Triple Crisis is pleased to welcome Professor Stephany Griffith-Jones, Director of the Financial Markets Program at the Initiative for Policy Dialogue at Columbia University, as a regular contributor.
It seems that currency issues will dominate discussions in the G-20 meetings in Seoul. This is an important subject, but one that is being tackled incorrectly, as Jane D’Arista so clearly sets out in her blog.
The issues of imbalances and exchange rates relate mainly to the pattern of global growth, clearly a significant theme. But far more important in the short term, especially for poorer people both in developed and in developing countries, is to have MORE growth than current policies in developed countries will assure.
In Europe, fiscal consolidation has suddenly become the dominant paradigm. Some countries-like Greece, Portugal, Spain and Ireland-are forced both by pressure from financial markets, combined by that exercised by the European Commission, mainly under the influence of the German government, into draconian fiscal adjustments, which will undermine their growth prospects. Even less easy to understand, the new British government is pursuing fiscal consolidation at a scale and speed unwarranted by any possible future market unwillingness to finance public debt. Yes, the UK has to reduce its public deficit and debt, but there is no reason to do it recklessly and in a way that will both harm those most vulnerable in Britain and undermine growth and employment.
Most difficult to understand is the economic policy of Germany, Europe’s largest economy. It too is pursuing fiscal consolidation, even though there is no pressure from the markets for funding German debt (quite the contrary). Though the German economy is doing relatively well (especially by the paltry European standards) largely thanks to exports, it could do far better if it pursued more expansionary policies, which would be beneficial for German citizens. From a European and a world economy (especially developing country) perspective, more rapid growth in Germany would be very positive by adding welcome and needed aggregate demand.
The US situation is also cause for concern, as necessary further fiscal stimulus, given anemic growth and high unemployment, will unfortunately be blocked by the new Congress. Quantitative easing will most likely not significantly expand private sector spending in the US, at a time of lack of confidence by over indebted households and companies, as Joseph Stiglitz so clearly argued in a recent article in the Financial Times.
It is the sum total of these policies across Europe and now in the US, which is the main cause for concern. Simultaneous fiscal retrenchment in so many countries, at a time when the private sector in those countries is unwilling and often unable to expand consumption and investment, will inevitably lead to far lower or even negative growth. This is not necessary, but the product of wrong policies.
Therefore the developing countries in the G-20 should demand from the rich ones, as a priority, that they pursue policies that are more conducive to growth within their own economies than the ones which they have started to follow this year. Indeed developing countries have a very strong interest in growth in developed countries, so their own development does not get derailed.
So I believe one of the key messages the developing countries should take to the G-20 is pressing the richer countries to deliver growth, and in ways that do not undermine developing countries.
It is a bit of a paradox that, in the past, developed countries imposed austerity during crises on developing countries, e.g. via the IMF. Now, it should be the opposite! Poorer countries should demand growth from richer ones, so their own, at present quite successful, growth is not undermined. An alliance urgently needs building between developing countries and those in rich countries who favor growth-oriented policies: workers, SME and many other entrepreneurs, Keynesian academics and journalists, and NGOs. It is necessary to challenge the incorrect anti-Keynesian consensus emerging in the developed world and pursue policies that have been proved to work so effectively in the past.