In my last blog post I said we would be watching the outcomes of the G20 Summit in Seoul with interest. Unfortunately there is little of interest to report in terms of decisions and actions, as frankly nothing meaningful was accomplished by the leaders of the world whose countries together produce around 85% of global GDP. In fact, our view is that they all need an eye test, as clearly few were wearing their corrective glasses given the myopic focus on domestic interests rather than dealing with what are pressing global issues of economic imbalances and currency tensions amongst other “small” matters such as climate change, poverty and ongoing conflicts. If this lack of effectiveness continues, the world in 2020, to use another definition for the term, could be in poor shape.
What are the issues? First, the G20 was formed in crisis at the height of the financial collapse in 2008, when international co-operation was critical in the face of a global recession. Now that the recession has eased in many G20 member countries, if not been replaced by a renewed period of growth in the case of many of the rapidly developing economies, the urgency for continued co-operation has lessened substantially. In its place have been increasing concerns and efforts to keep domestic economies on the road to recovery.
Which has led to the second issue: Growing domestic economies is tough when the big consumer markets of the US and Europe remain constrained in terms of spending power because recovery is slow and fragile while unemployment rates remain high and public sector spending is being cut. This means the US and Europe (with the exception of Germany) want any money there is available to be spent on domestic products to keep home industries healthy, rather than on imports from the big exporters including China and Germany. Trade tensions have therefore increased, along with the prospect of “currency wars” as economic imbalances continue to grow. The G20 was expected to address these key tensions but bitter divisions remained. Rather than agreeing how to tackle the issues, the world’s leading statesmen and women only succeeded in setting out a vague timetable for agreeing “indicative guidelines” on tackling the imbalances in 2011: “These indicative guidelines composed of a range of indicators would serve as a mechanism to facilitate timely identification of large imbalances that require preventive and corrective actions to be taken.” Quite what is meant will obviously be open to many interpretations, and sets the scene for more debate than decision-making in the coming months, even as the IMF warns that deficits in advanced economies are on track to double by 2014, exacerbating the problems.
What is clear though is that getting agreement on how to tackle the issues will be subject to ongoing disagreement which leads us to issue number three: There is no common understanding or agreement on the root causes of the problems at hand and the options for tackling them. Once again, seeing (and hearing) aids have been thrown aside with everyone focused on what they can see, i.e. the things closest to them. Without shared understanding – and even more importantly ambition – to tackle global challenges, economic and beyond, there is a prospect of a continued series of unilateral actions which may have unintended and unwanted consequences at the debating table and more importantly in the real world.
A final issue to note is the increasingly weakened role of the US as global “ringmaster,” able to bring parties to the discussion table and drive for results. Barack Obama has had a tough couple of weeks with political losses in the US mid-term elections, failure to secure the expected bilateral trade agreement with Summit host South Korea after opposition from parts of the US car industry, being accused of being an exchange rate manipulator after the US announcement of quantitative easing, and having to back off US suggestions for setting targets for economic imbalances as he and his advisors came under a hail of criticism from G20 “partners.” Understandably he was reported to have cut a reticent figure at the Summit – quite a change to just two years ago when his election was greeted with hope and enthusiasm across the world. It is clear that the US is no longer the only superpower on the block: China is becoming more assertive as it expands its global role, Germany is seeking more influence in Europe to complement its role as European financier to the heavily indebted economies around it, while Russia is paying increasing attention to South and South-East Asia which will be key to future world growth. For better or worse, the coming decades will see a world of multipolar powers, both economically and politically, not necessarily with aligned interests or perspectives on the future.
Back to the question we asked last week. Where does this leave businesses? The good news is that the Basel III standards on bank capital and liquidity were rubber-stamped which could improve the stability of financial markets, while emerging nations also got a greater voice in IMF governance. The bad news is that global co-operation on the big economic challenges seems a distant hope, which could impact global economic stability and continued economic recovery, plus signal greater exchange rate volatility and increase the potential for trade wars and protectionism. Perceptions of a weaker US, along with a general loss of faith in American-style capitalism, could in the longer-term lead to new models of capitalism and global governance. Unfortunately, the period in between will remain uncertain and volatile.
So time to look at scenario planning on many fronts – from securing sustainable supplies of critical resources, to planning for economic, exchange rate and political instabilities, to thinking through how shifts in the dynamics and spending power of key markets could impact your business.