Trying to Grow

Trying to Grow

“Break the fever”

President Barack Obama

The recently held G20 Summit in Los Cabos, Mexico, made two notable moves. One was the enhancement of IMF’s coffers, and firewall, to over 500 billion dollars from the erstwhile 430 billion, inclusive of a fresh pledge from the BRICS of 75 billion dollars.

This large promised input from developing countries, led by China at 43 billion dollars, Russia, Brazil and India at 10 billion each, and South Africa with 2 billion, may be, as the BBC reported, the most tangible thing to come out of this summit. It also comes with a demand for, but given the present crisis, not an insistence upon, enhanced voting rights in the IMF allocations and other decisions, for the self same BRICS countries. The world as we know it is shifting gears.

This BRICS money will be lent to the Eurozone, and others who need it to contain the fallout, if the debt crisis warrants; but only after exhausting other financial seams available to it. These  amount to an impressive 800 billion dollars.

The other notable point made was a policy direction- endorsed by all, even austerity advocate Germany, to promote fresh growth and jobs. Germany has been pressured into this stance instead of the radical belt-tightening it has been calling for. It is probably unhappy because it has often had to foot large portions of debt refinancing or outright grants outside its borders. This is an unintended consequence of being the strongest economy in the EU.

The Eurozone crisis is costing a great deal more already, with no signs of abatement, than all the costs associated with the reunification of Germany and the stimulation of the impoverished Eastern region rescued from erstwhile Soviet influence.

Growth in Europe, may however mean reaching out beyond the Eurozone where the demand scenario for their technology and skills is far greater. Los Cabos did, after all, bring together 20 countries that collectively account for 80 per cent of global output.

The fact is, it is hard to grow in situ when all your infrastructure is already developed, and there is little to take care of except operations and maintenance or the renewal of obsolete facilities.

Prime Minister Manmohan Singh may have had something like this in mind when he urged the EU to invest in the infrastructure of developing countries. He may well have had India specifically in mind where the investment funds required to develop just some of the infrastructure gaps run into trillions of dollars. And it did get a mention in the 14 page declaration at the end of the Summit. It wasn’t however, a very pointed point: “We will intensify our efforts to create a more conducive environment for development, including supporting infrastructure investment.” But then, that is the tell-tale nature of denial.

The “consumption”, which has been the driver of growth in Europe in recent times, is a spiralling thing without essential purpose. A bigger house is nice but not necessarily essential. Ditto, better cars, holiday homes and indeed, holidays. But improving one’s lifestyle via taking on more and more debt is seen to be undeniably unsustainable now. However, it is very painful to lose, at the individual level, what has been gained, because of a macro level meltdown. It is a prevailing wind that led all to all the profligacy after all.

For the moment, the summiteers, ensconced in the luxury resort at Los Cabos, began on a good note. They celebrated the reprieve in Greece, the world’s 34^th   ranked economy, with the pro-bailout coalition under formation. It has pipped the far Left challenge by a narrow 2 percentage points in the recent elections held there. Greece will stay put in the EU for now, though the threat to secede remains if austerity or debt servicing terms prove too onerous.

Still, right now, it will not precipitate a crisis of confidence both in the Euro and the EU. The election result from Athens also provides an opportunity to try and put its house in order. As a nation it borrowed to consume, and now it has too big an appetite to go on a drastic diet. But Greece can’t be blamed in isolation for doing exactly what the rest of EU and indeed America has done.

This even as the trillion dollar economy of Spain is tottering on the brink, as is that of Italy. These are the 3^rd and 4^th largest economies in the Eurozone. The regular nostrum of a bailout is going to assume titanic proportions in the event of a collapse. This because all of the IMF lending limit of 800 billion dollars plus the Eurozone’s own emergency funds of another 800 billion Euros would not be enough. Germany too would have to dig very deep into its finances.

A related problem is the lack of an integrated financial system in the EU and so very little control of how the new money would be deployed. Besides, it is indeed hard to bring this about because of each nation’s sovereign needs and wants. Nevertheless the classic stagflation notes are evident already with a high cost economy plagued by flagging demand, and it will inevitably aggravate the intent to promote domestic growth as the way out of this predicament.

So growth, bluntly put, may mean going in to develop Africa, Asia, South America, Arabia, and Eastern Europe; many parts of which are rich in natural resources, vast territory, much of it highly arable and lush, huge reserves of petroleum and so on. Western Europe by contrast is over- exploited and over -developed already, a manufacturing wasteland today, with basic manufacturing outsourced overseas.

The Arabs, who have burned their fingers investing their billions in petro-dollars in US and European blue chips, top flight property, privately owned A listers etc, are seeing the truth of this for themselves. Ditto to some extent for the reserves-rich Chinese, who are snapping up companies like the Indians, but have mostly invested trillions of dollars in US Government Treasury Bonds. And this exposure is making them more than a little uneasy too.

