The world’s most affluent nations will take decades to work off the biggest buildup in debt since World War II. The political costs may be permanent, laid bare at today’s Group of Eight summit of leading industrial powers.
Bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114 percent of gross domestic product in 2014, more than triple the 35 percent of the main emerging economies including China, the International Monetary Fund, or IMF, forecasts.
The run-up in debt has hastened a power shift that is sapping the industrial world’s authority to impose its economic doctrine, currency arrangements or greenhouse-gas reduction strategies. Even some G-8 officials acknowledge that the group has lost its grip amid the global recession.
The eight-nation forum that starts today in L’Aquila, Italy is "a lot less relevant given ... developments in the world," French Finance Minister Christine Lagarde said July 5.
Rush to emerging markets
The industrial world is beset by the harshest economic conditions in a lifetime: a projected U.S. budget deficit of 13.6 percent of GDP in 2009, unmatched since World War II; an annualized 14.2 percent contraction in Japanese GDP in the first quarter, also the worst since the war; in the first three months of 2009, German exports had their steepest quarterly decline since 1970 when the data were first compiled. Reflecting the relative fortunes of the G-8 and emerging markets, developing nations’ share of worldwide stock-market capitalization has climbed to a record 24 percent from 15 percent at the start of 2007.
"China’s economic recovery will continue," Zhang Jianhua, head of the central bank’s research bureau, said in this month’s China Finance magazine.
While the surge in borrowing has prompted calls for alternatives to the dollar as a reserve currency, emerging-markets policy makers aren’t near consensus on a plausible option.
Staunching the recession, combating climate change, promoting trade and dealing with Iran top the agenda of the G-8, a grouping with combined GDP of $32 trillion that includes the U.S., Japan, Germany, Britain, France, Italy, Canada and Russia. Divisions persist over dialing back stimulus measures - Germany says now is the time to begin curbing deficits - and the scope of financial oversight. Britain opposes more intrusive market oversight proposed by the European Union.
"Different countries are pulling in different directions and that is ... quite troubling," said Niall Ferguson, a history professor at Harvard University in Cambridge, Massachusetts. The uncoordinated response is "one of the classic symptoms of a global crisis."
While the eight deliberate, leaders of five developing economies - China, India, Brazil, Mexico and South Africa - hold a parallel summit nearby before the G-8 meeting.
Led by China, emerging economies don’t share the "somber fiscal outlook" of the affluent world, the IMF says. The IMF says the debt won’t be repaid as quickly as after World War II, which ended with debt topping 250 percent of GDP in Britain, 200 percent in Japan and 100 percent in the U.S.
In wartime, governments exercised "comprehensive control" over the economy and citizens felt a "moral duty" to buy war bonds, the IMF said in a June 9 report.
Rich nations’ debt constituted 78 percent of GDP in 2006, the year before the financial crisis took hold, while emerging-markets debt has dipped from 38 percent, the IMF says.
The industrial world’s borrowing spree "decreases its ability to maneuver," said Paul Hofheinz, president of the Lisbon Council, a research group.
Russia plays a dual role, straddling the G-8 and acting in concert with developing economies. It last month hosted the first-ever summit of the BRIC economies - Brazil, Russia, India, China - financiers of $1.1 trillion in U.S. Treasury debt as of April.
The BRIC get-together failed to endorse a Russian call for diversification from the dollar, showing it is easier to denounce the U.S.-led world order than come up with a viable alternative.
"The credibility of the Anglo-Saxon model is under threat," Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said last month. "Yet there are no ready substitutes that are able and willing to step in."