THE WORLD ECONOMY AFTER THE G-20 MEETING

Conference Call with Martin Wolf, Associate Editor and Chief Economics Commentator, Financial Times, London
April 15, 2009

NORBERT JOREK: Martin, prior to the meeting in London the other week, you predicted the G-20 leaders would fail to deal with the big challenges. When you look at that Global Plan for Recovery and Reform the leaders committed themselves to, is that a step in the right direction, perhaps an acceptable outcome for a group as diverse as the G-20?

MARTIN WOLF: I think that in trying to assess whether a meeting is successful, one always has to start with some relevant benchmark. So if one were to judge it by one benchmark, which is how typical it is to get 20—actually more than 20—countries, which are very diverse with very different interests and are in very different positions, to agree on anything that looks even halfway relevant, then I think I would regard the G-20 meeting as quite successful. The communiqué is substantive. It has very substantial elements in it. There was significant agreement, I think at least on the intentions on increasing the resources of the IMF and the multilateral development institutions, very substantial text on regulation, on protection and the continued commitment to action to sustain reasonably dynamic demand going forward. So it clearly could have been much worse, and I don’t want to wish to suggest for a moment that it would have been better for the world if there had been no G-20 meeting, or that it would have made no difference if there had been a G-20 meeting and they hadn’t agreed on anything. At one point there were leaders like Monsieur Sarkozy who threatened to walk out if he didn’t get what he wanted. I never thought it was a very plausible threat—it was a fairly typical French negotiating tactic—but in fact it was clearly much better than nothing, and, even more, than a failure.

When I wrote that it was going to fail, I was doing this, of course, partly for effect, in the sense that as an outside commentator I believe it is my job to encourage policymakers and leaders always to aspire higher and not to let the acceptance of mediocrity get in the way of necessary achievement. But even more, because I am concerned that in at least one fundamental respect, which I wrote about in the column you referred to, we are not achieving what is necessary. As at least some of the participants in this call probably know, I have been arguing for many, many years that we have had a fundamentally unbalanced world economy in terms of excess capacity in some countries, and excess demand in other countries. Obviously by definition they have to match, and the relationships were structurally unsustainable. And one consequence of these imbalances at the external level was very significant internal imbalances, particularly in the high-spending countries—the United States is the most important, but also the United Kingdom, Spain, a few other places, Central and Eastern Europe. What was happening in these countries is they were accumulating domestic debt and external debt at an extremely rapid rate, and this was an unsustainable path. I have to admit that the breakdown that has happened is considerably worse than I had earlier feared, but this underlying problem was in my view a significant part of the root of this terrible crisis.

Now, therefore, I was arguing in the column that it is an important indication of whether this coordination process, the G-20 process, is actually a coordination process. Whether that is successful, as we come through this crisis, is if these fundamental imbalances are, at the structural level—that is when we’re back at full employment, back at vigorous growth in the world economy—that these imbalances have been rectified. But my own very strong view, and it’s pretty clear from the evidence, is that if anything, they’re likely to be exacerbated, because so much of the demand stimulus in the world, both monetary and fiscal policy—absolutely necessary demand stimulus, given the collapse in private demand—is coming from the country which had of course the biggest financial crisis, the biggest spending excesses and the biggest debt accumulation. But now it is the government and the central bank that is driving this spending, rather than the private sector’s credit bubble and associated housing and other asset bubbles that we saw before.

Now, in my view, the result is going to be an unsustainable recovery. That is to say we may if we’re lucky, and it looks increasingly likely, stop the collapse, the sort of crisis situation in which we’ve been for the last few months. When people talk about the green shoots, that is really what they mean. We may get some genuine recovery in final demand, a lot of government-driven demand, around the world, in the United States and in China with its big investment boom. That will lead us to some sort of recovery in the world’s economy, certainly stabilization or recovery next year. But I’m very concerned that these underlying deep imbalances, far from being rectified, are going to be exacerbated. And if so, this recovery will not prove to be a proper, full, sustainable recovery. I was concerned that these would not, therefore, be successful discussions at the G-20 meeting given this issue, against this challenge, and I’m afraid that turned out to be correct.

