Are we in a 'seldom seen transformation'?

The Group of 20 has congratulated itself on acting in concert to save the world. But will it?

At the heart of the crisis is a massive imbalance which at some point has to correct. The United States is afloat on Chinese savings.

It wants vast amounts more of others’ savings to stop the unemployment rout — now 8.5 per cent after the loss of 5.1 million jobs in 15 months — and help it spend more even though spending too much on borrowed money got it to where it, and we, are now.

President Barack Obama went to the G20 meeting wanting others to share more of the “burden” of restimulating the world economy. Kevin Rudd came back plotting a third big stimulus in next month’s Australian budget.

Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy demurred on new stimuluses. Instead, the G20 agreed on a massive funding of the International Monetary Fund and World Bank to help poor countries, where the recession is biting viciously.

And — more important long term — there were mutterings that China and India should have a say in who runs those organisations, which have for 60 years been dominated by the United States and Europe. British Prime Minister Gordon Brown declared the “Washington consensus”, which drove those bodies in the 1980s and 1990s, “over”.

That was the tectonic shift last week in London, world capital in the nineteenth century and now trussed in a grim fiscal bind. China holds overborrowed American consumers in hock. Henceforth, the United States will need to share power to a degree that will rankle in its heartland.

Look at the group pictures. Obama grinned with other white pretenders to power. Chinese President Hu Jintao looked gravely out at the camera.

He had good cause.

The rhetoric was impressive, They did all meet. They did agree to meet again. They agreed the globalised financial sector must be overseen and trade and finance protectionism shunned (but 47 measures have been taken since November when they last said that).

Wall Street surged — by Friday to the biggest four-week rise since 1933, the year the 1930s depression found a bottom. If the parallel is real, maybe this depression’s bottom is not far away.

Maybe. Chinese have a longer sense of history than Americans. Hu Jintao had cause for gravitas. First, 1933 was four years after 1929; we are not yet two years into this one. Second, the United States and the world economy stayed sluggish through the 1930s — in part because of subsequent trade protectionism — and really got going only with heavy spending to fund the second world war. New Zealand picked up earlier but at the cost of a foreign exchange crisis.

This time the fiscal stimulus has been frontloaded. There have been small signs of life in China, the United States and Britain, which fuel hope of an upturn through 2010 in line with forecasters’ mathematical models.

But beware a false dawn. Overborrowed consumers in rich countries still have to get their debt down. Unemployment discourages borrowing and spending in any case. And overborrowed governments will also in due course have to correct their balance sheets. There is precious little room for more stimulus. That promises a long hard slog.

Private overborrowing is a big factor here, too, which compounds the global downturn’s impact. So in preparing his budget Bill English has to guess how long and deep the slow patch will be. John Key moots an upswing later this year, in line with the forecasters’ models. But economists also say “the risks are downside”.

The deeper issue for English — and Key — to ponder is whether the global economy ever returns to the way it was before the borrowing binge or whether when on the other side of this canyon things will be done a bit, or a lot, differently and thus policy responses will need to be different.

That is the other interesting dimension to the G20’s agreement to boost IMF and World Bank funding. Rachel Kyte of the World Bank’s International Finance Corporation, who was here last week, argued that this is the time for poor countries ravaged by big cuts in foreign investment, exports and remittances, to improve institutions and make themselves more attractive to business investors for when the upturn comes.

And she insisted that there has in fact been improvement and that the crisis is focusing developing countries on making the necessary changes in infrastructure and “smart regulation”. “There are public-private partnerships like we have never seen before and in a depth we have never seen before”.

Kyte talked also of “seldom seen transformations” that come out of big world events. The reconstitution of the IMF and World Bank is one indicator. If she is right about better policy in developing countries, that is another.

Against such a backdrop, the May budget would be a just a point in time. The real interest may lie in whether the free-thinker Key/conservative English duo can chart a path for this country on the other side of this turmoil.