Summits are defined by their location. It is quaint that the 1933 World Economic Conference took place in the Geological Museum in London’s Kensington, at a time when international cooperation seemed as alien as a fossilized dinosaur. On these criteria, Deauville, in French Normandy, with the (slightly faded) elegance of a past era of elite luxury, ostentatious consumption and sumptuous banquets, is also perhaps not an altogether fortunate choice for the G8 meeting.
This year, the G8ers are talking about interesting but peripheral issues, such as the economic impact of the Internet. Worse, they are talking about important issues, like food security, in a peripheral way.
The food issue emerged for the first time as a major theme at the July 2009 summit in L’Aquila, Italy, as a response to a commodity boom that was beginning to falter, but that has since reemerged with the force of a hurricane. Now the G8 will discuss funding for palliative measures. The issue of food is, however, intimately tied to a host of much broader economic issues, which the international community is not properly addressing. Even though the global economy today looks relatively robust in general, international economic cooperation is more fragile now than at any moment in the post-1945 world.
Weak food security highlights all of the major problems of the modern world non-order: Economic and financial nationalisms threaten. There is talk of currency wars, national management and regulation of banking, and growing demand for greater levels of trade protection. And all of these issues are inter-connected. The discussion of monetary policy is especially divisive. Because of low interest rates in the US, major financial institutions can borrow cheaply in dollars and then chase much higher returns in the major emerging-market countries.
The result creates an impossible dilemma for many of the world’s most dynamic economies. If they try to clamp down by raising domestic interest rates, they will only attract greater capital inflows. If they let the exchange rate rise, they might deter some capital inflows, but they would also penalize their exporters and push up domestic unemployment. Emerging-market policymakers in big countries such as Brazil, China and Turkey routinely attack the US and its monetary policy as a source of inflation, social tension and political instability.
The most obvious and dangerous consequence of low interest rates in the major industrial countries is their impact on commodity prices, which is especially pronounced for food and fuel. As many economists, notably Jeffrey Frankel, have shown, prices on these markets are established by an auction-like process; as a result, commodity markets transmit the effects of monetary expansion particularly quickly. By contrast, branded products, into which producers have sunk major investments in securing the market, have prices that are much stickier and do not reflect the effects of monetary policy as rapidly.
Higher food prices have had a major impact in expanding the area devoted to cultivation in many countries and have led to higher output levels worldwide. Brazil, Russia and China, but also Algeria, Egypt and South Africa — indeed, all African countries that have maintained functioning governments — have seen dramatic increases in food production over the past decade.