NORBERT JOREK: Martin, if you look at all those measures, and you say that they basically will not help us to stimulate the economy successfully to get us on a path of a sustainable recovery, as you call it, what else should the leaders do going forward, maybe another G-20 meeting in six months from now, to get us to that sustainable recovery?

MARTIN WOLF: First of all we must understand that the reason we generated these huge imbalances was very deep in the world economy, and solving it is going to be very, very hard. The sort of standard argument from people who have this point of view is to say that the right way is for countries which have very, very large trade and current-account surpluses to expand domestic demand more, therefore allowing those countries with large deficits to improve their net export position or reduce their net income position, and therefore generate the sort of demand which doesn’t depend on domestic, debt-fueled spending, and if we don’t get that sort of adjustment, then we are going to simply continue with the imbalances for the reasons I’ve already discussed.

Now, if you then think about the countries of the world, who might be able to do this and how, you’ll realize of course that they have very big structural problems of their own that get in the way of doing this. In the case of China it’s easy to expand investment but the investment actually is likely—and it’s what they’re doing now—to exacerbate the problem of excess capacity when the investment all comes on stream. So, they’re courting a sort of “sorcerer’s apprentice” track. Consumption is only about 40 percent of GDP. It’s very difficult to expand it dramatically. In Japan and Germany, two other very important structural surplus countries—though temporarily Japan’s surplus has disappeared—the problem is that the household and private sector really doesn’t want to spend its savings, and government debt and deficits are already very large. So it’s very difficult to form a structural policy to raise spending in these countries. They tend to be structurally excess-supply countries.

Now, I’ve tended to suggest that a large part of the answer is to transform the IMF, in particular to support more spending by emerging countries, which will allow more of them to run deficits, which in fact seems to me to be the direction we all should be going in the medium to long run. In this context, something quite important happened in that the resources of the IMF that are supposed to be raised to $750 billion or so, that’s a tripling. And there is an agreement to give $250 billion or so of SDR, special drawing rights. If that were used in the future as a way of increasing reserves and a substantial part of this is allocated to emerging countries, that might also support spending.

The basic conclusion I am making is, I think there are things that could be done. I think the surplus countries have to look at this very carefully, because again, I think they’re going to find it’s very difficult to sustain these surpluses. That’s why they’ve been so badly hit by this recession. But I have to accept that this is a long-term structural shift, because the problem underlining this crisis was a long-term structural problem.

NORBERT JOREK: The structural problem, I think, is also something that the leaders alluded to when they wrote in their communiqué that this is a global crisis requiring a global solution. As we go forward, how will that global solution shape up? What will be the right structure to develop that global solution? Will the G-20 replace the G-8? Will multinational institutions like the IMF gain more importance, but at the same time, require new governing models? How do you see that process unfolding?

MARTIN WOLF: I have two points to make on this. The first is, whatever we do at the global level, and this crisis has very much emphasized this point, the fundamental policy levers remain with national government, particularly fiscal and monetary policies, also in fact, of course, trade policies and policies that support financial institutions. Ultimately, these rest at least largely with national government. So nothing that we do at the global level can do more than coordinate actions by national governments, or to some extent supervise and monitor actions by national governments. But in the last resort, the authority and responsibility does continue to rest in national government. So let’s not overdo our reliance on instruments of global governance. Nonetheless, coordination is important, cooperation is important in certain fields, and of course, it is very, very important that there be assistance for emerging economies in poor, developing countries which are very badly hit by this. And in all of these ways, international organizations can play a role.

I think it’s very important that we then think about these international organizations, to divide these into two categories. The first category is what I call institutions of informal intergovernmental cooperation, like the G-7, G-8, G-20 and so forth. And the other is formal international institutions, universal in scope with very precise mandates and secretariat, and an institutional framework, like the International Monetary Fund, the World Bank, the World Trade Organization.

