The G-20 lost it way after 2009 when its member states abandoned efforts to coordinate global economic policies for national solutions. Going alone though has reached its limits. The way forward to sustained growth and employment is not through a flurry of one-off national initiatives, but rather through global policy coordination.

The G-20 lost it way after 2009 when its member states abandoned efforts to coordinate global economic policies for national solutions. Going alone though has reached its limits. The way forward to sustained growth and employment is not through a flurry of one-off national initiatives, but rather through global policy coordination.

LONDON – Politics trumped sensible economics in the United States this summer, when Congress and President Barack Obama could not agree on taxes, entitlements, deficits, or an investment stimulus. Europe’s leaders were also paralyzed – ruling out defaults and devaluations, as well as deficits and stimulus. And, having run negative real interest rates, printed money, plowed in liquidity, and subsidized commercial banks, central bankers everywhere – most recently US Federal Reserve Chairman Ben Bernanke – appear to have concluded that they, too, have reached the limit of what they can do.

As a result, few people today doubt that the world is drifting, rudderless and leaderless, towards a second downturn. The pre-summer debate about whether we faced a “new normal” of slower growth has been resolved: nothing now looks normal. Muddling through has failed. Unable to conclude a global trade deal, climate-change agreement, growth pact, or changes in the financial regime, the world is likely to descend into a new protectionism of competitive devaluation, currency wars, trade restrictions, and capital controls.

Related: Dominoes of Doom – The Political Economy of the Global Financial Crisis: George Friedman

Related: Marx was Right – Capitalism is on a Self-Destructive Path: Nouriel Roubini

But this is not a time for defeatism. Countries claiming to have reached the limit of what they can do really mean that they have reached the limit of what they can do on their own. The way forward to sustained growth and employment is not through a flurry of one-off national initiatives, but rather through global policy coordination.

That was the goal back in April 2009, when the G-20 set itself three critical tasks. The first, preventing a global depression, was achieved. The other two – a growth pact, underpinned by a reformed global financial system – should now be the main items on the G-20’s agenda when it meets.

In 2010, the International Monetary Fund estimated that a coordinated approach to macroeconomic, trade, and structural policies could achieve 5.5 percent higher global GDP, create 25-50 million additional jobs, and lift 90 million people out of poverty. But a global growth pact looks even more indispensable today, given the world economy’s structural problems and huge imbalances between production and consumption.

It may seem strange to describe the greatest financial crisis since the 1930’s as a symptom of a bigger problem. But, when historians look back on the wave of globalization after 1990 – which has brought two billion new producers into the world economy – they will find a turning point around 2010. For the first time in 150 years, the West (America and the European Union) was out-manufactured, out-produced, out-exported, out-traded, and out-invested by the rest of the world.

Indeed, by the early to mid-2020’s, the Asian consumer market will be twice the size of the US market. Today, however, the West and Asia remain mutually dependent. Two-thirds of Asia’s exports still end up in the West, and south-south trade accounts for just 20 percent of global turnover.

Put another way, ten years ago the US engine could drive the world economy, and ten years from now the emerging-market countries stand to take over that role, particularly given the rising purchasing power of their middle classes. But, for now, America and Europe cannot expand their consumer spending without increasing exports, while China and the emerging markets cannot easily expand their production or consumption without the guarantee of strong Western markets.

Divided We Fall

So, first, we must restore the broad vision of global cooperation contained in the G-20 growth pact (which has since been downgraded to what the IMF now calls “an in-depth analysis of…those countries identified as having large imbalances”). But a broader and deeper agenda is needed: China should agree to raise household spending and consumer imports; India should open its markets so that its poor can benefit from low-cost imports; and Europe and America must boost competitiveness in order to increase their exports.

The G-20 was also adamant in 2009 that future stability required a new global financial regime. David Miles of the Bank of England predicts three more financial crises in the coming two decades. And, if the BoE’s Andrew Haldane is right that rising pressures in Asia threaten future turmoil, the West will regret its failure to entrench global capital-adequacy and liquidity standards and a more transparent early-warning system.

The problem is already evident. Europe’s banking-sector liabilities are nearly five times higher than in the US, at 345% of GDP. Germany’s banks are leveraged at 32 times their assets. So, not only is bank recapitalization essential for financial stability, but so is a reformed euro, built on fiscal and monetary coordination and an enhanced role for the European Central Bank in supporting individual governments (not individual banks) as lender of last resort.

The G-20 will not achieve growth and stability without a renewed focus on long-term debt reduction. But there is also a short-term imperative to avoid a cycle of decline. So we should draw on Robert Skidelsky’s national investment bank proposals to equip our infrastructure – not least our environment – for future challenges and to stimulate growth and job creation. One model is the European Investment Bank, which, with €50 billion of capital, has been able to invest €400 billion. But there is perhaps a deal to be done with the Chinese on investing their reserves and with Western multinationals on the tax treatment of repatriated profits.

