7 Nov, 2011

More Crises Loom As G20 Summit Lets Financial Terrorists Walk

Imtiaz Muqbil at the WTM 2011 in London

LONDON : When the World Travel Market opens in London on Nov 7, two issues will dominate the speeches of industry leaders: the global economic outlook in the light of the Eurozone crisis, and the so-called carbon tax to be levied on airlines. Both are inter-linked. Although attempts will be made to position tourism’s job-creation potential as a solution to global economic woes, the travel industry needs to beware the warning signs and not seek too much comfort in its “resilience” and rosy growth forecasts. The statements and communiqués issued by last week’s G20 summit contain clear indications that more crises loom.

On the surface, the carefully written G20 outcome documents give the impression that the governments of 20 of the top developed and developing countries have everything under control and are working seriously to solve the problems. But a closer analysis indicates that financial terrorism, a major cause of global economic woes, is rife and as uncontrollable as geopolitical terrorism. The G20 outcome documents are full of references to currency volatility, shadow-banking, tax fraud, countries that are still “facing exogenous, including systemic, shocks” and banks which “need to boost their resilience to financial and economic shocks.” They refer to “loopholes and overlapping regulations”, “persistent exchange rate misalignments”, “compensation practices that lead to excessive risk taking”, and flawed policies that once categorised financial firms as being “too big to fail”, making taxpayers bear the costs of their collapse. And so forth and so on.

Screw-ups

References to these screw-ups are scattered throughout the three main documents issued after last week’s G20 meeting in Cannes – one final declaration, one communiqué and one action plan to create jobs. Indeed, the action plan leaves no doubt about the seriousness of today’s situation. It says:

“The global economy has entered a new and difficult phase. Global growth has weakened, downside risks have heightened, and confidence has waned. Uncertainty over the sustainability of public debt levels in some advanced economies has increased, and the rebalancing in demand from the public to the private sector and from the external to the domestic sector has not materialized.

“In Europe, sovereign debt risks in some countries have generated a difficult dynamic of rising interest costs and stresses in the banking system, which are now weighing on confidence and real activity in the euro area. Growth in the euro area is now projected to be weaker and unemployment higher.

“In the US, the recovery has been shallower than expected. The desired rebound in private demand has not materialized due to a combination of weak job growth, the ongoing correction in the housing sector and the associated rebuilding of household balance sheets. More certainty and determination over medium-term fiscal consolidation will contribute to the strengthening of growth.

“In emerging markets, there are also clear signs of a slowing in growth as developments in advanced economies begin to weigh on these countries. In some emerging market economies, financial stability and overheating risks remain. The lack of exchange rate flexibility in some countries limits policy options to deal with these risks.”

First Question

Even to the average reader, the first question that would arise is: “How did the G20 countries let this materialise in the first place?” They now say they “recognise” the problems and the serious impact on the livelihoods of the most vulnerable. Having agreed on a package of solutions, which may take years to work, the G20 leaders also invite accountability, thus: “We will also hold ourselves accountable for meeting our commitments to address near-term vulnerabilities and move ahead on reforms.” They do not say how they plan to hold themselves accountable. Nor do they identify the processes and channels available for ordinary people affected by the leaders’ mistakes to make them accountable.

It takes a few readings of the craftily crafted G20 outcome documents to realise the near state of anarchy in global financial markets and better understand why the Occupy Wall Street movements are gaining ground worldwide. Perhaps the most glaring flaw is the complete lack of blame directed at market speculators, who make millions by manipulating the prices of three of the most important elements of the global economy: money, energy and food. All three have the worst impact on the global poor. Yet, the G20 documentation does not once mention the words “speculation” or “speculators.” Instead, the euphemism used is “price volatility”.

The G20 leaders say: “We reiterate that excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.” They add, “Our actions will help address the challenges created by developments in global liquidity and capital flows volatility, thus facilitating further progress on exchange rate reforms and reducing excessive accumulation of reserves.”

The G20 leaders “stress the importance of well-functioning and transparent physical and financial energy markets, reduced excessive price volatility, improved energy efficiency and better access to clean technologies, to achieve strong growth that is both sustainable and inclusive.” They also “commit to mitigate the adverse effects of excessive price volatility for the most vulnerable through the development of appropriate risk-management instruments.” Finally, the leaders say, “We support the concrete initiatives mentioned in the Cannes Final Declaration, with a view to foster investments in agriculture and mitigate the impact of price volatility, in particular in low income countries and to the benefit of smallholders.”

Letting the financial terrorists off

But they say nothing about going after the financial terrorists who cause this “volatility”. The reason for that is obvious: To do so would expose the corruption, cronyism and nepotism among the “banksters” and their cohorts, the politicians, regulators and bureaucrats, as the Occupy Wall Street civil society movements are demanding. Many of these financial terrorists sit on the boards of travel & tourism corporations and speak at industry conferences, especially those focussing on investment promotion. Bringing them to book will be a tall order. A few of them may face arrest and conviction, but the vast majority will walk free.

The G20 does recognise the destabilising influence of the credit ratings agencies. The Final Declaration says, “We reaffirm our commitment to reduce authorities’ and financial institutions’ reliance on external credit ratings, and call on standard setters, market participants, supervisors and central banks to implement the agreed FSB principles and end practices that rely mechanistically on these ratings. We ask the FSB to report to our Finance Ministers and Central Bank Governors at their February meeting on progress made in this area by standard setters and jurisdictions against these principles.”

