
• Build a narrative and vision that will communicate to a wider public the need for international approaches to global problems.
• Develop social protection systems that will insulate citizens from international volatility and instability.

Ultimately, any international reform agenda must be about the needs of global citizens. Lose sight of this fact and, however attractive new policies appear in prospect, in practice, they will fail.

For references, see PDF version.

A new study by Rebecca Thornton lends further support to the idea that financial incentives should play a part in HIV prevention. In a randomised trial of over 2,000 Malawians, she gave some participants money in return for testing for HIV and finding out their results. Those receiving the cash were on average twice as likely to turn up to be tested as those left empty-handed. Even pretty small sums, amounting to a tenth of a day’s wage, had a significant effect on the likelihood of getting tested.

Unfortunately, Ms Thornton also found that being tested didn’t have much impact on sexual behaviour (though several other studies have found that knowing you’re HIV-positive makes you less likely to indulge in unsafe sex). Still, cash incentives could be used to persuade the reluctant to adopt other preventative measures, like male circumcision, condom use or, as the World Bank hopes, to find their own ways of staying negative.

H/T Chris Blattman.

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 will happily blog when these predictions are proven wrong.

- 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

- The report of a new High Level Commission on modernisation of the World Bank, chaired by former President of Mexico Ernesto Zedillo;

- A UN General Assembly task force on the global financial system, chaired by Joseph Stiglitz (composition and terms of reference to be announced on 30 October);

- An EU summit on the financial crisis and reform of global financial institutions on 7 November, to prepare for…

- A G20 summit on international financial institution reform in Washington DC on 15 November (though no-one seems to have told the G20 secretariat);

- A UN Financing for Development summit from 29 November to 2 December – it’s been in preparation since last year, but Ban Ki-moon has now suggested turning it into a UN summit on the financial crisis, in NYC rather than Doha as planned (Ban says:

“I strongly believe that holding the summit at the United Nations, the symbol of multilateralism, will lend universal legitimacy to this endeavour and demonstrate a collective will to face this serious global challenge…”)

I make no claim to this being a comprehensive list (and will add to it as I find more baubles to hang on the tree).  But it all invites the question: how much is really going to be achieved through all this pannelling and summitry?  As Eurodad, the civil society network on debt relief, notes on its website:

Too right.  Over the summer, there were no fewer than three summits (FAO; G8: WTO) that claimed in advance that they were riding to the rescue on food prices, and which then failed to deliver anything interesting.  Now it looks like we’re about to do the same on the credit crunch…

Update: Eurodad have produced a helpful FAQ on the ‘Bretton Woods II’ summit – download it here. Thanks to Alex Wilks.

Update 2: David and I have published a briefing paper on the Summit.