by Alex Evans | Nov 13, 2008 | Climate and resource scarcity, Cooperation and coherence, Global system, London Summit
Ahead of this weekend’s G20 summit, David and I have published a short paper entitled A Bretton Woods II worthy of the name. Key points:
– The summit is unlikely to be able to live up to its billing. Leaders do not yet understand the nature of the problem well enough to be able to implement viable solutions. However, the problem is more fundamental than a simple lack of shared awareness.
– History suggests that leaders will only think the unthinkable on institutional reform once the challenge they face has really hit rock bottom. But history also suggests that we are wrong to think that the worst of the crisis is now past, given that many past banking crises have taken five years or more to unravel.
– Bretton Woods 1 looked across the whole international economic waterfront in 1944, while this weekend’s summit will be much more narrowly focused. Leaders will make a big mistake if they try and tackle finance in isolation, given the growing impact of resource scarcity, and that 2009 is supposed to see another ambitious global deal – on climate.
– We need to recalibrate what we expect from globalization through a serious debate about subsidiarity. Where has globalization gone too far, too fast? Where do we need more integration at a global level? These were exactly the questions that preoccupied Keynes in 1933, when he weighed the relative benefits of global versus local across a range of variables. We need a similar debate today as a precursor to serious international economic reform.
– Leaders need to extend their horizons in (at least) five directions: onto longer time scales; beyond financial regulation into wider resource scarcity challenges; into other international processes, especially climate; towards grand bargains with emerging powers; and beyond government, to non-governmental networks.
Full version after the jump, or better yet here’s the pdf.
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by Alex Evans | Oct 22, 2008 | Cooperation and coherence, Influence and networks
If you haven’t read it already, World Bank President Bob Zoellick’s speech on multilateral reform earlier this month is definitely worth a read. One of best nuggets in it is his call for “a Facebook for multilateral economic diplomacy” – the rationale for which goes like this:
The G-7 is not working. We need a better group for a different time. The G-20, though valuable, is too unwieldy in moving from discussion to action. We need a core group of Finance Ministers who will assume responsibility for anticipating issues, sharing information and insights, exploring mutual interests, mobilizing efforts to solve problems, and at least managing differences.
For financial and economic cooperation, we should consider a new Steering Group including Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, and the current G-7. Such a Steering Group would bring together over 70 percent of the world’s GDP, 56 percent of world population, 62 percent of its energy production, the major carbon emitters, the principal development donors, large regional actors, and the primary players in global capital, commodity, and exchange rate markets.
But this Steering Group would not be a G-14. We will not create a new world simply by remaking the old. It should be numberless, flexible, and over time, it could evolve. Others may be added, especially if their rising influence is matched by a willingness to help shoulder responsibilities.
This new Steering Group should meet and videoconference regularly to foster group responsibility. The Deputies should have frequent and informal discussions. An active network of bilateral consultations within and beyond the group will support it. We need a Facebook for multilateral economic diplomacy.
It’s a timely reminder that there’s no hard and fast rule to say that multilateral cooperation has to revolve around formal multilateral organisations – and especially refreshing to hear this coming from the head of the World Bank. (And yes, he does have a Facebook page, since you wonder.)
Responses to the financial crisis over the last few weeks seem to bear out Zoellick’s point. Although multilateral cooperation has been central, multilateral organisations haven’t been: the IMF, for example, has been largely absent from the main action, and while the EU managed in the end to be at the forefront of marshalling a collective response, it was the Council of Ministers – not the Commission – that pulled it all together.
In this light, it’s perhaps ironic that while Gordon Brown has come to be seen as one of the main organisers of this non-organisationally-based but nevertheless fundamentally multilateral crisis response, his stated vision for multilateral reform is very organisationally focussed, what with emphasis on a new Bretton Woods, an enhanced early warning role for the IMF and so on.
by Alex Evans | Oct 13, 2008 | Climate and resource scarcity, Conflict and security, Cooperation and coherence, Global system
Letters of Credit (LOCs) are the crucial lubricant without which the wheels of international trade cannot turn. Here’s how John Mauldin explains them:
If you are a manufacturer of a product and want to sell to someone outside your borders, you typically require a letter of credit from the buyer before you load any cargo at a port. A letter of credit from a prime bank is considered to be proof of your ability to pay. It not only can be a source of ultimate payment, it can be a source of inventory financing while goods are in transit.