As far as the former of these is concerned, it seems to me pretty clear that at the global level, the G-20 is probably too large, that is to say it contains a number of countries that are clearly not systemically important and are, potentially, there for international political reasons rather than because they are important economically. But the G-20 does include all the substantially important countries. The countries in the G-20 account for about 85 percent of world GDP and most of world trade, and in this respect they are much more representative than the G-7 or G-8. And, for that reason, if we’re going to discuss global coordination in any way, and global cooperation, we have to do it now in the G-20 framework and I assume that the G-20 meeting at heads of government level will continue in the indefinite future. This may not replace the G-8, partly because international institutions of this kind never die, but it should certainly be more significant than the G-8.

I think the G-20 is going to be very difficult to manage. It’s a large group, it’s a very heterogeneous group, unlike the G-7, which just contains Western developed countries and Japan, but it is the one we’re going to have to deal with, and we can’t imagine that we can continue to hold meetings of the G-8, and then invite the Chinese, the Indians, the Brazilians, as it were just for tea or coffee. It’s just too insulting, and they won’t cooperate. And in this case, it’s clear that the major emerging countries did contribute substantially. So it seems clear to me that the G-20’s development into a heads of government coordination body is a permanent change in the global environment and a highly desirable one, however difficult, and there will be another summit for sure, and I expect this will become a regular event.

The second question is international institutions with a formal mandate, secretariat, which can actually do the research, monitoring, surveyance, lending and all the other things. The core institution here in the context of a crisis like this is of course the International Monetary Fund. This is what it was created to do, to deal with these sorts of problems. I think there are a few pretty obvious questions about the future of the IMF, some of which the G-20 meeting dealt with. First, it needs more resources. Its loanable resources were down to $250 billion. You should compare this with the total stock of world foreign currency reserves, for which these IMF resources were a substitute, and this total stock of world foreign currency reserves peaked at $7 trillion last year. So $250 billion made the IMF virtually irrelevant, and this was very costly, accumulating these $7 trillion in reserves, mostly by emerging economies. The decision to increase the resources by $750 billion, largely by borrowing and the so-called new arrangements to borrow, rather than through regular subscriptions, is very significant. The same is true, as I said already, for the allocation of special drawing rights, which are reserve assets to be used by members of the IMF.

The first thing is to increase the IMF resources. The second thing is to make it legitimate as an institution dealing with emerging countries. The IMF has to be more representative of the membership as a whole and particularly of emerging countries. At the moment, the over-represented region without a doubt is Europe, which has about a third of the vote. I’m talking here really about Western Europe. This is almost double what the United States has. And in addition the Europeans have, up to now, always appointed the managing director of the IMF. Both of these positions are anomalous and unacceptable. They cannot be sustained if this institution is to be a legitimate institution in the world. My own view is that the collective Western European representation probably needs to be cut back to about the same level as the United States, perhaps a little bit more, because there’s somewhat more people. All this has to be, then, transferred to emerging countries, particularly in Asia. If that were done, then they would have a much more substantial weight. An obvious way of doing this would be to consolidate the Eurozone members’ votes into one, and have one representative of the Eurozone who would then have a vote at a weight roughly comparable to the United States. That is simply the most obvious thing to do. We have to deal with this over-representation problem and the voting weights, if it’s to be legitimate.

The final thing that is, I think, a very important question, is separating out the lending functions of the IMF from the surveyance functions of the IMF, and particularly the global monitoring function. I think it’s going to be very, very important to create more independent surveyance and monitoring of the world economy. I think it’s one of the big conclusions from this crisis, that people weren’t listening to the Fund’s analyses because they basically could be doctored too easily. One of the things that people have been talking about and ideas have been put forward is to set up a separately funded surveyance function which would be fully independent. Things like the World Economic Outlook and similar financial stability reports would be transferred to this, as well as much of the monitoring, though this is less obvious, of national programs.

But in any case, I think the operating functions of the IMF have to be looked at. There are very, very important changes in global governance that are needed. I haven’t even talked about the much bigger questions of global financial regulation and how on earth we coordinate what will inevitably continue to be predominantly national regulation of globally operating institutions. One of the most striking features of this crisis is that we have no solution to how we regulate and govern financial institutions that operate globally when regulation is, and continues to be, national. And above all it will continue to be national, because as we’ve seen ultimately, it’s national taxpayers that stand behind financial institutions, so nations simply cannot give up this right to regulate. The question of how we relate global governance in the financial system to the role of nations is not solved at all. That’s just one of the huge challenges that this crisis has made obvious.

