G20: Heading Towards the End of Globalisation?

A "grave recession" in the world economy may lie ahead, with a profusion of new barriers to trade and capital flows, if the Group of 20 major economies (G20) fail to come up with solutions to the present crisis.

The G20 will probably begin to suffer "progressive fragmentation" at its Nov. 11-12 summit in Seoul, because it is based on "unsustainable coalitions" and there are insurmountable conflicts between members, according to Fernando Cardim, a professor at the Federal University of Rio de Janeiro.

Only "a remarkable diplomatic initiative" at this point could bring about the common understanding needed for "a collective solution," which would be the only way out of the global economic crisis, he said. "Perhaps the vision of the abyss" will stimulate a spirit of cooperation among government leaders, the Brazilian professor added.

The G20 is made up of the main industrial powers and emerging economies, spanning wide differences: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, the United Kingdom, the United States and Turkey, as well as the European Union.

Carlos Tadheu de Freitas, chief economist for the National Trade Federation and former head of Brazil's Central Bank, said nothing but "hot air" would come out of the Seoul summit. He forecast a period of global "stagflation", with stagnation or deceleration of economic activity in emerging countries that had previously been growing, aggravated by inflation.

"After three decades of globalisation, the worldwide system of production of goods and services is integrated, and it would be seriously disrupted if an epidemic of protectionism blocks the flow of trade and investment," said Mariano Laplane, head of the University of Campinas' Institute of Economics.

This would spell "chaos for the countries of Asia, which depend heavily on exports," and it would seriously damage Latin American countries that are highly reliant on foreign trade, like Argentina, Chile and Mexico, Cardim predicted.

Brazil, thanks to its huge domestic market and relative self-sufficiency, is likely to suffer to a lesser extent, Cardim and Freitas concurred. One reason for this is that the country has accumulated substantial reserves, which could cushion the expected fall in annual GDP growth from five percent to three percent, Freitas said.

The U.S. Federal Reserve (or Fed) announced it will buy Treasury bonds worth 600 billion dollars in the next eight months, flooding the global market with dollars and causing further devaluation of the currency. The announcement was met with gloom around the world.

The general reaction will be greater control over capital flows, as a first step, Freitas said. If that does not work, there will be a tidal wave of trade protectionism, which will slow down economic activity in the emerging countries that are shoring up the global economy, he predicted.

In seeking to solve its own crisis, the United States is transferring the cost to the rest of the world. The policy adopted by the Fed between 1979 and 1981, when it gradually raised interest rates to more than 20 percent a year to tame inflation, plunged a large part of the world into a crisis which cost indebted countries one or two "lost decades."

Today, the situation is different: the goal is to overcome recession and devalue the dollar to increase exports, to the detriment of trading partners. But "emerging countries nowadays have means to defend themselves," Laplane said.

Brazil, for instance, has acquired massive foreign exchange reserves of close to 300 billion dollars, paying a high price for keeping them because of its high basic interest rate, at present 10.75 percent. Unable to stem the appreciation of the local currency, the real, against the dollar, it raised taxes on inflows of foreign capital, from two percent to six percent.

The government needs to adopt other measures "to select" capital inflows, including the requirement that investment must remain in the country for a specified period, as Chile requires, said Laplane. However, he acknowledged that after the Fed decision, "nothing will stop the flood" of investment in Brazil, attracted by the high interest rates and strong economic growth.

The United States and China have their reasons for keeping their currencies undervalued, but emerging countries have "appreciable moral force" on their side, in their effort to prevent an "economic recession" that would be disastrous for everyone, as it would lead to a trade war and the closure of capital markets, he said.

"At some point, common sense will prevail" in the defence of an "open and integrated economic system, which the G2 (China and the United States) is thwarting," Laplane predicted.

Cardim said that, in fact, every country always "tries to transfer internal problems outside itself," but actions by great powers have effects of a different magnitude, and in today's world "everyone reacts, so a very dangerous period is opening up, with unlimited potential for conflicts."

In 2009, there was "a climate of cooperation," because of the general fear of a global economic depression, Cardim said. But once the panic was past, there was a return to the old ways of "casting the burden of costs onto other shoulders," he added. The gains by the opposition in the Nov. 2 U.S. congressional elections mean the government cannot slow its pace now, before the new legislature takes office Jan. 3.

"Avoiding a collapse" along the lines of the 1929 crash was very important, "but God only knows what will happen after this G20 (summit); it will be a time of tension and regression," Cardim concluded.

An "exchange rate war" is now being waged, and the future "depends on how far U.S. monetary policy goes," according to Freitas, because if inflation rises substantially, interest rates will also go up, putting an end to the dollar's spiral of devaluation.

The flood of dollars generated by the Fed's decision will further drive up the already soaring prices of farm and mineral commodities, due to speculation, which could reach 2007 levels. Inflation and hunger would then join unemployment as looming threats arising from the global economic crisis.

[Source: By Mario Osava, IPS, Río de Janeiro, 09Nov10]

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