And if you are a business which is buying a product, you do not want to release money until you know the product is on the way. There are buyer’s and seller’s agents who make sure these things happen seamlessly, and world commerce had grown because of it.
Just one problem: it looks like LOCs may be no more immune from the credit crunch than any other form of credit. Here, for instance, is Canada’s Financial Post on Wednesday last week:
The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.
“There’s all kinds of stuff stacked up on docks right now that can’t be shipped because people can’t get letters of credit,” said Bill Gary, president of Commodity Information Systems in Oklahoma City. “The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy.”
As Alan Beattie reported in the FT on Saturday, Brazil has now offered a blanked guarantee for all trade credit involving its companies, which will commit fully a tenth of its foreign exchange reserves. WTO Director-General Pascal Lamy, meanwhile, has announced that he’ll convene a summit on the issue next month: here’s an excerpt from his speaking points on Friday –
The financial crisis may also be having an impact on developing country access to financing of imports and exports. As you know we have held a number of meetings on this issue at the WTO with both multilateral institutions and private banks, the last one last April, to check availability of trade financing at affordable rates. Up until then, the situation seemed to be stable with volumes and rates at normal levels. But just this week Brazil brought this issue to the forefront.
Given the deterioration of the financial landscape, and despite the welcomed announcement yesterday by the World Bank IFC of an increase in its trade financing programme by $ 500 million, I have today convened major providers of trade finance to a meeting on 12 November to examine this issue and find ways to alleviate the situation if it was to deteriorate.
Bottom line? Naked Capitalism quotes an email from “a well connected international investor not prone to alarm”:
At the end of the day, if every counterparty is bad then you don’t have a market and you don’t have an economy. I spoke to another friend of mine this afternoon, whose father has been in the shipping business forever. Pristine credit rating, rock solid balance sheet. He says if he takes his BNP Paribas letter of credit to Citi today for short term funding for his vessels, they won’t give it to him. That means he can’t ship goods, which means that within the next 2 weeks, physical shortages of commodities begins to show up.
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by Leo Horn Phathanothai | Oct 12, 2008 | Africa, Conflict and security, Economics and development, Global system
So far, many observers and experts point out, developing countries seem to be holding out quite well amidst the global financial turmoil. In reality the current global financial crisis poses multiple and profound risks to development, which I will briefly outline.
Finance ministers from 24 developing countries (the Group of 24, or ‘G-24’) meeting last Friday at the IMF, noted that:
“many emerging markets and developing economies are not immune to the spillovers of the ongoing global financial crisis”
and that:
“preventing macroeconomic volatility from financial spillovers and sustaining continuous growth were key priorities for developing countries”
See the G-24 public communiqué here.
There are several ways in which the global financial crisis can impact on development. Impacts will be highly country-specific. Key factors include:
- Cuts in international development aid – Jakaya Kikwete, President of Tanzania and Chairman of the African Union, expressed his ‘deep concern’ about the financial crisis dampening rich countries’ commitment to development aid (see news report here). And for good reason: development aid tends to be strongly pro-cyclical, in other words a nation’s generosity to other nations tends to be proportional to its own good fortunes.
- Reduced access to international financial capital markets – The impact will likely be bigger for middle-income countries and some emerging markets (excluding China, given it is a super high saver). Much of sub-Saharan Africa had limited access to international private capital to start with, and will therefore not be strongly affected by this.
- Possible reversals in capital inflows to developing countries – due to the global credit crunch and as investors’ appetite for risk abates.
- The spread of stock market turbulence to emerging markets – in one day last week, markets in Brazil, Mexico, South Africa and Turkey plunged 10%.