Finally, as the Nobel laureate economist Michael Spence has shown, growth is now a necessary but insufficient condition for job creation. Today’s epidemic of youth unemployment, in particular, requires new approaches – a development bank, for example, to help employ the bulging youth population in the Middle East and North Africa, and training and apprenticeship programs elsewhere. The G-20’s growth compact must be a jobs compact, too.

Related: What Will Make the Great Financial Crisis Look Like Child’s Play? The Next One: Gordon Brown

The G-20, which represents 80 percent of world output, came into its own in 2009 as the only multilateral body able to coordinate global economic policy. Unfortunately, its member states soon abandoned that goal and defaulted to national solutions. Predictably, going it alone has proven futile in ensuring economic recovery. The G-20’s time has come again. The sooner French President Nicolas Sarkozy calls the G-20 together to act, the better.

By Gordon Brown

Copyright: Project-Syndicate, 2011

Gordon Brown served as Chancellor of the Exchequer of the United Kingdom from 1992 to 2007 before assuming the role of Prime Minister between 2007 and 2010. Since then, Brown has been appointed as the inaugural ‘Distinguished Leader in Residence’ by New York University, taking part in discussions and lectures on the global financial crisis and globalisation, as well taking on an unpaid advisory role at the World Economic Forum.

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19 May 2011.

19 May 2011.

In 2008, when we were hours away from ATMs running out of money, small businesses being unable to pay their staffs, and schools and hospitals closing down through lack of cash flow, it felt as if the crisis of the century was upon us. But if the world continues on its current path, the historians of the future will say that the great financial collapse of three years ago was simply the trailer for a succession of avoidable crises that eroded popular consent for globalization itself.

Yet what happens to the world’s economy is not random—it’s about the change we choose. Globalization may have unleashed change of a scale, scope, and speed unprecedented in human history—but it has also given our species an unprecedented opportunity to act in concert in order to master the forces that buffet us.

The truth is that the world has seen a shift in productive power over the last two decades that is more dramatic than any since the Industrial Revolution, with more than 2 billion men and women joining the ranks of industrial producers, trebling the size of the world’s industrial economy. This year—for the first time in industrial history—the combined forces of America and Europe are being outproduced, out-manufactured, out-exported, and out-invested by the rest of the world. The corollary of this change is that the next 20 years will also see another worldwide revolution, this time in consumerism, and it will be dominated by Asian workers, who will treble the world’s middle class. This second wave of change will turn all the old certainties on their head: America, once the biggest consumer in the world, will face an Asian market twice its size. Germany will be just 4 percent of the world’s consumer spending and the U.K. just 3 percent—but Asia will be 40 percent. Asia’s spending potential will be a staggering $25 trillion.

This transition, to a world with multiple poles of growth, will be directly felt on nearly every Main Street, shop floor, and kitchen table. So, too, will the risks associated with a globalized financial system that remains perilously unregulated. The global flows of goods, services, and capital create global problems that can be answered only by global solutions and by a consensus between world leaders to reach binding agreements for the good of all nations.

The world needs to act in concert to tackle the threat of further financial crises, too. When our biggest banks came within hours of meltdown, we started to learn the hard and bitter lessons of a system that had developed beyond the control of individual nations. The crash made clear that vast flows of money had to be monitored across the globe, not merely within nations, that early-warning systems were needed from one continent to another, that banks must be properly capitalized, and that we could not hope to manage with merely local supervision the institutions that had outgrown national borders.

For a brief moment in 2009, during the London G20 summit, the world’s leaders showed an impressive resolve to act together to create a more prosperous and stable world. Their resolve grew out of the banking crisis and the threat of a global depression, but today that resolve has evaporated in a retreat into national shells. [quote]“Mini-lateralism” is now the order of the day. A trade deal is unlikely in 2011 or 2012—the first trade-round failure since 1948.[/quote]

There will be no climate-change agreement either, even though nuclear worries are escalating and the case for low-carbon investment becomes more obvious by the day. Nor will there be sufficient global support for the unemployed of the Middle East, North Africa, and sub-Saharan Africa (who together constitute the fastest growing of the world’s young), with all the problems of immigration and insecurity that such neglect will unleash. Global growth will be far lower than it otherwise needs to be, unless the world begins to understand that there is no solution to financial instability, diminished trade, and mass unemployment without a global deal for jobs and justice.

The IMF showed a few months ago that if the world worked together, up to 50 million new jobs could be created—millions of them in Europe and America—and 100 million people could be taken out of poverty. This November, at the next G20 summit, under the leadership of Presidents Sarkozy and Obama, we have the chance to take control of the huge and historic changes confronting us. It is not our fate to be at the mercy of financial chaos, decline, and recession: there is an alternative. Securing it will not be easy, but, as I have said before, it is in the space between the possible and the perfect that campaigners for justice must always be.

Gordon Brown, Writing in Newsweek.

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