Democrats' refusal to mend their ways

Although decisions at the Seoul G-20 summit won't trigger any quick remedial actions, the flaws of the axioms and theories propounded by the US universities over the decades have apparently been noted; whether the democracies are prepared to stop treating them as divine schemes remains to be seen.

Until now, nations took pride in building trade surpluses and exchange reserves practising the beggar-thy-neighbour policy. This flawed value is now being questioned. It took decades for democracies to discover that they were on the wrong track. But this faint sign of rationality owes itself more to the deadly indebtedness of the world's sole 'super' power.

In the communiqué, issued after the summit, the members admitted their horror at the prospects of fixing a global economy nourished by huge US trade deficits with China, Germany and Japan, and pledged to reduce the gaps between nations with large trade surpluses and those with huge deficits - inequalities that didn't bothered the G-20 earlier.

The G-20 members have finally realised that "persistently large imbalances" in current accounts reflect nations' odd foreign trade and investment preferences. To prevent such surpluses and deficits from reaching dangerous levels, G-20 proposes to introduce "indicative" guidelines for measuring these imbalances ie classifying them as acceptable or punishable.

The G-20 members propose to develop these guidelines with the help from the IMF and other economic wizards, and G-20 finance ministers and central bank governors will meet in the first half of 2011 to review progress on the subject. Three cheers for the global leadership it is that felt this need 37 years after free floating of the currencies! Didn't the global recessions since 1973 offer enough lessons?

Global economic management wasn't as bad until 1973, ie until exchange rates remained fixed. Beginning the 1980s - Thatcher-Reagan era of unbridled capitalism - however, it became progressively ruthless, and reckless after the demise of the Soviet Union, the most worrying aspect thereof being China's joining the capitalist club.

Remaining rooted in an imperial mindset has been capitalism' lethal flaw because, while it prioritises profit above all, it sidelines the most important prerequisite for assuring it - growth of buyers' purchasing power, ie their remaining gainfully employed and interested in improved levels of existence. If nations are systematically impoverished, can these trends be sustained?

Flawed capitalist values remain entrenched in state policies and the quest for trade surpluses and exchange reserves continue to sideline the long-term benefits of reducing the gap between the rich and the poor to check desperate reactions (eg terrorism), and assure a more stable world order. Whether this mindset is changing, remains to be seen.

The only G-20 country that made sense during the Seoul summit was India. Prime Minister Manmohan Singh pleaded for surplus reserves being invested in the physical infrastructure of the hard pressed developing countries rather than being invested in the US government's debt paper. How the funds invested in these securities were squandered should open the world's eyes.

The US businesses were happy until they could report make-believe profits but not anymore. For the highest post-World War-II jobless numbers, they blame the cheap yuan because "production plants must move to China to benefit from low labour costs and the undervalued yuan." What, however, they won't dilute is their quest for unfair profit, nor would they strive for cost economies - the legacies of the imperial era.

This scenario didn't emerge yesterday. During these decades, in the true imperial style America lost its focus; it opted to become the 'super' power to get all it wanted by using its military muscle. Instead of forcing successive governments to revert to a saner profile of existence, didn't the US businesses use this muscle and the WTO to get unfair trading benefits until China beat the hell out of them?

The sole 'super' power is now pleading its case with China for a weaker yuan, telling the Chinese that a strong yuan would make Chinese exports costlier for the Americans and the US imports cheaper for the Chinese, and is also pleading with the Chinese companies to sell more within China rather than export to the US and other countries.

With other countries, the US approach is different; the Fed plans to pump $600 billion into the US economy to depreciate its dollar vs. their currencies to give the US exporters an unfair advantage. According to The National Interest, "the idea that Bernanke is engaged in something nefarious by further driving down the value of the dollar doesn't hold water."

The logic offered is that the "crocodile tears-shedding." China and Germany have been relying on exports to boost their economies by pursuing a beggar-thy-neighbour policy. Conclusion: don't condemn the wrong being done by them; join them in this 'crime'. Doesn't this reflect democrats' refusal to mend their ways?

Asian economies fear that continued US policy of keeping interest rates low could inflate new bubbles in global markets, and falling yields on the US bonds could channel investment into high return-paying South Asian markets, and Asia could again become vulnerable to a 1997-like crash if investors later decide to pull out.

Despite being hit by the current recession, Europe hasn't lost its senses. That's why it was amenable to accepting the Sovereign Debt Restructuring Mechanism (SDRM) proposed by the IMF. But the US withheld its support for the SDRM because it implied accepting the authority of supranational regulation, which a 'super' power and 'super' democracy can't accept even if the whole world does so.

Democracies (such as the US) don't accept failures. But the view now gaining ground is to limit this self-destructive tendency by not bailing out states whose debt exceeds a threshold based on their ability verifiable capacity for periodically servicing their debt. It implies improved governance to assure optimal utilisation of every penny of public debt that the democrats aren't used to.

If enforced credibly, this discipline could goad the democrats into becoming better economic managers that they haven't been, courtesy their loyalty to speculators and market manipulators that finance their election campaigns. But by imposing this discipline half-heartedly, the G-20 will remain a club that wastes its time 'measuring' the size of governance problems rather than addressing them.