NORBERT JOREK: At the summit, the leaders also committed themselves to fight protectionism. That obviously is a very noble statement. However, with some countries facing unemployment of up to 10 percent or more perhaps later this year, how strong a push for protection will there be from local constituencies? Will politicians be able to withstand the pressure and keep trade open, and make sure that world trade doesn’t collapse even further than what the World Trade Organization already forecasts, being 9 to 10 percent less than last year? What’s your view on this?

MARTIN WOLF: This is certainly one of the really huge threats. I’m massively concerned about the possibility of serious protection. I think it’s very important to distinguish what I referred to as microeconomic protection from macroeconomic protection. By microeconomic protection, we’ve seen lots of it already. I mean that as a result of the terrible crisis, specific industries get into terrible trouble. The car production is the most obvious one in the world. It’s the most significant one at the moment outside finance. And individual countries feel obliged to provide support in subsidies of various kinds, and perhaps a bit of border protection, although it’s actually mostly been subsidies, to their domestic producers, which are so terribly hard hit. And there will be lots of these individual industry cases. That always happens in recessions. It happened very much in the early ‘80s, for example. I actually think that we’re going to have this, despite the World Trade Organization agreements and the awareness of the potential costs of this sort of intervention—it will go on, it will probably get worse, but it’s probably going to prove manageable.

The one exception to that, which is, I think, a very big issue, is protection within the financial system itself, in particular in countries where governments have provided vast quantities of money to their banks. They’re of course looking for credit growth within those countries, and that is tending to starve countries that were dependent on finance from foreign banks or from domestic banks that are foreign-owned—a big issue in Central and Eastern Europe. They’re a bit concerned that this is going to lead to a pulling back of finance away from these countries, and indeed it’s happening, and that’s even more obvious as a result of all the guarantees to lending to banks, to bank deposits that have been provided, which again pulls money away from the rich core countries. So nationalism in the financial sector is a very big challenge, and that sort of protection is not covered by the WTO, and it’s a very big worry.

But, as I said, the big issue is what I call macroeconomic protection. What do I mean by that? Well, what I mean potentially is that let us suppose two, three years from now, something like that, the recovery has been weak, demand is not very robust anywhere. Unemployment remains extremely high across the world. Structural current account imbalances continue to exist, more or less as I am concerned about. And the countries which have historically over-borrowed and have large debt and need a surge in net exports are unable to expand them because demand is not expanding sufficiently in the rest of the world, and exchange-rate movements are blocked for various reasons, perhaps most obviously because of the exchange-rate policies of some of the exporting nations, particularly in East Asia.

In that situation I think there will be a very strong temptation for the countries which have very large net imports, and very large current account deficits, to argue that these are a drain on domestic demand, that they are pursuing stimulus policies, much of the benefits of which are going to countries elsewhere—as it were, they’re spending their own governments into bankruptcy to sustain jobs in exporting nations. This is not sustainable. They want to re-import their demand. And this is a real ‘30s-type situation. And of course while we have a general view that trade wars fail, it is important to remember that if there are wars over demand, the countries with vast net imports are in a better position to sustain demand by cutting off imports than countries with vast net exports. So the imbalances problem, in my view, is potentially linked to a significant surge in what I call macro-protectionism, sometime in the next two years if we don’t get sustainable rebalance or recovery in the world economy—and I’m very concerned we’re not going to get that.

So in the short run I believe protectionism is manageable, but in the long run we may see quite a new form of protectionism. Genuine attempts to use protection as a form of demand management policy are possible. In particular, if countries are beginning to feel they’ve run out of fiscal room, they just can’t sustain the huge deficits they’ve been running. And I can easily imagine that happening in the United States or the United Kingdom in the next three or four years. The present level of fiscal deficit is unsustainable. If they start to cut those fiscal deficits and demand starts collapsing domestically, which is possible, then actually trade or exchange-rate policy is pretty well all they’re left with, unless they’re just going to be prepared to accept a very, very deep and prolonged recession, and I don’t think they will be. This is potentially a very, very serious threat and it is why, in my view, this rebalancing agenda remains at the center of what we’ve got to do, however hard it is.

