The G20 and the HIRCs


A group of seven highly indebted rich countries (HIRC) of the world have organized a meeting of twenty nations in London in order to discuss the future of the world’s finances.  They have invited some creditors among developing countries such as Brazil, Argentina, Mexico, some Arab countries, China, and India, leaving aside all the other surplus countries in the world, which are also creditors to the United States and Europe.

In fact, their accumulation of export surpluses over a period of twenty years is what has allowed deficit countries to over-borrow to the tune of 200% of the GDP on average, the figure growing fast.  Gordon Brown, feeling a little weak, invited two more European nations to the talks — just in case.

A few things come to mind.  First, “he who pays the piper calls the tune,” and now the piper is undoubtedly paid outside of Europe and the United States.  Second, the world order as we knew it since 1944 has come to an end, and the new world order will have to take the new G7 into account in order to make quick decisions.  This means that China, India, Brazil, and Russia are in, and some European countries are out.  Anyway, the discussions held by 20 countries+2 will be irrelevant, since this needs to be a global discussion, given who the new creditors and debtors are.  Third, the significant new role of Asia as a whole in both international trade and international finance calls for a revision of the IMF/WB boards reflecting this major change and diminishing the US and European role.  Fourth, this should lead to the elimination of US veto power established in 1944 and of the mechanism by which one of these institutions has a European director and the other an American one.  This is hardly relevant these days, aside from being undemocratic, opaque, and not reflecting the current economic and financial realities.

Finally, a system in which economic policy leads to massive surpluses that help finance massive deficits created by its model itself cannot work forever, as this crisis has begun to demonstrate.

The fact is that a group of leading nations are now principal global debtors.  These are highly indebted rich countries that have sustained trade and fiscal deficits for more than a decade and accumulated major debts, thereby draining credit from developing nations.  These are countries that have over-consumed systematically and in some cases done so with a very lax domestic credit policy.  The argument was that the consumer in the West was better off with cheaply manufactured goods from Asia, Central America, and Africa.  The fact that no nation can borrow indefinitely for consumption was not taken into account.

Initially, surplus countries bought US Treasury Bills and kept their reserves partly in those instruments.  Then the purchase was extended to British and European government bonds.  It was not clear that buying government bonds in large quantities would lead to over-borrowing on the other side.

The table below shows that the reserves held by the former G7 countries are roughly one third those held by the new leading emerging nations.  The former G7 countries minus Japan hold one sixth the reserves of the seven largest emerging nations, most of which are in Asia.  The ratio of external debt in other currencies to the GDP, counting both private and public debts, is very high for Great Britain, France, and Germany, in the range of 150-450% of the GDP, followed by the US which is in the range of 90-100% of the GDP.  Public debt in local currency is the highest in Japan, Italy, and the US.  The very high level of Japan’s public debt, in the range of 70-170% of the GDP, is a result of the banking crisis of the 1990s.  If added up, the sum is over 200% of the GDP.  The growth prospects of all those countries are negative.

HIRC comparative indexes
December 2008
  International Reserves Growth
GDP (PPP) Public Debt/GDP** External Debt/GDP***
Political G7 (Billions USD) (%) (trillions USD) % %***
USA 70.57 -1,6 14.58 74.09 93.42
Canada 41.08 -1,2 1.34 62.30 56.74
Great Britain* 57.30 -2,8 2.28 47.20 458.53
Germany 136.20 -2,5 2.86 62.60 156.79
France 115.70 -1,9 2.10 64.40 209.63
Italy 104.00 -2,1 1.80 103.70 58.86
Japan 954.10 -2,6 4.49 170.40 33.25
G-7 1478.95      
G7 of Reserves        
China 2033.00 6.70 7.80 15.70 5.38
Brazil 197.40 1.80 2.03 40.70 11.63
Russia 435.40 -0.70 2.23 6.80 23.69
India 274.20 5.10 3.32 59.00 4.91
Taiwan 280.90 0.89 0.76 28.20 13.08
South Korea 231.20 0.70 1.31 27.20 19.05
Singapore 170.10 -2.50 0.24 92.60 10.25
Fuente: IMF, ( Jan 2009 report), CIA, Central Banks, US Treasury
* Great Britain’s external debt is estimated for December 2007.
** Public debt is measured in domestic currency
*** External debt includes private and public debt in foreign exchange

Table prepared by Leonel Carranco Guerra, Observatorio Económico de América Latina, at IIEC UNAM.1

Is it reasonable for lenders to continue lending to contracting economies?  What happens to debt payments when the economies that have over-borrowed stop growing?  Will they enter a recessionary cycle because they have to adjust consumption downward in order to live within their means?  Is it reasonable or fair for developing nations to finance rich nations openly?

The role of the IMF was to be a watchdog and whistleblower for all countries.  It was designed for this end, but it lost its track and ended up concentrating on emerging nations instead of looking at its entire constituency.  The Financial Stability Reports illustrate what they fail to monitor.  The crisis began to unfold in October 2007 in the United States, but the FSR looked the other way.  The Federal Reserve and European Central Bank’s first support programs began in late 2007, and the IMF kept completely silent.  It did not blow the whistle and hence did not prevent the crisis from spreading.  True, it no longer has the capacity to do so, as the sum of derivatives has reached twelve times the global GDP.  No one can prevent a major crisis unless we all agree to new rules that ban some financial instruments and that recapitalize the banks, throwing out hedge funds.

In this context, then, with Asia’s important role of leadership in the new international financial architecture and a new major role for Latin America and the Middle East, as well as Russia and its neighbors, in world financial and economic affairs, it seems odd that Mr. Brown hopes to lead the discussions on changes.  Debtors are in no position to set the rules of the game, as debtor nations learned in the 1980s.

It may well be that we need to bury the model of export-led growth and switch to a new one, at the same time putting an end to floating exchange rates.  We went through this same problem in the 1930s and agreed then to have fixed exchange rates and industrialization policies together with welfare policies.  That was the context in which the Bretton Woods system was created.  It had both a fiscal and an external aspect, supervised by the then newly created IMF.  It seems that these days the IMF doesn’t look into the HIRCs’ accounts, or doesn’t care about them, or the HIRCs don’t care much about the IMF opinion.  All of this must come to an end and be addressed by all UN member countries, since no country should be outside the scope of international supervision and no new lending should go to shrinking over-borrowed economies, however developed they may be, unless they reorganize their economies and bring financial order to their nations.  At the World Social Forum in Belem do Pará this January, we agreed that this means much more than changing IMF governance.  A new world order is possible.

1  See Leonel Carranco Guerra, Observatorio Económico de América Latina, “El G-7 ya no es el mundo. ¿Hacia la década pérdida?” Agencia Latinoamericana de Información, 22 March 2009.

Oscar Ugarteche, a Peruvian national, is a Senior Research Fellow at the Instituto de Investigaciones Económicas, UNAM, Mexico, member of the Mexican Research System, and member of Latindadd, as well as the president of the Agencia Latinoamericana de Información (ALAI).  The original article was published by the Asia Times under the title of “An Imbalanced Summit” on 25 March 2009.  The Spanish version “El G20 y los PRAE” was published by ALAI on 25 March 2009.   It is edited and republished here for educational purposes.