guardian.co.uk, UK
A G8 removed from the real world
Climate, oil and food crisis – it’s no longer business as usual for
world’s leaders
Monday July 7, 2008
Larry Elliott, economics editor The Guardian,
It’s been 13 long months since the leaders of the G8 gathered for
their annual talkfest. I’m sure the details of last year’s communique
are etched into your brain but just in case you’ve forgotten what was
agreed in Heiligendamm, here’s a reminder. "We noted," the G8 said,
"that the world economy is in good condition and growth is more evenly
distributed across regions." This was June 8 2007, two months to the
day before the entire global financial system came to a shuddering
halt. If you like your humour black, it’s rather funny isn’t it?
But wait, because it gets better. The communique expressed confidence
that there would be "a smooth adjustment of global imbalances which
should take place in the context of sustained and robust economic
growth". Glad to see, then, that there was no risk that the US
sub-prime mortgage crisis would prompt what the International Monetary
Fund has called the biggest shock to the global financial system since
the Great Depression.
In fact, the G8 had nothing to say about housing bubbles at all,
though it did find time to discuss the need for a settlement between
Armenia and Azerbaijan over Nagorno-Karabakh. And so it goes on. The
G8 managed a cursory glance at what hedge funds were up to and decided
that – on balance – there was nothing really to worry about. "While
noting the positive contribution [sic] of hedge funds to
financial-market stability, we also want to minimise systemic risks by
increasing transparency and market discipline on the part of all
parties involved."
These are the same cuddly hedge funds, presumably, that have been in
large part responsible for driving up the price of oil and food on
commodity markets, to the point where the "good condition" of the
global economy is threatened by stagflation and hunger?
As one hedge fund manager, Michael Masters, told a Congressional
hearing in May, speculation in commodity futures has increased 20
times in the past five years – from $13bn (£6.5bn) to $260bn – and
during that time the price of a basket of commodities has risen by
183%. The increase in demand from speculators, Masters said, had been
almost equal to the increase in demand from China.
There are extremely eminent economists, such as Paul Krugman, who say
that speculation is not the reason the cost of crude has doubled in
the past year even though physical demand has barely increased. There
is, of course, one way to find out. The G8 could agree this week to
release crude from their strategic reserves for the hedge funds to
buy. My bet is that if they did so, the price of oil would fall like a
stone.
Will the G8 do so? It would be foolish to bank on it, and indeed far
safer to expect a repeat of last year’s hotch-potch of complacent
inanity. To be sure, there will be reference to the headwinds facing
the global economy because the challenges facing the summit are as
great as they have been since French president Valéry Giscard
D’Estaing called for the first cosy chat at the chateau of
Rambouillet outside Paris in 1975. Indeed, the threat is now even
greater, since at least in the mid-1970s the problems facing the
summiteers were primarily economic – the collapse of the post-war
golden age of growth in the face of rising inflation. This time, the
G8 has more on its plate than simply a bog-standard cyclical economic
downturn at the end of a prolonged period of low inflation and strong
growth. In addition there are three other meaty issues to consider:
the threat of climate change; the threat that the global economy may
soon be facing shortages of two vital resources (oil and water), and
the parlous position of many of the world’s poorest countries as they
grapple with the effects of global warming and rising food prices. As
a paper released by the Cabinet Office today shows, it is the poor
who suffer most when the cost of food rises: in Britain food accounts
for 15% of the household budgets of the poorest 10% of the population
compared with 7% for the richest 10%. In the developing world, food
can take 50-80% of a family’s income.
Global economy
In the build-up to the summit, it has been clear that the individual
members of the G8 have been tempted to concentrate solely on the
problems facing their own economies and to defer action on the issues
that have dominated these events over the past five years – Africa
and climate change. Gordon Brown was right to say at the weekend that
it would be a profound mistake for the G8 to adopt that approach. For
one thing, it is impossible for any country, no matter how big and
powerful, to insulate itself from developments in the global
economy. And even if they could, it would still be stupid since in
the long-term the stability of every country in the world will
require energy security, action on climate change and the spread of
economic prosperity to the billions living on or below the
breadline. This is certainly not the time to renege on the Gleneagles
aid pledges made three years ago or to decide that the threat of
unemployment makes tackling climate change something that can be put
off for another day.
The prime minister is also correct when he argues that the big issues
on the agenda this week have to be dealt with together rather than
individually, since it is quite clear that there is no lasting
solution to the world’s macro economic problems that does not include
a solution to where we are going to get our energy from, and how we
marry strategies for growth with strategies for environmental
sustainability.
Brown has ideas for what should be done – investment in agriculture, a
stronger commitment to renewable energy, the conclusion of a global
free trade deal and progress on a new climate change deal in
Copenhagen next year. The difficulty with this blueprint is it fails
to get to grips with the magnitude of the problem and so does not go
nearly far enough.
If the G8 was doing its job properly, this week’s communique would be
rather shorter than usual. It would say the world is about to be
battered by a triple crunch of a credit-fuelled financial crisis,
galloping climate change and – even in the absence of speculation – a
long-term increase in energy prices caused by the imminence of peak
oil.
All this requires more than just the tired old business as usual
nostrums. On the last two occasions the global economy reached crisis
point – in the 1930s and 1970s – there was radical change. It is
worrying and depressing that there is an intellectual vacuum when
there ought to be a plethora of ideas about how to dig ourselves out
of this hole.
A pamphlet to be released later this month suggests the answer is a
Green New Deal, which would involve far tougher regulation of capital,
changes to tax systems and a sustained programme of investment in
energy conservation and renewable energy. It certainly has a more
coherent answer to the problems we face in 2008 than the G8, though as
one of the authors I probably would say that, wouldn’t I?
guardian.co.uk/business/economics
larry.elliot t@ guardian.co.uk