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Rt. Hon. Lord Mandelson, Secretary of State for Business, Enterprise & Regulatory Reform
FAAP (Private University) Event on the Global Economy, Sao Paulo, Brazil, 26 March 2009
I’ve been thinking quite a lot lately about Cancun. Not because I’ve been hankering after sunny beaches in a cold British winter – tempting as these are. Rather, I’ve been thinking about what happened there in 2003. I think that we will look back on the Cancun WTO Ministerial as a marker in a very important shift in the politics of the global economy. A marker of the political emergence of what we often call the emerging economies, led of course by Brazil.
For four years I saw that debate, that shifting of the tectonic plates, first hand around the WTO negotiating table. In the forceful leadership of Brazil and India, and in the growing engagement of China and the commitment of the other South East Asian emerging economies. In some ways the WTO has been a test bed for a new politics that is only now imposing itself on the wider politics of the global economy.
Cancun was about the balance of economic weight in the global economy, and the agenda of the institutions that make the rules for the global economy. And frankly it was about our attitudes, in Europe and the US, to the end of the unquestioned prerogatives of the North Atlantic world, and how they needed to change. It has taken a crisis to make the new realities of the global economy impossible to ignore.
Those realities fall into two categories: power and the rights and responsibilities that come with it; and interdependence. We don’t talk about decoupling anymore. Because we are all coupled to the same global demand engine, and the stalling of that engine is being felt everywhere. It is true that the only reason that global growth is the right side of zero in 2009 will be because of the engines of the emerging economies. But the failure of demand elsewhere is having a damaging effect here. Whether it is in the supply of credit, the slump in demand for exports or foreign direct investment or the fall in global commodity prices. No one is insulated from the effects of this downturn, and we are all part of what must be done to end it.
So I see a direct political line between what started in Cancun and what will happen next week in London. However long it might persist as a grouping, as a steering committee for the global economy the era of the G8 is over. The London Summit carries the burden of huge expectation but its work is genuinely vital, and it genuinely marks the start of a new way of doing things.
I think you can define the three core challenges facing the G20 in London as confidence, confidence and confidence.
Confidence through changes that will help ensure that the events of 2007 and 2008 cannot happen again. That means starting work on the necessary regulatory changes that reduce systemic risk in global finance, through changes to oversight, rules on remuneration and liquidity requirements. Getting that done means changing the balance of voice and influence in the institutions that will do it. That means bringing forward the necessary reform of the IMF and the World Bank, enhancing their roles where necessary. The G20 has already made the decision to expand the Financial Stability Forum (FSF) to include Brazil and other emerging economies. Which is badly overdue.
Secondly, confidence through a restoration of the basic mechanism of credit in the global economy. That means coordinated action to stabilise banks and restore the flow of credit. This is critically important in the area of trade credit finance, which still underwrites more than 90% of international trade and which has dried up dramatically in the last year. The trade finance gap has been estimated at least $200billion and the London Summit needs to consider the means to close it, including through new resources for the International Finance Corporation’s liquidity program.
Finally, confidence through a willingness to take whatever action is necessary until growth is restored, consistent with long term sustainability. That means coordinating national monetary moves and stimulus packages so that they reinforce each other. It also means strengthening the capacity of the IMF to provide stimulus support for economies less capable of boosting demand from their own fiscal resources.
It also means keeping the global trading system open, resisting protectionism through an explicit standstill in the creation of any barriers to trade or investment. It also means a commitment by leaders to complete the Doha WTO world trade deal as a matter of urgency, because a trade deal is in effect a stimulus package. When he speaks this afternoon, the British Prime Minister Gordon Brown will set out in greater detail the scope of what Britain believes we need to achieve.
So confidence, confidence, confidence. Confidence that we understand the root of the problem for business, which is credit and demand. Confidence that we understand what went wrong in financial markets and have a clear strategy for putting it right. Confidence in the future.
Confidence also means recognising our strengths as well as our vulnerabilities, both in Brazil and Britain.
I don’t want to downplay how tough the next year or two is going to be. But fifteen years ago a global financial downturn on this scale would have left Brazil with a currency crisis, inflation and a collapsing economy.
Britain is also fundamentally strong, not least because of a decade of reform that has given the UK the most open and flexible product and labour markets in the world. And a commitment to free trade and open investment that has made it one of the most dynamic economies in the world.
