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The G20 Must Wake America Up

A column from today’s Guardian by Kevin Gallagher, a research fellow at the Global Development and Environment Institute at Tufts University.

We haven’t done enough to fix the global financial crisis – or prevent the next one. The US has been asleep at the wheel

Kevin Gallagher
Thursday 24 September 2009 18.00 BST

When President Barack Obama hosts the G20 summit in Pittsburgh today, world leaders should send the United States a wake-up call to re-invigorate its stimulus efforts, get serious about financial reform and pass climate change legislation.

In London in April the G20 agreed to co-ordinate fiscal stimulus packages, support the world’s poorest economies, reform global finance and avoid depression-style protectionism. On top of all that, they promised not to be diverted by such tasks when it came to putting together a serious global climate change treaty by year’s end.

On many of these fronts the US is asleep at the wheel.

On the bright side, the US did pass a significant fiscal stimulus package. Despite lots of fear mongering to the contrary, the US also avoided anything close to Smoot-Hawley era trade protections. For all the commotion over tires and “Buy America” provisions, such measures are miniscule relative to the 50% increase on thousands of tariff lines during the depression. And for the most part these moves have been within the bounds set by our trade treaties.

Such efforts by the US and other G20 nations seem to be working. The IMF estimates that fiscal stimulus from the G20 is close to 2% of global GDP in 2009 and will be 1.6% in 2010. And despite minor and necessary deviations from “free” trade, the IMF saysglobal growth will contract by 1.4% in 2009 but expand by 2.5% in 2010 if the world doesn’t begin exiting from their stimulus packages.

That’s the good news. Alarming is that most stimulus packages don’t include provisions that will benefit the world’s poor. A new report by the International Labour Organisation estimates that approximately 222 million workers across the globe could slide into extreme poverty (living on less than $1.25 per day) if poorer nations aren’t included in the global response to the crisis.

The G20 did commit to granting the IMF $500bn in capital for lending to those in need. However, the IMF’s draconian conditions have kept all but the most desperate nations from opting for the funds. The World Bank pledged $100bn but has delivered less than one-third of those commitments, says a G20 scorecard by Jubilee USA, a development group.

The UN commission of experts on the financial crisis called for 1% of stimulus funds to be earmarked toward poorer countries this June. This goal should be enshrined in Pittsburgh.

Just as important is seeing to it that a crisis like this doesn’t happen again. It has now become clear that unregulated financial markets are inherently unstable. When the economy seems to be in good shape, market participants and regulators tend to enter a dream world where they take on ever more risk – more risk than underlying assets can cover. That leaves us prone to panics that can quickly turn into crises.

Despite this recognition, little real regulation has materialised. And as we turn over in the night, Wall Street has re-instituted mortgage-backed securities and begun mimicking such instruments for life insurance policies and patents.

At the global level, the US won’t seriously discuss the fact that reliance on the currency of a dominant power that borrows too much wreaks havoc on the world. Since little has been done, developing nations still have the incentive to accumulate reserves and thus accentuate global imbalances where the global poor loan to the rich.

On climate change, Jubilee’s G20 assessment puts the amount of carbon-friendly stimulus dollars at $180bn. This is welcome, but without real action by the US and China – who account for 46% of global carbon dioxide emissions – such funds will go wasted.

China won’t act unless the US does, and the Obama administration can’t act if Congress doesn’t. Congress must be on board before the administration goes off to Copenhagen to negotiate a global climate treaty, less they suffer the same fate as the Clinton administration in 1997 when it negotiated the Kyoto protocol without the advice and consent of Congress. That blunder lead to no deal at home and little action globally.

If G20 leaders help the US wake up and smell the coffee on the hard realities of the global economic crisis, they can help shame the US into getting back on a more sustainable course. We’re dreaming if we think we’ve done enough to fix this crisis and prevent the others that loom.

guardian.co.uk © Guardian News and Media Limited 2009

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