Older powers find themselves up against a Bric wall

ANALYSIS:Reaching agreement on reforms is difficult when the economic health of countries is so varied

THE CONFLICTS at the heart of the global recovery were laid bare in Paris as G20 finance ministers and central bankers gathered at the weekend to plot difficult reforms to prevent a repeat of the debacle. It’s a slow-moving train.

In the vast French finance ministry, the leaders of the world’s advanced and emerging economies took stock of a two-speed turnaround which sees China and other developing countries zooming forward while older powers struggle to gain traction. US treasury secretary Timothy Geithner sees emerging economies enlarge by 5-7 per cent while his country expands 3-4 per cent and the European laggards plod along with 1-2 per cent growth.

It is a given that this increases the power of the fast-growing “Bric” countries – Brazil, Russia, India and China – and depletes the influence of the western world. That is the backdrop against which world leaders are seeking an agreement to address the massive trade surpluses run up by strong exporters such as China, Germany and Japan and the huge current account deficit in the US.

These imbalances, mounting again after a lull in the thick of the crisis, have prompted huge cash flows into the emerging world. To western eyes, this threatens stability by stoking inflation and price bubbles in developing markets. It also carries the danger that any new shock could undermine the titanic effort to resolve the worst financial implosion since the second World War.

Hence pressure on emerging economies from western leaders, who argue they are not doing enough to reduce their massive trade surpluses or reverse protectionist policies that artificially boost competitiveness. Even as recovery takes hold, insistently high unemployment remains a constant concern.

There are two sides to the story, of course. The constant refrain from the EU and Europe is that China keeps the yuan artificially weak to boost exports and make imports less competitive. For its part, Beijing takes issue with American quantitative easing, saying it fosters harmful capital flows. That such policies put downward pressure on the dollar is not without significance for China, which is now a major holder of US dollar reserves.

When the flames of the crisis were at their most intense, there was plenty of high talk from world leaders about their new-found commitment to deepen global economic co-ordination. From this the G20 emerged as the world’s premier policy-making forum, all but replacing the previously dominant G8 group. Zip forward a couple of years, however, and ambitious rhetoric meets hard political reality.

At issue in Paris was an attempt to adopt a common range of shared imbalance indicators. In theory at least, such indicators would help world leaders identify corrective measures each country should take to rebalance growth. This is controversial stuff, heralding as it does unwelcome external interference in internal affairs. Predictably enough, the talks proved difficult.

Negotiations at official level broke up without agreement on Friday night as China held out against the inclusion of foreign reserves and exchange rates as key indicators. Ministers took up the gauntlet on Saturday morning, clearing the way for a deal.

Indicative guidelines will be used to examine public debt, fiscal deficits, the private savings rate and private debt. The “external imbalance” – composed of the trade balance and net investment income flows and transfers – is also to be assessed “taking due consideration of the exchange rate, fiscal, monetary and other policies”. That such indicators did not include mention of the real effective exchange rate or reserves was something of a victory for China, and for the other Bric countries who supported Beijing on reserves.

But using such indicators in practice to change the course of economic policy is another matter entirely. Even with International Monetary Fund (IMF) involvement, it is likely to prove highly contentious. Will the rules be binding? To what extent will leaders adopt difficult decisions in the “global” interest that play badly in the domestic scene?

Still, European Central Bank (ECB) chief Jean-Claude Trichet said world political leaders shared an “elementary consensus” that they have a higher interest in the smooth functioning of the global economy.

“It is never easy precisely to co-ordinate policies and have the appropriate balance between national interest and a superior interest,” he told reporters.

“It certainly calls for appropriate communication because the lucidity of public opinion is of decisive importance to permit the appropriate function of the G20 and its success.”

But conflicting words from US Federal Reserve chairman Ben Bernanke and his Chinese counterpart Zhou Xiaochuan illustrate just how difficult co-ordination is in practice.

Before the formal talking starting on Friday night the two men appeared at a Banque de France open forum. Sitting at the opposite ends of a podium in a hotel ballroom, their public remarks underscored the depth of the differences between the world’s largest and second-largest economies.

Bernanke pressed global policymakers to “clarify and strengthen the rules of the game” to prevent instability. “Capital flows are once again posing some notable challenges for international macroeconomic and financial stability,” he said.

When Zhou spoke, however, he stressed China’s determination to do its own thing. “External pressure has never been an important factor of consideration and we have never paid special attention to it.”

While insisting the Chinese economy is already moving its focus to services from manufacturing, Zhou said it would take at least a decade to shift China’s economy away from its export-based model. For good measure, he said Chinese exporters would not yield their grip on export markets and added that they were resistant to the appreciation of the yuan.

It is in the face of such assertive attitudes that the French presidency of the G20 is trying to reform the international monetary system. Finance minister Christine Lagarde acknowledged it won’t be done “in a year or a month”. It wasn’t an overstatement. “I take things one day at a time. If it is difficult it will be difficult,” she said.