G20 dreams: Free Trade and Facile internationalism from the CBI

Richard Lambert, director general the CBI, wrote an article for the Business section of the Times on 5/3/09 with recommendations for leaders at the forthcoming G20 conference. On first read, I dismissed it as pie in the sky; but the defenders of the old economic system are taking this agenda seriously. In fact it is more or less the consensus, supported by the BBC, Financial Times and other pillars of the liberal ascendency. Lambert has argued cogently and honestly, albeit for something which is unrealistic.

I shall leave aside that financial liberalisation led to the E. Europe debt crisis, and trade imbalances are the underlying reasons for the world crisis - let's say the past is the past. But here I gloss what he is really saying or omits to say.:

1. There is no mention of debt and solvency. If you don't have the money, you can't spend it, except by incurring more debt, which leads to paying more for credit, due to low credit-worthiness.
   
2. He thinks that “confidence” can help us out of recession; yes, psychological factors may have some impact, but ultimately confidence has to be based on something real. When you know you are exposed financially, it is unlikely you will feel confident enough to spend more. Nor should you: from the outset, the argument starts to look grossly immoral, because it encourages us to keep piling on debt indefinitely.


3. No mention of trade imbalances. According to free Trade orthodoxy, every country must benefit from unrestricted free trade, based on the principle of comparative advantage, which unfortunately for the West, no longer applies. And the de-industrialisation of the west means generally lower wages to pay for those cheaper Chinese goods
   
4. Lambert is calling for strengthened world governance; more mechanisms to make governments unaccountable to their own peoples, it is time for the economic guardians to rule - in order to soothe populist tendencies and curb the protectionist spirit. Free Trade in the end relies on a loss of democratic Freedom.
   
5. There is a touching faith in the ability of government summits to successfully implement top-down solutions to the world. Lambert sounds like an internationally minded socialist
   
6. There is the usual mantra about free trade pulling people out of poverty in the world; nothing about how it damages western interests and impoverishes us. Again this ambassador of economic liberalism sounds like a member of Socialist International. But I don't buy this free trade helps poverty argument, even though I believe that Capitalism and some trade help alleviate poverty. For example, if China were less export-driven, it might produce more for its own consumers and allow its currency to appreciate, increasing the purchasing power of its people. China’s export drive is encouraged by the unlimited free trade system. [There are also social and environmental externalities.] .
   
   
7. Most important of all: there is no mention of the political realities, namely that the world is made up of nation states and ethnic units: some of these will benefit more from the free trade system than others and consequently be more powerful in relative terms, the obvious case being China, whose surplus- and-production-based economy has increased its wealth, bargaining power, military capacity relative to the debtor-consumer nations. Lambert talks as if the world is one homogenous entity where the interests of all countries coincide.
   

To me, Lambert’s position is an example of how economic liberalism and free-trade, after 1989 became the new vehicle for the internationalism of the liberal-left. They believe in one world, that nationalism, nation states, and ethnic rivalries should, and can, be made to disappear. Implicit in Lambert's argument is the belief that we are merely individual economic units with no national affiliations.

In the real world, powers will be powers; it is sensible for each nation to co-operate where possible, but be prepared to defend its interests when necessary. Unlike Lambert, I am not arguing for Utopia, but for a strategy to survive in the real world.

Summary of Lambert's article.
The G20 countries comprise 85% of world output. Their problem is the pernicious feedback loop between the real economy and financial markets, which:

1. causes asset prices to fall and cost of capital to rise; which


2. impacts consumer and business confidence; which


3. reduces demand for consumer and capital goods; which


4. slows economy, increases credit risks; which


5. lead to uncertainty in financial system

Leaders have talked free trade and walked protectionist policies (tariffs, industry subsidies, exchange rate interventions and bailouts to favour home market); nor has there been progress on Doha. The task of the G20 is to DO WHATEVER IT TAKES to restore world's financial system.

1. Governments must agree on common approaches, so that actions of one country (e.g., Ireland propping up banks) does not undermine other countries;


2. Governments must reverse collapse in demand for goods and services. Fiscal stimulus can do this ( e.g., US committed to stimulus = 5.5% of GDP; surplus countries have need and responsibility to do the same: china is on the way, while Germany and japan must do more; )


3. a) a growing number of countries need international help e.g., central/eastern europe;

b) it is in the interest of international community to do this to avoid serious economic and political strains to europe and beyond;

4. urgent priorityis reform of IMF, in order to:
   a) to increase resources and therefore lending capacity to deal with multiplying problems;
   b) to give greater prominence to the emerging economies in its governance structures
5. To counter protectionism we need transparent mechanisms that will monitor commitments and highlight abuses [sc: world government]

Globalisation is good because it has helped lift 500 people out of poverty in 15 years; crisis will put 90 million back to extreme poverty. This is economically damaging and socially damaging. therefore West must increase devleopment assistence and intend Millenium goals on poverty

Tactically, London should adjust the Washington programme, not get bogged down into details of financial regulation.

In conclusion, transparency and independences are necessary: IMF needs greater responsibility to identify stress points in global economy and be free to criticise US; as are co-ordinated efforts to rebuild financial stability and to check the fall in global demand

1. support for increased resources and governance reforms for multilateral institutions;


2. practical steps to push back protectionism and complete the trade round;


3. start a process to reform financial markets.

This is a "big ask" and needs political leadership but, if G20 does this, it will help restore confidence for business and consumers everywhere.
END.

Or to summarise more succintly: pass me that slice of apple pie. Make sure it is laced with opium, because I can't face reality yet.