UK humbled as Asian nations flaunt new-found power

London: It was a somewhat chastened British government which hosted the meeting of the finance ministers and central bank governors of that new focus of global economic power, the Group of Twenty, last week.

In the run-up to the meeting at St Andrew's on Friday and Saturday, India's finance minister rubbed it in by boasting about the size of India's foreign exchange reserves (it has just made a huge purchase of gold from the International Monetary Fund) and about the Indian economy's relative resilience during the current financial crisis.

There was certainly room on the table for humble pie at yesterday's meeting. The mere fact that the G20 has become the official political forum for trying to come to grips with the imbalances in the world economy is both a sign of changing power structures in the world and a reflection of the poor leadership of the traditional G7 (which still exists, comprising the US, Japan, Germany, the UK, France, Italy and Canada) and, it has to be said, of the leadership shown by the IMF in the years leading up to the crisis.

Neoliberal policies

The fact is that the G7 and the IMF bought the "Washington Consensus" — the process by which, as Robert Skidelsky summarises it in his new book Keynes — The Return of the Master: "The Bretton Woods philosophy of managed global capitalism was replaced by … the neoliberal policies advocated for developing countries by the US administration: free trade, privatisation, deregulation, balanced budgets, inflation targeting, floating exchange rates."

The "intellectual" framework behind this approach lay in the "new" (or rather old and long since discredited) branch of classical economics which placed so much faith in "efficient" and "unregulated" markets.

Asian governments learned their lesson during their financial crisis of 1997, not least when the Clinton administration opposed the setting up of an Asian Monetary Fund.
 
Countries such as China and India built up their reserves and paid more attention to exchange rate management.

It is now notorious that a major problem facing the world economy is the way that by tying their exchange rate closely to the dollar, the Chinese have become super-competitive.

The US economic establishment regards the distortion in the dollar-yuan exchange rate as a serious barrier to the much-desired "rebalancing" of the world economy.

Not only was the old G7 insufficiently representative of the world economy (the G20 includes Russia, China, India, Brazil, Australia etc), it was up to its neck in the economic and financial policies that helped to bring the world economy to the edge of the precipice last winter.

As Skidelsky points out: "Britain has half the total of European credit card debt." There is nothing new about the need for Britain to adjust to "the real mediocrity of her circumstances".