The Seoul G20 summit was notable for the increasing political weight of the emerging economies. Not only was it located in one, but, in many ways, it was also dominated by them.
In two crucial areas, macroeconomics and global economic development, the emerging economies’ view prevailed. An excellent proposal to link the two agendas — macroeconomics and development — also emerged from the summit and should be implemented next year.
A key feature of the world economy today is that it is running at two speeds. The US and much of Europe remain mired in the aftermath of the financial crisis that erupted in the fall of 2008, with high unemployment, slow economic growth and continuing bank-sector problems. Emerging markets, however, have generally surmounted the crisis. Whereas last year was a tough year for the entire global economy, emerging markets bounced back strongly this year, while rich countries did not.
Recent data from the IMF’s World Economic Outlook tell the story. This year, high-income countries are expected to achieve modest annual GDP growth of 2.7 percent, while the G20’s emerging economies, together with the rest of the developing world, are expected to grow by a robust 7.1 percent. Asia’s developing economies are soaring, with 9.4 percent growth. Latin America is expected to grow by 5.7 percent. Even sub-Saharan Africa, the traditional laggard, is expected to grow by 5 percent this year.
This two-speed global economy largely reflects the fact that the 2008 financial crisis began with over-borrowing by the rich countries themselves. Two high-income economies got themselves into trouble. The US, where consumers — assisted by reckless lending to non-creditworthy households — had borrowed heavily to buy houses and cars, was the main culprit. The periphery of the EU — Ireland, Portugal, Spain and Greece — also began a borrowing binge a decade ago upon joining the euro, fueling a real-estate boom that likewise went bust.
Emerging economies, for the most part, avoided this disastrous over-borrowing. One reason, certainly, was the vivid memory in Asia of the 1997 financial crisis, which underscored the need for limits on bank borrowing and capital inflows. By and large, Asian emerging economies were more prudently managed during the past decade. The same can be said about Brazil, which learned from its own crisis in 1999, as well as Africa and other regions.
In the run-up to the Seoul summit, the US government put forward a proposal that the surplus regions of the world should increase their domestic demand — mainly consumption — to boost imports and thereby help the deficit regions (including the US) to recover. The G20’s emerging economies were not impressed. Their answer was straightforward: The crisis began with US over-borrowing, so it is the US’ responsibility, not theirs, to clean up the mess. The US should cut its budget deficit, increase its savings rate and generally get its own house in order.
The emerging economies reacted similarly to a second US initiative, the US Federal Reserve’s so-called “quantitative easing.” Emerging economies once again spoke nearly in unison. They told the US not to boost the money supply artificially, as this would create the risk of yet another financial bubble, this time in the emerging economies and in commodity markets. Once again, the clear message to the US was to stop using gimmicks like fiscal stimulus or printing money and instead undertake a serious longer-term economic restructuring to boost saving, investment and net exports.