G8 lesson in spectacular irrelevance

BRITISH Prime Minister Tony Blair has at least done the world one favour: he has hastened the demise of the Group of Eight as a serious international forum. Thanks to Blair and his agenda as the G8 chairman, this week's summit will be about as relevant as Live8, and as harmful to Africa.

Visit the official G8 Gleneagles 2005 website and you find two issues highlighted: Africa and climate change. This fashionably silly political correctness under Blair's chairmanship exposes the G8 for what it has become: an increasingly irrelevant and unrepresentative body.

George W. Bush has completely wrong-footed the practitioners of what British author Patrick West has appropriately called conspicuous compassion by putting a serious policy proposal on the table. His suggestion that Europe and the US agree to eliminate agricultural subsidies is unlikely to go anywhere, beyond a few meaningless paragraphs in the summit communique. But it shines the spotlight where it belongs.

Open world markets are a far more effective and less damaging than aid or debt cancellation in helping Africa and others out of poverty. And there is no more effective cure for poverty than the economic growth open markets foster. Conversely, there are few bigger threats to future economic growth than the climate policy embraced by Blair and Europe.

The politically correct poncing about ahead of the summit has diverted attention from where it belongs, as Bank of Canada governor David Dodge pointed out last week. Dodge told London's Financial Times that the summit should be focused on the threat to global growth from economic imbalances rather than Africa and climate change. He said the rise of China, India and Brazil meant the G8 was no longer the right forum to deal with these issues.

Economists such as Ben Bernanke, now head of the US Council of Economic Advisers, Bill Gross of PIMCO, the world's biggest bond fund, and Martin Wolf of the Financial Times put these problems in an interesting historical perspective. The parallel they draw, explicitly or implicitly, is with the 1930s, and what John Maynard Keynes called the paradox of thrift and Bernanke calls the global savings glut.

The central element of this analysis is an excess of savings in about 60 per cent of the world economy, reflected in current account surpluses and large international reserves, and extensive dissaving and spending in the US and in some other deficit countries such as Australia and New Zealand, reflected in large current account deficits and rapidly rising foreign debt and other external liabilities.

There are a number of reasons for this excess saving (shortage of aggregate demand), including ageing populations and the boost to oil exporting countries' revenues from high oil prices. But the most important is the deliberate policy of holding down exchange rates and boosting international reserves by Asian countries, most notably China.

According to Reserve Bank of Australia governor Ian Macfarlane and others, the main motivation for this policy was the Asian financial crisis of 1997. Following this, Asian countries decided to make themselves less vulnerable to sudden shifts in international capital flows. This involved cutting spending, keeping savings high, running current account surpluses and building up currency reserves. One result has been that international capital flows are now running from poor countries such as China to rich ones such as the US and Australia. This runs counter to economic logic and historical experience.

Capital should flow from rich countries to developing ones, where the opportunities to profitably invest the money should be greatest. However, as Macfarlane puts it, the Asian countries are taking out a very expensive form of insurance to reassure international investors of their ability to withstand a future financial crisis.

This insurance takes the form of investing their reserves in US dollars at a low rate of interest, when they could get better returns investing the money at home. So we have excess saving in a large part of the world, offset by spending and deficits largely, but not only, in the US.

In principle, the solution is obvious: increase domestic spending and run down surpluses in countries with excess savings, and cut domestic spending and increase exports in countries with deficits and debt. The trick is to manage this without causing an international recession.

For example, an effective way to rebalance the US economy is to have a domestic recession, not an attractive solution either to the US or to the mercantilist Asian countries whose prosperity depends on the US remaining the consumer of last resort.

An alternative would be for the US dollar to depreciate sharply, but any US dollar depreciation is unlikely to be large enough to bring about a sufficient improvement in the US current account on its own. Then what?

Macfarlane's suggestion is to shift the focus from the deficit countries to the surplus countries whose policies are the root cause of the problem. The difficulty is the political resistance to the policy changes that would allow rising domestic spending and a rising exchange rate in these countries, even though the latter would reflect a rise in living standards.

So none of these changes will happen quickly. But barring accidents, the US and Australia, countries with deep financial markets and the ability to borrow in their domestic currency, can sustain a large current account deficit for a surprisingly long time while the adjustments take place.

What is needed is an international forum where the necessary policy changes can be debated and agreed on. The G8 has proved itself spectacularly unsuited to this role.

There is no accountability with governments. Once they release the money, who knows where it ends up. Probably a good bit of it to Muslim terrorists operating in Africa.

If all these wealthy entertainers would follow Christ's plan, they would see a much better result, because they would be much more involved in where and how their own money was being used. At least Bill Gates is headed in the right direction with his own foundation.

Luke 18: 22 Now when Jesus heard these things, he said unto him, Yet lackest thou one thing: sell all that thou hast, and distribute unto the poor, and thou shalt have treasure in heaven: and come, follow me.

"......the summit should be focused on the threat to global growth from economic imbalances rather than Africa and climate change."

This is an unprecedented disaster in the making.

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