This past week might not mark a turning point in the global recession (as Obama and the rest of us surely hope), but it did mark a turning point for international finance.
Just two years ago, when I was teaching International Economics to graduate students, we spent a week discussing the diminished role of the IMF and how it was fast becoming a mere advisory body. Many developing countries were flush with budget and current account surpluses, and were openly criticizing the OCED-dominated IMF as superfluous and out of touch with their needs.
How quickly things change!
At the close of the G-20 summit, the members announced an infusion of over $1 trillion into the IMF to help developing countries in the wake of a plunge in exports and a concomitant fall in GDP growth. The IMF, so recently deemed close to obsolescence, has become one of the pivotal organizations for steering the global economy through incredibly difficult times. Nations whose finances were in relatively good shape before the downturn—e.g., the Ukraine, Iceland, and Pakistan—are now in line for new loans.
Perhaps more importantly, the G-20 meeting was a success on additional fronts. The major players agreed that more global stimulus might be necessary (although no one wanted to appear to bend to American pressure right away), and there was widespread agreement on the need for tougher international regulation of financial services and investment banks. There was progress even on non-economic matters, with Obama and Russian president Medvedev agreeing to discuss a reduction of each nation’s nuclear stockpiles.
For a summit often noted for the ferocity of its protests and the feebleness of its collective action, this G-20 meeting gave encouraging signs that we could be entering a new era of genuine international cooperation.
Behind these signs lie trends that will have a huge impact on the world’s economic order. It is clear that the U.S. was living beyond its means, and must become a more frugal nation; America has to reduce its unsustainable debt loads, and its aging population has to put aside more money for retirement. But in order for the U.S. to cut back on consumption, and not send both its economy and the world’s into a tailspin, the developing nations need to increase their consumption. We are already seeing signs of this shift, with the Chinese government taking major steps to increase domestic demand (despite Hu Jintaos' recent statements that the Chinese savings rate is just right).
The challenge underlying this tectonic shift in the world’s consumption patterns is how to make sure that billions of new consumers don’t pollute and degrade the environment the way those in the West did during their transition.
But make no mistake: the people in these up and coming nations will not be denied refrigerators, washing machines, cars, and computers. They have waited long enough, and the 21st century is going to be their coming-out party.
Jason Scorse