A Bretton Woods II worthy of the name

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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The financial crisis is no excuse for backtracking on climate change, au contraire

With a global recession looming, international efforts to curb greenhouse gas emissions may be in jeopardy, as concerns are voiced in the US, Canada and Europe about the wisdom of adopting measures that would impose an additional cost burden on already fragile economies. Such thinking is misguided, and it is dangerous. A recession may in fact ease the introduction of carbon emissions trading schemes.

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.

Is international trade next to seize up?

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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Virtual thirst

Full marks to WWF for their report on virtual water use today, which finds that when imports of virtual water – the water used to grow or manufacture goods that are then imported into the UK, sometimes from severely water-stressed countries – each Briton uses some 4,645 litres, making the UK the sixth largest net importer of water in the world.  Only 38% of the UK’s net water use actually comes from Britain’s own resources, the report adds.  (Press release; report.)

Virtual water’s a handy concept, not least in that it shows up where consumers’ real water impact takes place.  Turning off the tap while brushing one’s teeth is all very well, but if you really want to have an impact, go vegetarian: here’s the amount of water it takes to produce selected foods:

1 kg of potatoes – 500 litres

1 kg of wheat – 900 litres

1 kg of rice – 1,900 litres

1 kg of poultry – 3,500 litres

1 kg of beef – 15,000 litres

(Source: the excellent Atlas of Water. Buy one today.) Agriculture’s easily the world’s largest consumer of water, too: it accounts for 70% of global water use, compared to 20% for industry and 10% for the domestic sector.

In case you wondering, WWF says the top 5 net importers of virtual water are Brazil, Mexico, Japan, China and Italy.  And the top 5 exporters? The USA, Australia, Argentina, Canada and Thailand.  (Sixth is India, where water tables are plummeting.)

Beginning the reconstruction

Whilst the US has stolen a march on Europe by deciding to send aid with the US military, this will be palliative and humanitarian, rather than deal with the longer-term reconstruction requirements.

The EU has similarly released funds for humanitarian programmes – which will be needed to help and house the estimated 100.000 refugees. But for the longer-term, what’s needed is joint UN/World Bank Assesment Mission to survey the reconstruction requirements

Such a mission should then be followed up by a donor’s conference hosted by an EU state. There the US and EU can pledge aid and coordinate their contributions.

France, which has led mediation efforts and recently hosted similar events for the Palestinians and Afghanistan, are ideally prepared to lead the effort.

If the EU wants to play a larger role on the civilian side – given its likely subsidiary peacekeeping role – it would be logical to appoint an EU Special Envoy to lead a joint EU Council/Commission Reconstruction Mission with third-party participation ie the US (like ICO in Kosovo). Preferably UN-mandated but not strictly necessary as it could be by Tblisi’s invitation.

Adam Kobieracki, the Polish former NATO Assistant Secretary-General would be an ideal candidate unless the mandate of the current EUSR Peter Semneby is to be refocused from the South Caucasus (inc Armenia).

In most post-conflict scenarios, the host government is very weak and coordination therefore a task for the international community . This is patently not the case in Georgia and the sooner the Georgian president appoints someone to lead the reconstruction effort – or take the role himself – the better.

Two tricky questions, however, remain.

First, given the damage done to the Georgian security forces, it will be necessary to survey their state and propose an Security Sector Reform plan to rebuild these. Putting a plan together will require an assessment and a seperate donor conversation.

– although this will obviously be contentious with Russia. To start off, the US, Canada and the UK should field a joint mission which can report back to other donors.

Second, what to do about South Ossetia and Abkhazia? The fighting has clearly wrought considerable damage in the break-away republics and if the refugees are ever going to return, many of their houses will need to be rebuilt and the economy re-started.

But to what extent should this be Russia’s task as opposed to the EU’s? And if the EU gets involved – funding a large reconstruction programme – should this work be part of a quid pro quo over other issues, for example the role and independence of its peacekeepers? Any Assesment UN/World Bank mission should clearly spend time in the two break-away republics but the analyses should be seperate from the assesment of Georgia proper, not automatically be part of the donor’s conference and deal directly with the criminalised political economy of South Ossetia and Abkhazia.

From Gazprom to Foodprom

Oh dear.  First the collapse of Doha, and now this:

Russia plans to form a state grain trading company to control up to half of the country’s cereal exports, intensifying fears that Moscow wants to use food exports as a diplomatic weapon in the same way as Gazprom has manipulated natural gas sales.

The move by Moscow, the world’s fifth-biggest exporter of cereals, has been sharply criticised by US agriculture diplomats as a “giant step back” to the Soviet era.

Morevoer, in the future Russia’s strategic importance as a grain producer is likely to grow as a result of climate change: higher average temperatures are likely to benefit Russia’s agricultural productivity, at least in the short term, as temperate latitudes are projected by the IPCC to see some carbon fertilisation effects between one and three degrees C of warming. (This said, Russia’s yields could still fall in absolute terms if extreme weather events, droughts and changes in water availability impact heavily – but it’s still likely that Russia’s importance as a producer would grow in relative terms.)

Russia (like Canada) looks set to be one of the big winners of the 21st century world of scarcity.  Massive investment in new oil production even as the price soars; the prospect of even more resource finds as the Arctic melts; relatively lower exposure to climate impacts; and Russia’s role as a breadbasket of the world (with all the influence that this entails) set to grow and grow.

The value of democracy?

I was doing a little research for my upcoming book on West Africa yesterday, and came up with the following factoid: since 1960, the top five countries on the United Nations’ Human Development Index (that is, the countries with the best quality of life in the world – Iceland, Norway, Australia, Canada and Ireland) have had 44 changes of government following peaceful democratic elections. The total for the bottom five countries? Two. Yes, in a total of two hundred and forty years, there have been just two peaceful handovers of power that have respected the will of the people. One in Sierra Leone, one in Mali. Burkina Faso, Guinea-Bissau and Niger have had none. Doubters of the economic value of democracy, take note.