It is true, of course, that our large financial services sector was particularly exposed to a global crisis that began with a serious failure in global credit markets. As a major global exporter we are also feeling the sharp contraction in global demand, especially for big ticket consumer goods like cars. But other big globalised exporters like Japan, Germany and Brazil are feeling the same impact.
The point is that as global growth and demand picks up again, our openness and flexibility will be key assets, as will our global trading networks and a competitive pound. The City of London will remain a global hub for financial services, even if it is not fashionable in British politics to say so right now.
For all the talk of the credit crisis revealing the weaknesses of ‘Anglo-Saxon’ capitalism, the credit crunch has not put in question the basic value of flexible and competitive markets as the foundation of growth or openness to trade and investment. Britain’s economy is built on those things. Anglo-Saxon or otherwise, they will see us through.
And it is worth spending a moment to reinforce that point. Nobody would deny that the credit crunch has forced us to assess some of our basic assumptions about financial markets and their capacity for self regulation. As the British Prime Minister said in Washington two weeks ago, this is the time to question orthodoxies, to understand what went wrong.
But in the rush to declare the birth of a ‘new capitalism’ - and don’t misunderstand me, I believe that some business and regulatory models on Wall St and in the City have proven fatally flawed – we still need to defend the parts of the old capitalism that have underwritten three decades of transformation for people and societies around the world.
Trade was central to the pre-crunch global economy, and was indirectly implicated in some of its weaknesses. Above all, the imbalances that built up through the persistent trade surpluses and deficits of some of the world’s largest economies worked against the stability of the system as a whole. But the principle of free trade itself was not the problem, and it is a necessary part of the solution. Rebuilding demand, and transmitting that demand throughout the global economy, will continue to require an open trading system.
It is the importance of trade in driving recovery that is the lesson of the 1930s. By creating a tit-for-tat spiral of closing markets, the retreat into protectionism in the decade after the crash of 1929 put a structural check on economies trying to return to growth. It dismantled the engine, notionally in the attempt to fix it.
Free trade has always had its critics, and they have often had an important case. Intelligent criticism over the last half century has pushed the defenders of free trade to acknowledge that it is not a development panacea. While it produces huge benefits for consumers and wider economies, it does not come without costs for industries exposed to greater competition. Open trade must be flanked by policies that help workers adapt to change and that enable the poorest countries to compete fairly with their more advanced trading partners. The growth that comes with rising trade, especially in the developing world, has to be sustainable and properly managed.
These arguments qualify the case for free trade; they do not trump it. The basic value of open trade and the basic case against protectionism has not been damaged by the credit crunch, and it remains central to any chance of a sustained global recovery. The evidence is sitting around the G20 table. There is no G20 country that has not benefited from the expansion of trade and the creation of a global economy in the twentieth century. Brazil embodies that experience.
Last week in London we hosted a group of business leaders from every one of the G20 countries, in preparation for the London Summit next week. They included Carlos Bittencourt from the CNI, who spoke very strongly for Brazil’s commitment to openness and against protectionism. These men and women represented literally millions of businesses, representing more than 90% of global trade. Their message was strikingly unified and clear: don’t make the mistake of the 1930s. Keep markets open. Don’t fall into the traps of protectionism or economic nationalism. And they were frank enough to recognise that this is a challenge for business as much as government.
One Summit will not transform the global economy overnight, and we shouldn’t expect it to. But I believe that leaders in London next week can and will take some decisive steps forward across a range of fronts. After London will come the challenge of follow-up. And quickly after that the Copenhagen Summit on climate change, which will confront the same group of nations with a challenge that is, if anything, equally pressing, and even more demanding of compromise.
I started by saying that at least in terms of the governance of the global economy, the era of the G8 is over. Whatever ultimately replaces it, it will confront us both in the North and the South, in Brazil and Britain, in Mercosur and the European Union, with a political challenge of the first order. Brazil and the other emerging economies are now being looked to for leadership, from both the developed world and those much further down the development ladder.
As I said, it took a global economic crisis to force the issue that first presented itself at Cancun in 2003. Now that we finally have a potential steering committee for the global economy that actually looks like the global economy, the challenge for all of us is to make it work. And to make it work quickly enough to end this downturn and to ensure that the upturn brings a stable, shared and prosperous future for us all.
