You know you have a really big crisis when you call in not the G7, or the G8, but the G20. That’s 13 more chances of coming up with solutions than if just the hardcore seven were involved.
The G20 (South Africa and 19 others) held a summit in Washington last weekend to discuss the crisis in financial markets and the world economy. It produced an 11-page statement that commits to more meetings but not much substantially more.
Given the depth of the crisis, which has seen the Dow halve in value this year, you may have thought that at least some fresh and creative ideas would have come out of the summit.
Could it be though, that the G20 has not risen to the challenge because it has misdiagnosed the problem? Could it be that it has not seen the elephant in the room or, if it has, prefers not to notice it?
The root cause of the crisis, the G20 statement says, is prolonged prosperity, which led to greed and a lack of due diligence. Weak underwriting standards, increasingly complex financial products and excessive leverage combined to create vulnerabilities in the financial system.
Policymakers, regulators and supervisors in some advanced countries did not adequately appreciate and address the risks building up in financial markets, leading to the global all-fall-down.
The G20 said that major underlying factors included inconsistent and insufficiently coordinated macroÂeconomic policies and inadequate structural reforms that led to unsustainable global macroÂeconomic outcomes. “These developments together contributed to excesses and ultimately resulted in severe market disruption.”
In English this means that the United States lived well beyond its means, borrowing heavily from China and others. It also means that oil-importing countries are wholly and unsustainably on the hook to oil exporters.
The G20 appears to hold the view that measures such as tighter regulation of financial markets, limits on executive remuneration, greater market transparency, universal accounting standards, less protectionism and increased international cooperation are needed to get back to business as usual.
But the problem is surely greater than this. If this was all that was required, the G20 could have issued an authoritative statement saying that it was tackling these measures as a matter of urgency and that they would be implemented or tightened, globally, with immediate effect.
The problem is deeper; the global economy is broken and needs to be rethought substantively.
On the face of it the environment need not feature at a financial crisis meeting. Indeed the word does not appear in the statement.
Climate change appears just once, as does energy security: “We remain committed to addressing other critical challenges such as energy security and climate change, food security, the rule of law, and the fight against terrorism, poverty and disease.”
Climate change may not have been the first thing on the minds of the G20 last weekend, but there is every reason to think that energy security should have been.
President elect Barack Obama has made energy security a major part of his platform, telling voters time and again that the US spends billions of dollars importing oil from countries that don’t necessarily like it.
An analysis by Clive Rubin of CIBC Markets, published here last week, sees the 500% increase in oil prices since 2002 to $147 a barrel, rather than subprime fallout, as the underlying cause of the global crisis.
The International Energy Agency (IEA), in a major report last week, said that while there are still significant amounts of oil in the ground, it is getting more costly to extract. While oil was trading below $50 this week, the IEA sees prices rising, through periods of volatility, to $200 by 2030.
The IEA based its data on an analysis of the world’s 400 most productive oilfields. It suggests that no sooner will global markets recover than the oil price, which again begins its upward rise, will threaten economic growth again.
Peak oil theorists, who for some time have been arguing that production will hit a peak, leading to price spikes as demand outstrips supply, see the IEA report as further evidence that the theory is correct. They see peak oil to be part of wider resource depletion as economic growth consumes vast amounts of resources.
But policymakers do not carry resource depletion around with them as part of their toolkits. If they worry about the environment they worry about climate change, a pressing issue, but not one that is likely to consume too much time at G20 meetings on the financial crisis, for instance.
There is considerable evidence now that resources globally are under threat. But G20 leaders did not convene at the weekend to consider resource depletion and the effect this is having on global markets.
They could have printed out and circulated the United Nations Environment Programme’s call in October for the transformation of the Âglobal economy so that it works for the broad majority of humankind, within boundaries set by the planet’s rate of resource renewal and waste-absorption capacity.
The Worldwatch Institute picks up on this idea, calling ahead of the G20 meeting for a Global Green Deal to be made the centrepiece of its Âdeliberations.
“This broad approach will require a conceptual blueprint evocative of America’s 1930’s New Deal — but more audacious in scope and vision,” say Worldwatch’s Gary Gardner and Michael Renner.
They see five strategic underpinnings to the Global Green Deal:
- Systematically phasing out fossil fuels as part of a transition to a renewable energy economy;
- Launching an efficiency revolution by doing more with less;
- Investing in green infrastructure through revolutionising the electrical grid, creating transport systems that are less reliant on automobiles and embrace rail and mass transit;
- Creating a circular economy where materials circulate; and
- Working for a fairer distribution of wealth within and across borders.
A key underpinning for the Global Green Deal, Gardner and Renner say, would be for governments to ensure that prices “tell the ecological truth ending the free ride which fossil fuels have enjoyed vis-a-vis renewables”.
Using resources more wisely would help enormously in combating climate change. Supporters of this approach say that viewed though the lens of resource depletion, climate change could be tackled with greater coherence and urgency.
Funding for the Global Green Deal would come from numerous sources, says Worldwatch:
Cutting back on global annual military spending of $1.3-trillion;
Tapping the sovereign wealth funds of oil states and governments with large surpluses, estimated at $2-trillion to $3-trillion last year;
Levying the Tobin tax on trade in currencies — this amounted to $3,7-trillion daily in 2007;
Eliminating subsidies for fossil fuels which are estimated at up to $250-billion annually;
Encouraging the insurance industry, which has paid $1,4-trillion in weather-related disasters between 1980 and 2004, to contribute to climate stabilisation as part of the Global Green Deal; and
Treasury bonds could also be dedicated to green investments. China has already taken the lead in this area.
There is almost nothing in the G20 statement to indicate that we are setting out a new path towards a sustainable global economy. But perhaps there are two signs of hope.
One is that the G7 is recognising that many more players will need to achieve a solution.
The other is that Obama is making it clear that his commitments on the stump to a greener future will be an important part of his presidency.
Last week he supported the idea of funding for the near-terminal US auto industry, but said that this had to be conditional. The industry needs to tell us what needs to be done to make it sustainable, he said. What indeed?