G20 2006 Summit – More Muddling Through

Not exactly the long called-for energy summit leading to a resolution of armed conflict, the G-20 meeting did release a communiqué (http://tinyurl.com/y3my49), one-fourth of which devoted to global energy and minerals markets.

In all fairness, the G-20 is an informal annual meeting of the finance ministers and central bankers of twenty of the world’s key countries – Canada, United States, Mexico, Brazil, Argentina, European Union, Germany, France, Italy, United Kingdom, Russia, Turkey, South Africa, Saudi Arabia, India, Indonesia, Japan, South Korea, China, and Australia – and not of the actual key “business” players around the world’s hot spots with decision-making powers to affect such a resolution.

Instead, we receive some useful information on what to expect on the global economic outlook in general, economic policy, energy policy, immigration policy, and several other issues: in short, more muddling through, onward with economic globalization.

I. Global Outlook

Along with the usual projections on economic growth rates, there are three noteworthy points.

First, finance ministers and central bankers recognize that free trade is still of fundamental importance to economic growth and globalization, protectionism needs to be avoided, and talks to extend trade must be revitalized.

Second, upward pressure on inflation continues and inflation rates in many G-20 countries will remain stable at current levels or increase, implying steady or increasing interest rates going forward.

Third, we can expect further immigration flows from developing countries with young populations to countries of early industrialization with aging populations.

II. Global Energy And Minerals Markets

In short, the path to long-term energy security for this set of policy-makers is to let price signals, i.e. free market forces, and domestic and international competition to determine investment and research in the effort to increase supplies as global demand for energy and minerals commodities is set to increase significantly over the coming decades, driven by a strong world economy, rising incomes, and ongoing industrialization and urbanization in many economies.

In this context, cooperation means domestic policy coordination to favor investment, expanding global trade, and efficient management of both private and state-owned energy production firms. Well-functioning markets, they argue, will support investment in new supply, generate efficiency and new technologies, encouraging the use of renewable and alternative energy sources, and allow knowledge and resources to flow.

Two further points to note in this regard: 1) the recent new energy law in the US is a hodgepodge of subsidies for a far-flung array of initiatives; 2) The Economist recently ran a special report (http://tinyurl.com/ydfvjp) on such initiatives and the dubiousness of subsidies to support them: take away the subsidies, and many of these initiatives are simply not viable.

The conclusion is that we are going to muddle along for the foreseeable future with a mix of conventional fossil fuels and investment in increasing their supply, amidst armed conflict or the threat of it in several regions where such supplies are abundant but probably peaking, nuclear, coal, renewable (hydroelectric, solar, wind, waste) and alternative sources, all the while hoping for technological breakthroughs, and that policy-makers are satisfied with that.

III. Demographic Change

In terms of demographic trends, countries of early industrialization and many developing countries are moving in opposite directions, so we can expect current migration trends to continue. In this context, the G-20 recommendation is to focus policy adjustment on financial markets and further aspects of labor mobility.

As mentioned in the previous post, the function of financial markets is to facilitate the movement of goods through space and time, assuming efficient energy, storage, and transportation. This also means, according to the G-20 communiqué, emphasizing to people, especially in the early industrialized countries, the need to be aware of their retirement income needs and that international policy and financial flows with respect to migrant labor remittances, pension payments, and healthcare payments must be flexible, low-cost, and efficient.

In conclusion, do not expect the new US Congress to pass a strict new immigration law, if any. Do expect a continuation of the shift in the burden of pension and health expenses from US corporations to individuals privately. At the same time, also expect inflation to continue to devalue government pension payments and healthcare payments, accompanied by a general lower quality of healthcare in both the US and Europe, on the one hand, while the citizens of developing countries start to receive some kind of pension and healthcare benefits from their governments: in short, the two sides are slowly converging towards a mediocre middle somewhere; there are simply not enough resources to go around to provide everyone with a top quality education, healthcare, and pension.

IV. Several Other Issues

The communiqué also had sections on reforming the IMF and the World Bank, advancing growth-oriented domestic economic reform within member countries, aid commitments and effectiveness, exchange of tax information, sovereign borrower/private-sector relations, and money laundering and terrorist and illicit financing. Of these, probably the most important are the exchange of tax information and money laundering and terrorist and illicit financing, for various reasons.