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Who Are The G-20 and What Are They Up To? Part 1

Introduction

If you are like me, when you hear news dispatches of G-20 meetings – in one ear and out the other. But when you look at who they are and what they are trying to do, it is somewhat interesting and perhaps important. The G-20 just completed a meeting in Paris. News reports suggested it was not an overwhelming success.

Who Are The G-20?

Remember the G-7? That included the finance ministers of 7 developed countries: Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. They used to meet and discuss global economic issues. The 1997 Asian financial crisis hit home the fact that other parts of the world are growing in importance, and as a result, the G-20 was formed. How is the G-20 different than the G-7 

  • Central bankers are included as well as finance ministers;
  • 12 countries were added: Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, and Turkey.
  • The European Union, and in particular, the head of the European Central Bank, is the 20th member.
  • The head of both the IMF and the World Bank attend all meetings on an ex-officio basis.

These 19 countries are responsible for 75% of global GDP – a real power grouping of nation-states and international institutions. But unlike the World Economic Forum, it does not include corporations or NGOs, nor do non-governmental leaders such as Gates or Clinton attend.

In Table 1, selected economic data on the attending countries is presented. From the summaries at the bottom of the table, the divergence between developed and emerging countries is apparent. The emerging G-20 countries are projected to grow at 5.7% in 2011; the advanced at only 2.5%. And unemployment, government deficits, and government debt are much higher in the advanced countries. I have suggested before that there are two global economies: the tired, slow-growth, debt-laden advanced countries and the high-growth, low-debt emerging countries. I now believe there are actually three country groupings if importance: advanced, emerging, and oil exporting nations.

Topics Covered In the Paris Meetings

Advanced nations were troubled by “global imbalances”. Emerging nations were less concerned by these imbalances. What imbalances? Growth rates, exchange rates, savings rates, trade surplus/deficits, and net income flows. There was also discussion of steps needed to insure Western banks do not collapse again, the Euro bailout, commodity prices, along with monetary/fiscal policies.

Global Imbalances

Let’s look at a few of the imbalances that concerned at least the representatives of the advanced nations. Consider first current account imbalances. The current account summarizes trade balances, income flows, and transfer payments. Current account balances are presented in the first column of Table 2. The next column includes the countries’ international reserves. Assuming there should be some relationship between a country’s reserves and its trade, I divide international reserves by its exports in the final column of the table.

The US current account deficit is large and its international reserves to export ratio is low. There is no real problem here, as long as the dollar remains the international reserve currency of choice.

Bernanke presented a very interesting paper at the meetings. He argued that a “global savings glut” was responsible for a number of the most important global imbalances. One could turn that around and say voracious US consumers were at the heart of the problem. I will have more to say on this shortly, but Table 3 indicates where the G-20 are today. The data represent positions, assets and liabilities and not flows. Don’t worry that columns do not add up. For data of this sort, errors and omissions are large. Nevertheless, the data do provide a pretty good overall impression.

The first column represents the net financial international position of each country. Assets minus liabilities. The second column represents the net on direct international investments (actual investments in factories, infrastructure, etc. The US has invested $3.3 trillion more overseas than foreigners have invested in the US. The last three columns are financial investments. Again using the US as an example, foreigners have invested $1.1 trillion more in US equities than Americans have invested overseas (as I have indicated elsewhere, this margin has dwindled in recent years). The final column provides data on debt flows. The US owes a net $5.6 trillion to foreigners.    

Conclusion

It is hard not to be struck by the US contribution to global imbalances. In the next section of this series, I will focus on several of the G-20s’ initiatives to deal with the problems they discussed.

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