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Economics Anonymous

Martin Hutchinson 

G20: The latest round of G20 meetings will hopefully knock some sense into politicians. With the recovery threatened by protectionism, competitive devaluation and excessive budget deficits, the meeting of finance ministers this weekend and the upcoming round with heads of state in South Korea could prove pivotal. Stagnant, developed and fast-growing economies need to smooth frictions now more than ever.

In the Great Depression, long before the G20 was a twinkle in anyone’s eye, currency wars and tariff hikes reduced world trade volume by two-thirds, worsening and prolonging global misery. It also produced the first worldwide attempt to coordinate economic policies, the 1933 London Economic Conference. Sadly, this was torpedoed by two newly elected leaders. Franklin Roosevelt didn’t take it seriously, while Adolf Hitler had alternate ambitions.

In this Great Recession, similar policy threats have emerged. The US Congress threatens anti-dumping sanctions on China, which in return is seen to be blocking shipments of all-important rare earths. The Fed, the Bank of England and the Bank of Japan are moving toward further quantitative easing, potentially flooding the world with unnecessary liquidity and holding down currency values. Even fast-growing dynamos like India and Brazil are running dangerously large budget deficits that threaten a potential crisis of confidence in global bond markets.

As global economic strength continues its shift from developed to emerging economies, tension is inevitable. Unemployment and wage erosion weigh on the West. The G20, with representation from across the economic spectrum, is the only workable forum to discuss these matters and adopt the policies necessary to mitigate these.

The gathering also provides a means by which to exert pressure on countries adopting damaging policies. And the G20 is a place where allegiances can vary wildly, depending on subject matter. The budget-cutting EU, China and South Korea can oppose fiscal profligacy; free-trade beneficiaries Britain, South Korea and India can oppose protectionism; and the monetarily cautious EU, China and Brazil can oppose excessive money creation.

Economically destructive habits are pervasive these days. With any luck, the G20 meetings will generate the necessary peer pressure to curb them.

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First Published: Mon, October 25 2010. 00:36 IST