It had been expected that the G20, which includes representation by leaders of China, Brazil, Turkey, India, South Africa and Indonesia, would take a stronger stance. That does not appear to have been the case. Although some progress has been made on issues such as global governance and better representation for developing countries on institutions such as the IMF and World Bank, there is little else to show. Reforming the International System as a whole is seen as “long-term endeavour”

In the short-term however, all signs are that this decade may be even worse than the past decade. The world order is undergoing a dramatic shift (which includes developments like the rise of Asia, the BRIC countries and now, the Arab world). These rising countries are showing increased assertiveness in global forums such as the United Nations, the IMF, World Bank, etc. There are demands for reform, increased say and increased influence. The world’s population is growing, the industrialised countries are aging and the emerging countries are where the markets, manpower and brainpower will lie.

As there is no longer a border-line between economics, finance and geopolitics in a globalised, interconnected world, this power shift could become a significant threat to the industrialised countries and the multinational corporations, most of which are based in the industrialised countries but derive most of their profits from the massive consumer markets of the emerging economies. Through international forums and institutions such as the development banks, the OECD, APEC and others where they call the shots, governments of the industrialised countries are working to ensure that their interests remain paramount. They are doing the same through the G20 caucus.

The root cause

The present-day economic and financial problems are entirely the responsibility of developed countries but the G20 summit outcome documents make no mention of that. On the other hand, the G20 summit wants the developing countries to “play their part” in the solution. Each country has been given a list of policy-measures they need to enact but whether those measures will meet the test on the domestic political and economic front is not clear. They agree to resist trade protectionism in all forms and have gained Saudi Arabia’s commitment “to continue playing its systemic role in stabilizing the oil markets in support of the global economy.” They want to target the emerging economies for infrastructure investment.

The communiqué stresses the “pivotal role” of Official Development Assistance to help meet the Millennium Development Goals but says “aid commitments made by developed countries should be met,” a clever phrasing that avoids use of the “must.” Instead, emerging countries are asked to “extend their level of support to other developing countries”. Over time, the outcome documents say, innovative sources of funding need to be found to address development needs and climate change. And who has been asked to suggest such “innovative financing”? Why, a certain Bill Gates!

Perhaps the most concrete aspect of the Final Declaration is a commitment to halving the cost of remittances, which should be good news to the legions of global migrant workers. Says the G20’s Final Declaration: “Recognizing that economic shocks affect disproportionately the most vulnerable, we commit to ensure a more inclusive and resilient growth. We therefore decide to support the implementation and expansion of nationally-designed social protection floors in developing countries, especially low income countries. We will work to reduce the average cost of transferring remittances from 10% to 5% by 2014, contributing to release an additional 15 billion USD per year for recipient families.”

Official Failure

The G20 summit in Cannes marks the official failure of unbridled, uncontrolled and unregulated globalisation, especially the claim that free movement of capital, products, people and services is a panacea for social and economic ills. The G20 governments, international finance institutions, consultancies and the MNCs suffered systemic policy failure, and today lack the courage to admit it. Trying to push too much change too quickly down the throats of too many countries that were clearly unprepared for it has backfired big-time.

Now, the G20 countries are trying to shove their fingers in the dykes. They have pledged a complete reform of their fiscal, financial, structural, and monetary and exchange rate, trade and development policies over a specific time-line. Just the agenda for financial sector reform includes: More intensive supervisory effort; clearing and trading obligations for OTC derivatives; standards and principles for sounder compensation practices, achieving a single set of high quality global accounting standards; a comprehensive framework to address the risks posed by systemically-important financial institutions; and, strengthened regulation and oversight of shadow banking.

Too Little Too Late

That may be a case of too little too late. The G20 financial and fiscal regulators are under too much pressure to implement too many fixes for too many problems across too many countries in too little time. Worse, they are up against the formidable financial terrorists who have no desire to be held accountable, but wish to continue profiting from the opportunities created by global crises. The G20 governments say they will hold themselves accountable, but do not seem to want to hold the financial terrorists accountable.

The carbon tax, about which there will be much hand-wringing at the WTM, is only one consequence of the malaise. Governments are short of money and see such taxes as being one form of “innovative financing” to meet their insatiable demand for revenue, along with other taxes on tobacco and alcohol.

For this, the travel & tourism industry has only itself to blame. Its constant boasting about its size and resilience makes it an easy target for the taxman. At the same time, travel & tourism industry leaders are seldom heard taking a more principled stance, such as questioning the huge costs of military adventures and the so-called “war on terror.” Living in denial and refusing to make such issues part of the public discourse only makes matters worse. Unless that mindset changes, travel & tourism leaders would be better off learning how to grin and bear it. Before promoting the industry as a part of the solution, they may have to first find ways to save it from becoming a repeated victim of the ceaseless cycle of problems.

Further reading:

Development agenda and excluded voices

“High and volatile commodity prices in recent years, in particular in fuel and food markets, have driven inflation up and threatened the food security of millions of poor people in the region. Increasing commodity prices over the past decade have been driven by fundamental supply and demand factors, while increasing financialisation of commodity markets has amplified the magnitude and speed of price movements.”

By Noeleen Heyzer, Under-Secretary-General of the United Nations and Executive Secretary of Escap, and Nagesh Kuma,  Chief Economist of Escap and head of its sub-regional office for South and Southwest Asia, in New Delhi.

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Blaming China won’t solve crisis

As China implements a more proactive strategy to open up its economy, its imports will exceed $1.7 trillion this year, and amount to roughly $10 trillion over the next five years, Chen said.

“We hope that other countries can adopt a longer-term vision and a more open mind-set, engage more in cooperation and partnership and less in the blame game, and join together to sail in the same boat through the current difficulties,” he wrote.

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Indian PM Manmohan Singh’s statement at Cannes

The Summit also discussed issues arising from the Greek crisis and the need to take protective measures to avoid contagion, We had stated that management of the Eurozone crisis is primarily the responsibility of the Eurozone countries and this assessment was shared by many other delegations.