Something unfamiliar will be in the background as world leaders hold a summit in Russia starting today: economic growth throughout the developed world.
And something will be missing: worry about a renewed financial crisis.
Leaders from 20 of the largest economies are more confident about their banking systems than at any other time since they began meeting five years ago. What’s more, the economies of the United States, Europe and Japan are finally growing simultaneously.
Yet fears are rising about emerging nations, which have helped drive the global economy for years: Growth is slowing, investor money is leaving and borrowing costs are rising, in part because of higher interest rates in the United States.
The result is a more divided world than the leaders faced at previous summits of the Group of 20 major economies — a disparity that could make any major breakthroughs at the summit elusive.
Europe’s financial crisis, and fears that the euro currency alliance might unravel, had brought focus to previous summits. The leaders first met in 2008 as the U.S. financial crisis was raging and infecting economies around the world. The United States, Europe and Japan are now economically sturdier.
“There is a stronger incentive to cooperate if you are on the brink of a crisis,” says Domenico Lombardi, an economist at the Center for International Governance Innovation in Canada. Without such a threat, “each country is looking after its own domestic affairs.”
After their first meetings, for example, the G-20 leaders embraced policies to try to rejuvenate the global economy. Last year, they agreed to boost the International Monetary Fund’s financial resources, which had been depleted by Europe’s crisis.
“The G-20 did pretty well in crisis-response mode,” says Fred Bergsten, director emeritus at the Peterson Institute for International Economics. “The question now is whether the G-20 can transfer from being purely a crisis-response mechanism to a crisis-prevention mechanism. … On that, the record is not yet clear.”
The problems engulfing emerging countries such as India, Indonesia and Turkey illustrate a key challenge. The problems stem in part from expectations that the Federal Reserve will soon slow its monthly bond purchases. The bond purchases have been intended to keep U.S. borrowing rates low to stimulate growth.
Long-term U.S. rates have been rising in anticipation that the Fed will slow its bond buying. Those higher rates have, in turn, led investors to pull money from developing countries and invest it in U.S. assets. India’s currency, the rupee, Indonesia’s rupiah and Brazil’s real, among others, have plunged in response. The rupee sank to a record low against the dollar last week.
The Organization for Economic Cooperation and Development, a Paris-based research group, said in a report this week that even as growth in developed nations is picking up, slowdowns in emerging economies will likely restrain the global economy.
Yet the advanced economies aren’t likely to alter their rate policies in response to the turmoil in emerging economies. Those policies have been vital to the recoveries in the United States, Europe and Japan.
“This is not something that the G-20 can settle, because it touches at the heart of national policymaking,” Lombardi says.
At the same time, the leaders will likely address the developing countries’ concerns in their statement when the summit ends. Zhu Guangyao, a Chinese deputy finance minister, says the United States “must consider the spillover effect” of scaling back its bond-buying.
“Even if it’s just a plan or a thought, you must have more communication,” Zhu said late last month.
China isn’t as vulnerable to the Fed’s policies as other developing countries. It limits its currency’s ability to fluctuate. And it’s sealed off its financial system from global capital flows.
China’s economy grew 7.5 percent in the April-June quarter compared with the same quarter a year earlier, the slowest in two decades. But its economy appears to be stabilizing. Premier Li Keqiang is focused on reforms intended to boost domestic consumption and shift China’s economy away from a reliance on exports.
About the Author