But, at the same time, it must be emphasised, the EU and America has a wealth of expertise in multiple fields, academic excellence and great know-how in futuristic technologies, high technology, formidable research capabilities, and a spectacular military industry. All strengths the less developed parts of the world badly need access to.

Europe and its big brother America, in the very same predicament, must therefore, without further prevarication, joint venture with the countries around the world that need their abilities, but this time on far more favourable terms than heretofore.

The tendency in the past has been to make expensive outright sales of second-rate technology or services, while holding back and reserving the latest developments for themselves. From this exploitative mindset, the EU and the US need to come to the table as fair-minded partners, assuming their share of risk and investment. And without hiding behind the over played notion of  “security risk”.

But this has always been the sticking point, right from the days of the North-South Summits that long preceded the present G series summits. Then however, Europe and America could afford to be smug and patronising. The more equitable space was mostly filled by the USSR, which partnered most of the developing nations on reasonable terms, while at the same time extending their spheres of influence. But that bipolar world too, is gone forever, even as the imperialist hangovers persist.

One does not have to go too far back. Some of the more recent annual Davos Economic Summits in Switzerland exhibited some of this neo-colonial attitude too, but today it is hard for the West to get away with it. Some of the shoe is now on the other foot, as it has always been for the then designated “Third World”.

The developing world has long had to brace itself to maintain some vestiges of its dignity, with “starving millions”, near zero growth, and debt enough to bankrupt them. Today we could affix such labels on the EU and America.

The US and the EU are decidedly broke and understandably bewildered, but are still having trouble getting off their high horses. They find it terrifying that their former “South” is relentlessly pushing to change places at the high table with them.

Their resistance to the changed equation will only lengthen the agony of shrinkage and being driven into genteel poverty if not outright depression, and prolong their years of difficulty. It is, after all, the kind of poverty that comes from not being able to afford the splendour and riches around them anymore.  

There is, as always, a way out. It is evident even in Greece, where the international, globe girding shipping tycoons are doing just fine thank you. They are, along with their international billionaire friends, keeping their heads down, of course, almost embarrassed for being viable, strong, efficient and profitable.

At the G20 Summit, national leaders of leading countries around the globe confined themselves to comments on process, rescheduling debt, vague pronouncements on being determined to revive their economies, other micro statements on coping, but they are still evading the main point, probably from fear of the political fallout.

Growth itself is in surfeit in the Eurozone, as the weak recovery figures show when another wave of crisis has not hit it. The EU has over capacity and high costs ruling everything except cutting-edge technology. And like America, most routine manufacturing of everyday things has long been outsourced to China and other lower cost parts of the world.

The twenty year boom experienced in the West before the bust has been based on consumerism and borrowed money. The curtain has undeniably come down in grief and tears over this model, even as it was once thought to be so much smarter than the earlier earn and spend idea.   

The communiqué at the end of the Los Cabos G 20 summit ran into 85 points. The last two said:

“84. We thank international organizations, including the UN, IMF, World Bank, WTO, FSB, ILO, FAO, and OECD, as well as civil society, for their input into the G20 process. Their reports and recommendations have provided valuable inputs to G20 discussions, in areas ranging from sustainable development to financial regulation.

85. We look forward to the rest of the work that will take place during Mexico’s Presidency until November 30. On 1 December, 2012, Russia will start chairing the G20. We will convene in St. Petersburg, under the Chairmanship of Russia. We thank Mexico for hosting a successful Los Cabos Summit”.

These points reveal the ongoing nature of summitry, and the growing importance of long term soft loaning institutions that are set up to channel the money,  without which many world economies of note are not going to make it.

The Eurozone has been profuse in its promises to put its house in order, but even the leaders may not fully accept, or even be aware that the house itself has changed irrevocably. There will be no going back to fiscal prudence. The madness has already cast everyone on a very different shore. Tomorrow it has to be a new Europe, willing to partner its former dependants and colonies, but in a generous and honourable manner.

Without this, there will be no survival or peace for the erstwhile masters. The subject peoples are fine in comparison, but the masters cannot, any more, survive without their help and collaboration. Thankfully, enough goodwill exists in the heart of the once subordinate. There is little malice harboured despite the many injustices perpetrated in the past.

Meanwhile, Europe is readying Euro 750 billion to rescue itself and a beleaguered Spain and Italy. It may be only the first tranche however. The world is in the process of being reordered. Perhaps this change is what the Mayan prophecy of 2012 actually meant. Not quite the physical end of the world but the beginning of a substantial new order.

(1,999 words)

21^st June 2012


Published as the Cover Story in The Sunday Pioneer, AGENDA Section on 23rd June 2012 as "Reordering the world" and online at www.dailypioneer.com

Gautam Mukherjee and online at www