- Downturn in global demand for developing country exports.
- Postponement of large investment projects. There is emerging evidence that large investment plans (e.g. in India’s power sector) are being delayed or cancelled as turbulence in capital markets undermine prospects for raising funds.
- Remittances will be impacted by the economic downturn, as well as inflation and a weak dollar. See a recent news report on how remittances to the Caribbean are being hit.
It is of course unrealistic to expect that developing countries can be wholly insulated from the global financial crisis. However, the one very powerful instrument that rich countries do have at their disposal to help keep development on track is aid. A cutback in aid at this point can have severe impacts, as high food and oil prices justify increases in aid. Aid will be needed for countries with reduced sources of revenue and finance, as social expenditures are typically the first to get cut when fiscal resources tighten. Emergency support should be targeted to countries that are fiscally highly vulnerable (the IMF has identified 22 such countries).
by Alex Evans | Sep 24, 2008 | Cooperation and coherence, Europe and Central Asia, Global system, Influence and networks
Over at the UN in New York, where it’s the annual jamboree that is the General Assembly, Nicolas Sarkozy has been calling on world leaders to hold a summit later this year on building a “regulated capitalism”. Four thoughts:
1) if this summit were to go ahead, it would mark the continuation of a trend towards head of state / government level summits on specific issues (as opposed to gatherings that cover a whole range of foreign policy issues, like the G8 or the Security Council). Earlier this year heads of government turned out in force for the FAO food summit; last year, Ban Ki-moon got a good turn out for his high level event on climate change at the UN.
But there’s only value in getting heads engaged if a) their involvement is needed in order to join up the dots between different areas of ministerial or department responsibility within their goverments (e.g. cross-sectoral bargaining that involves energy, climate and trade all at once), or b) their political clout is needed to forge a deal. I’m not sure that either of those conditions applies here – in which case, wouldn’t it make more sense to leave such a summit to finance ministers?
2) Sarkozy also said at a press conference yesterday that “we cannot wait any longer to turn the G8 into the G13 or G14, and to bring in China, India, South Africa, Mexico and Brazil”. Interesting to see this idea reviving; the scale of the current crisis (‘perfect storm’ etc.) might appear to militate in favour. But as ever, the big questions are less over who would be around the table and more about what it would do, how it would work and – above all – whether it would be any more effective than the G8 (which hasn’t achieved very much lately). More on this in a paper I wrote on new global leaders’ forums a while back.
3) While Sarkozy knows he wants a summit, it’s also clear that – so far – he doesn’t have any specific proposals for multilateral action. You can bet this will cause a frisson or two at Number 10, given that Gordon Brown does have a set of proposals for international financial reform, but so far lacks a coalition to push them. There might be potential for France and the UK to team up quite effectively here, not least given that Sarkozy will have recognised that without at least one major financial centre involved front and centre, his idea’s dead in the water (n.b in that regard that Sarkozy mooted London as a possible venue for the summit, along with NYC, Paris and Brussels).
4) Whether Brown’s proposals are the right ones to deal with the current crisis is, of course, a separate question. Looking at them again, the main impression is of the lack of specificity: calling for a “common approach to handling major global market disruptions”, a “clearer, more authoritative watchdog” or “common principles, shared analyses and information and collaborative management of crises” is all very well, but if there was ever a case of the devil being in the detail, this is it. (As for his calls for a global early warning system for financial crisis – by all means, but is now really the time to be thinking about that?)
It’s good to see that someone’s asking the big questions about long term prevention and looking to facilitate a serious high level conversation about where we go from here, and the UK should certainly get involved and think seriously about offering to host. But it’s way too soon to be thinking about shared operating systems or even shared platforms at this point: the key tasks now are a) to put out the immediate fire and then b) to build up shared awareness of what’s happened, why, and what we want to achieve as we consider a new financial architecture.
(For explanation of shared operating systems, platforms and awareness, see here.)