NORBERT JOREK: Certainly the rest of the year will be a tough year, and probably 2010 as well. What are the kind of leading indicators business leaders should look at to monitor the situation and give them some level of comfort and confidence that we may have reached the bottom and that it’s starting to level off again?

MARTIN WOLF: Perhaps we should break it out to three things. First, has the financial system stabilized? Second, is there a recovery in demand generated by the current sets of policies, typically fiscal and monetary policies? And finally, are we getting sustainable improvements in final demand around the world? Because that’s really the crucial thing.

Now, the first thing is the return to some sort of stability in the financial system. There are quite a number of relevant indicators, all of which are beginning to look quite positive. Interbank lending spreads, obviously stock market prices, spreads for risky bonds over safer ones, credit default swaps on relevant classes of assets. Now the picture I see is rather mixed, but the general sign is that we have moved away from the extreme panic phase of the financial crisis, that the immense range of measures taken by government has been successful. But obviously we have to monitor very carefully what happens to financial systems. This story isn’t over because in my view, a lot more losses are still to be reported and allowed for in the accounts of major financial institutions. I believe that whatever government concludes now, there will have to be more recapitalization of the banking system. But clearly the first thing to worry about is the health of the financial system, both in markets and the banks.

The second question obviously is, are we beginning to see recovery in final demand? In the present situation the principal force of final demand is going to be, as always, consumption—household consumption. It is the most important source of demand. So you need to look very carefully at things like retail sales around the world. The story continues to be a bit disappointing if you look at what figures just came out in the United States, but the rate of decline is slow. It’s very important to remember that unemployment is a lagging indicator. Final demand is what we should be looking at. At some point this year, there is going to be, in this context, a very significant inventory cycle which is going to pull manufacturing out of its decline, because demand for manufacturers fell so much, but production didn’t fall as much initially. Then it collapsed, and inventories will be running down, so there will be a pickup in manufacturing. That will be slightly illusory. That will be quite encouraging in the short run, but the thing to focus on is final demand, and particularly the composition of final demand—is there, in particular, a willingness by households to go out and start buying durables again? That’s what really disappeared and that’s an indication of improved confidence. The other sort of final demand that is going to be very important in the next year or two is of course government spending, government consumption. That will be again, or should be, very, very significant.

The third thing, as I’ve said repeatedly, is the long-run future of global final demand and where it’s coming from, and its growth. We have to emphasize, investment is justified by the need to meet final demand, so the crucial thing to observe is the growth in final demand consumption around the whole world, and particularly in countries that have historically been high-savings countries. If we don’t get really strong growth in final demand, which is predominantly consumption in these countries, then this won’t be a sustainable recovery. Those are, I think, the three stages of things we have to focus on, and as I said, I personally think the issue in this recession is looking carefully at the source and balance of the final demand, above all consumption, and its vigor. I expect that if there continues to be rising savings rates in many of the highly indebted countries, this has to be offset somewhere else and we have to look very carefully at what’s happening elsewhere.

PARTICIPANT QUESTION: Some of our biggest financial services companies have been somewhat insulated from this global meltdown—bigger banks such as HSBC, which have extensive footprints in developing economies. What is the world prognosis for how long these will remain somewhat insulated and what might corporations of this nature do to remain somewhat insulated and to help stimulate the global recovery?

MARTIN WOLF: Thank you very much indeed for the question. I think the broad question here—the underlying question for any bank—is, what is going to happen to the quality of the assets that that particular bank holds? In general, of course, if the bank didn’t invest heavily in assets which relate to, for example, U.S. or British housing, or other collapsed asset classes, then the institution concerned is obviously relatively solid now. And again, if a bank has been very, very broadly diversified across the world, in terms of its assets—HSBC seems to be a case—it seems to have been relatively solid. The big question therefore is whether, or more precisely how, the crisis as it has now transmuted into a global financial crisis and a global economic crisis—which is not what it was eight months ago—how is this crisis is going to affect the quality of the particular assets that the particular financial institutions own?

