Two groups, one that already has 13 members, the other which looks poised to comprise 13 members, could potentially help stabilize and redesign the global architecture for the 21st Century. This all sounds quite grand, but the truth is the world is in need of some rebuilding in the aftermath of the tornado which swept through global markets in the past month.
Let’s start with the group that is under construction. The G7 plus Russia seems horribly outdated. In the words of French President Nicolas Sarkozy after his meeting with George W. Bush at Camp David the world cannot “continue to run the economy of the 21st Century with instruments of the economy of the 20th Century.”
Sarkozy is referring to the so-called Bretton Woods institutions, named after the city in New Hampshire where they were created before the end of World War II. I was surprised that neither of those institutions -- the International Monetary Fund and the World Bank -- was given a mandate at their autumn meetings to re-engineer their structures to be the streamlined home for dialogue, financial regulation and monetary policy.
Sometimes it takes a crisis to prompt action and that is where we are today. At the Gleneagles Summit in 2005 Tony Blair formally invited leaders from the G5: Brazil, China, India, Mexico and South Africa to begin outlining the blueprint for the new G13. According to many who attended that meeting, the new emerging economic powers thought the rule book was already written before they showed up in Scotland. That blew over like a cold wind off the Atlantic and talks have stalled ever since.
The French President, who cut his teeth in the Ministry of Finance, is sensing a window of opportunity to move into action. While the current occupant of the White House may not be keen on building a new institution (and some may argue more bureaucracy) the future occupant just might be. And if a President Obama or President McCain doesn’t like the idea, come January there may be enough coal in this engine to leave the station anyway.
As it now stands, the G13 will meet sometime after the U.S. election. UN Secretary General Ban Ki-moon has offered to host this gathering at the organization’s headquarters, perhaps as a bid to eventually put the remit for this fortified group under the United Nations umbrella. That certainly needs to be decided over time. But it seems clear that the G7 (G8 with Russia) needs to design something concrete, and stand ready to build in a regulatory framework to take decisions on capital flows and new financial instruments (like mortgage backed securities) and the role of sovereign funds.
On the latter subject, it seems that if President Sarkozy and others are getting positioned to bring the developed and developing powers together it might make sense to consider a seat for the Middle East, representing both the sovereign funds and the oil producers. I never thought the number 13 was lucky; in fact I, like many in the world, remain superstitious about it. G14 has a nicer ring to it anyway.
This week U.S. Treasury officials will tour the major economies of the Gulf in an effort to enhance the dialogue between Washington and the major sovereign investors. Riyadh, Doha, Abu Dhabi, Dubai and Kuwait are all on the itinerary. Rather quietly at the IMF meeting in Washington, 24 so-called Santiago Principles under the International Working Group of Sovereign Wealth Funds were presented at the gathering. The timing is fortunate. In a period where markets are swinging five percent in either direction, it is always good to have a pool of $3 trillion available in the shape of potential emergency lenders and long term investors. The Santiago Principles can provide the political cover for those still worried about their intentions.
While the grand design of the G13 remains on the horizon, that other group of 13, OPEC, is trying to speak with one voice to recoup some dramatic losses. In a span of only 14 weeks, prices have dropped 50 percent. Three digit oil ($100 and above) seems long forgotten and the President of OPEC Chakib Khelil, has talked about protecting a price band of $70-$90 a barrel.
The secretary general of OPEC, Abdalla Salem El-Badri, during a speech in Moscow this past week outlined the cartel’s plan to expand production by five million barrels in 2012. That, he says, will require $160 billion of investment. If prices go back below $70 and stay there, I would not bank on all that coming on-line.
While the G7 is not eager in principle to have an official dialogue with a cartel, a G14 with a seat for the Middle East included in the mix, most likely would. That would not only be lucky, but prudent as well.
ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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