Global Imbalances And Their Solution

Paper for Panel Discussion by Ayo Obe
Legal Practitioner, Lagos, Nigeria
Beijing Forum
6th November 2010

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Although I am not an economist, I propose to look at ‘Global Imbalances and Their Solutions’ from the perspective of countries that are generally on the margins of the global financial system.  Countries such as these have had little scope for proactive measures to protect and grow their own economies, and have always had to adjust their policies (or simply survive) in the light of what the major economies are doing.  Despite the appearance of global inclusiveness, it is unlikely that much will have changed if and when the world’s leading economies agree new mechanisms and procedures to tackle global imbalances.

There is no question that China is one of those major economies.  The emergence of the G20 is a direct recognition of that since, as has been pointed out, without China, the G8 is irrelevant.  Certainly the issues raised by global imbalances could not be resolved within the G8 alone.

The G8 continues to meet and no doubt there are important issues for the member countries to discuss, but for those on the outside, there is a post-colonial feel to the whole affair, heightened by invitations to leaders of some African countries who attend side-meetings at which they plead for increases in development aid.

I am a citizen of one of those countries whose leaders regularly pop up at such G8 fringe events, Nigeria.  We were at the customary side-show for poor countries when the G8 held its meeting in Toronto, but when the G20 meeting started and the big boys sat down at the table, our President had to leave.

Even at the G20, Africa is represented by default, rather than strict mathematical right: South Africa – with the largest economy on the continent – is the only African member of the G20, but its economy is not the 20th largest in the world.  As the country with the largest population in Africa, Nigeria would love to be at that table also.  But the G20 is not about sentiment and wishes.  What is more, Nigeria’s economic muscle comes largely from its oil-dominated economy.

In this regard, Nigeria is little different from most other African countries, which depend on one or two commodities for the bulk of their export earnings, and probably more representative than South Africa of the situation on the continent.  Africa is vulnerable to volatility and downward movements in commodity prices, but it has little control over those prices.

Although most discussion of ‘global imbalances’ is about the persisting current account deficit of the US and other high income countries on the one hand, and the surplus of countries such as China on the other, as at 2005, only nine African countries ran a current account surplus balance while 41 were in deficit.

Add to this the fact that most of those in surplus are so because of commodity exports, and remembering that they have little control over the demand and the prices for these, Africa would be short-sighted not to concern itself about a global architecture that will address the problem of global imbalances (or mitigate their adverse effects).

Despite the renewed commitment by the G8 to achieving the 40-year old 0.7% of GDP aid target, the evidence suggests that African economies have grown more from 10 years of what has been described as Chinese ‘expansionism’ than decades of half-hearted development aid (which in any event does not equal the amount that Africa sends out in debt repayment.)  For the continent therefore, we must understand that it is trade, business and mutual co-operation that is likely to yield results for us, and whether or not our voice is heard, we have a clear interest in a new global architecture, even though the continent
is represented at the G20 only by South Africa.  We should look beyond a system that will regulate – and thus protect us against – the vagaries of volatile world commodity markets, and be thinking about one that will be useful to us if and when our economies move beyond dependence on commodity exports.

How likely is it that such a system will be agreed, and what part will we have to play in it in any event?

In this context, I think it is important that African countries do not allow themselves to fall into the error of believing that the problem is a US-China one, or that once the relationship between the US and China is on an even keel, everybody else’s problems will be solved.  Despite the size of the US deficit and the size of the Chinese surplus, their own mutual trade is not so great – the figures for 2008 – on the eve of the financial crisis – show that it accounts for just 3% of world trade.  For observers such as myself and others in Africa, we understand that the present American obsession with China is only natural: firstly because this country’s growth rates will soon make it the world’s largest economy - and however much one might realise that the only place to go from being at the top is down, the upward trajectory of the United States has been so sustained that it is only natural to start to imagine that it will continue that way for ever, and to resent the signs which show that it will not.  Secondly, it also seems to us that that position has been achieved by China without direct American tutelage or aid.

Thirdly, and perhaps most significantly, China’s growth has been achieved under the existing system.  The existing apparently unfair system!  It is something for African countries – or rather, African governments – which had been justifying their failure to achieve any significant economic take-off or make serious progress in lifting our people out of poverty on the ground that the rules are unfavourable, and that we need to have a complete – and fair – architecture of global trade agreed before we can be expected to start to make progress.

Without pretending to have solutions, it seems to me that the fact that the world was taken to the brink of financial meltdown must be separated from the individual issue of the US deficit and Chinese surplus, since it was the way that the sophisticated financial systems were operating in the world’s richest and most advanced economies that brought about the crisis.  Within those countries, a lot of blame has been thrown around but it is not bankers who are paying the price.

As for the blame being thrown around outside, China is in a better position to decline any role as the ‘fall guy’.  In any case, it is unlikely that crashing the Chinese currency will bring about a solution: rather, the shock waves are likely to be as disruptive for the world economy – in which most African countries are like small boats buffeted by waves for which we have inadequate rudders with which to steer our ships by – as the huge jump in oil prices was in the 1970s.

I wonder if we can remember what happened when the Organisation of Petroleum Exporting Countries tripled and quadrupled the price of oil?  The world was thrown into turmoil.  Nigeria’s then head of state complained that his problem was not money, but how to spend it!  But today, no Nigerian will pretend that the effect was anything but disastrous for our country.  The distortive effects remain with us – a poster child for the term: resource curse.  At the time of course, it all seemed to be going our way: all the small economies and commodity producers got excited, and the talk was of a New International Economic Order, in which the producing countries were going to have a new global architecture for the world’s economy: new rules that would see all of us – not just petroleum producers – but producers of other minerals and natural resources, taking charge of the markets for our raw materials and dictating their prices.  As responsible members of the comity of nations, we would of course work towards stability in the markets, but it would be a concession that we would be granting to the rest of the world …  Ha!

While we were sitting around, attending international negotiations and conferences, making grandiose plans and imagining that this new world international economic order would be agreed on our terms, the world passed us by.  And even those of us with oil money got swamped in the choppy seas that we had imagined would bring us sailing home to glory!  We were truly exposed as small boats with useless rudders.

The harsh reality is that it isn’t countries on the margins that get to make the new rules.  And to the extent that the world’s leading economies are prepared to consider new rules, it is what works for them that will be the goal: the appearance of fairness to the rest of us will be a useful side-effect, but we don’t have what it takes to hold up agreements that are not really about us anyway.

We should require agreement – dare I even say ‘harmony’ among the world’s leading economies about moving beyond the present situation.  Yesterday Mr. Zedillo delivered a brilliant examination of the global imbalances issue, and what needs to be done.  I don’t propose to re-hash it.  It is clearly in the interests of world trade and prosperity that there should be agreement, that deficit countries should reduce their deficits and that surplus countries should stop throwing their surplus into such deficit countries.  It is also better that this should be achieved gradually and smoothly.  But if I am to answer the questions that I posed earlier honestly, I would say something will indeed emerge, and that it will probably be favourable to trading nations.  But countries on the margins won’t play a significant part in agreeing it.  That does not mean that we are condemned to poverty and irrelevance.  But the lessons of the past suggest that we must play whatever hand we get as though it is the best hand we could have got, and stop waiting for a miracle delivered to us from outside to rescue us.

Thank you for listening.
 

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