It seems clear to me, however, that simply because we are now in a global recession this will almost certainly be a year in which the global economy contracts, which is the first time since the 1930s. With some economies, particularly highly indebted economies in the emerging world—Central and Eastern Europe are particularly hard hit—there are going to be important classes of emerging-country assets for the financial systems that will deteriorate in quality. Corporations which are heavily dependent on the Western world for demand and have borrowed a great deal will obviously be adversely affected. We’ve seen that happening in Latin America, some important cases, particularly countries where companies have borrowed in foreign currencies and those currencies have gone down. For instance, if you borrowed in dollars, the dollar’s been very strong. Again, that’s the sort of weakness that for the borrowers can affect the people who have lent to them. Again, companies that are very dependent on commodity production and exports have all been affected, and again this is a class of assets that can deteriorate in quality.

So the big problem I feel now is that because this has become a global crisis affecting the real economy in a very, very big way, there aren’t going to be many asset classes at all which aren’t going to deteriorate in quality and that any bank or financial institution that is exposed to any of these is vulnerable. So, I wouldn’t be prepared to say that there is any particular institution or class of institutions that can be completely confident of escaping the effects of what has now become a genuinely global crisis. But obviously, the more vulnerable the specific assets of that institution are to the global economy, the more vulnerable that institution itself is going to be.

PARTICIPANT QUESTION: It seems that we came from decades of excess and imbalances. From a corporate point of view, do you believe that in the long run we will need to reset at a lower level in terms of global consumption and we’ll need to scale down, assuming that, at least for Western economies, we will on average all become less wealthy, or am I being too pessimistic?

MARTIN WOLF: It’s a very pessimistic view, because it means that in a world of clearly very considerable need and want still—I’m leaving aside here environmental constraints, global warming and all these issues—it’s clear when you look around the world, there is a great deal of need or want. So what we are saying is that we somehow can’t organize the spending side of the world to ensure that the available productive capacity of the world is actually used. Now, that’s a pretty depressing sort of situation to be in. One feels that one ought to be able to avoid that.

Now, of course, if you wrote down enough of the debt that has been accumulated by consumers in the West, either directly or through inflation, we could start again. But of course that means, corresponding to that, a great deal of the notional wealth of the people who own the claims against these consumers would also have to be written down, and that’s a very, very difficult process. At the moment, however, we do have the debt overhang; it’s very significant I think in a number of big economies. In the United States, roughly speaking, private-sector debt-to-GDP ratios have tripled in the last 25 years, and it’s not easy to see how that can continue, for another 25, or even another five or 10, without great difficulty.

The key thing then, it seems to me, is to—and this is the argument I’ve been making in a recent book and in columns—is to develop new sources of demand, which are potentially there but are not realized. And this is particularly in the emerging countries. Particularly in China, the savings rate is too high, household consumption above all is too low. It isn’t sensible for China to continue to spend less than GDP indefinitely. But I’m particularly thinking that by reigniting the IMF and allocating SDRs, we can actually generate more demand in developing countries. It’s natural to want to export capital to these countries anyway. It seems ridiculous that we should rely for the demand balance in the world on excess spending from Americans, with capital flowing to the Americans.

I think it would make sense, therefore, to consider being quite radical about using the IMF as a means of transferring purchasing power. Essentially, this is about transferring purchasing power to people who want to use it. I have no doubt that there are people who want to use it—there are billions of people in the world who are called desperately poor. So I consider this ultimately a huge organizational problem, not a problem where we’ve gotten to the point of saturation at the world level, we can’t find anything that anybody would actually want if we could provide it to them. But the demand breakdown problem that we have as a result of this debt-fueled, unbalanced growth has been very, very severe and it’s going to be a big technical and political problem to get there in the short run, and the short run might now be many years, several years. We are going to have to go through an adjustment where indeed demand will probably be deficient and we might have quite a lengthy period of sub-trend global economic growth. And that’s going to be a miserable experience, not something we’ve had for some time, but it may be something business should conclude as a possible scenario for some time. I’m not talking about a continued recession, or even more a depression, although these are possible outcomes. I just think that it is plausible that we will not organize ourselves to have sufficiently robust domestic final demand in the world economy in the next few years to absorb our growing potential output, which is continuing to grow. Potential output at the world level is probably continuing to grow at somewhere around 3 percent a year.

NORBERT JOREK: Just on the issue of emerging markets: You touched on the fact that the IMF has now been given more resources to help emerging countries that are struggling, like in Eastern Europe, but also countries in Africa or Latin America, which once depended on high commodity prices and have seen these plummeting and therefore their export revenue has dramatically plunged. You mentioned the issue about banks here in Britain that are being nationalized and not necessarily encouraged by the national treasury to lend money to foreign countries, in particular emerging countries. Is there a risk that we are choking off that potential new demand that will most likely be in the emerging markets, with most of the growth in the world’s population? Is there a risk that we choke off this potential growth driver and prolong the recession we’re in at the moment?

MARTIN WOLF: Yes, I think this is a very important point. One of the reasons why the recession suddenly has become so severe, in theory, at the global level is that after September 2008, with the shocks in the financial sector that followed, it suddenly changed from being a crisis that largely affected a limited number of countries that were over-indebted and had a large number of bad assets. Now some of those were admittedly being shifted around the Western world. But they hadn’t affected the whole world and the rest of the world looked rather robust, but then the collapse in demand became much more severe, and the financial shock became much more severe. This of course affected the emerging world dramatically, both through the impacts of the collapse in demand and the associated commodity-price collapse, and the financial sector started going home, essentially. There was a flight to quality across the world and this squeezed emerging countries dramatically. They found themselves in an unsustainable position, and many have had to cut back dramatically on spending and imports, of course, in response. This is how a crisis becomes global. Essentially, we’ve seen that the epicenter of this crisis is the core developed countries. Once they got into really big trouble, and they got into really big trouble in the autumn, it went global, and then it ricochets back upon them and you get a sort of vicious downward spiral.

I think one of the big challenges therefore for the G-20 was to create the conditions in which we could try at least to stabilize financial conditions for the emerging world. I don’t think enough was done, but at least I think it’s the one area where you can genuinely see some achievement, if, and I stress “if,” but it’s not clear that it will happen, all this money that has been authorized in the IMF does come to it. It amounts in the end to about 1 trillion dollars that they’ll have. This should help these emerging countries cushion the adjustment and therefore slow down the rate at which they have to cut imports or even stop them—it means that they don’t have to continue to cut imports and that we don’t have this vicious spiral developing.

Of course that’s only temporary. In the longer run we need a recovery in demand in the most hard-hit countries in the world, the big developed countries, and we need a stable, long-term system for underpinning spending and therefore imports by the emerging countries, and we don’t have that yet. But I think, again, with luck we might have slowed the decline in the emerging world, but it is now quite clear that the emerging world is badly hit in many different ways and that it will of course rebound back on the developed world, and that’s why we have now got such a severe world recession. But in this respect, at least, some of this part of the announcement of the G-20 was significant. But I suspect more will need to be done and when we look at this in the latter part of this year and the beginning of next year, it will be pretty obvious that while there’s talk about green shoots of recovery, all that we’re really seeing is a slowing of the rates of decline, which is very encouraging, but not a full-fledged, vigorous recovery, and that more will have to be done. And part of what is going to have to be done is to look at the underlying financial conditions of the emerging economies, which is a problem we’ve had now for many decades, but has become much more serious now that the United States in particular is no longer able to act, or willing to act effectively as the global spender and borrower of last resort.

NORBERT JOREK: Martin, I would like to take the opportunity to thank you again for your expert views. We at the Council have been privileged by your participation and by your perspectives for many years, and we continue to benefit from it. Thank you very much for taking the time today, I’m sure everyone on the call has appreciated your insights, and we look forward to global leaders driving the economy in the right direction, and hopefully we’ll see some light at the end of the tunnel, perhaps in early 2010?

MARTIN WOLF: I hope so indeed, it will be very cheering indeed. And thank you very much, I’ve enjoyed it.

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