In a preview of the G-20 summit meeting Edward Luce and Krishna Guha write in the Financial Times that the United States' reputation as economic role model is kaput.
The "soft power" of the U.S. private financial sector has also been devastated by the economic turmoil. Under George W. Bush, U.S. officials used to urge countries such as China to embrace the likes of Goldman Sachs and Merrill Lynch and use them as engines of domestic transformation -- an idea no one is advancing today.
Thank goodness for small favors! Luce and Krishna's observations come in the context of an article arguing that President Obama faces great difficulty in getting the rest of the world to follow his lead, whether it be in pushing a "robust" global stimulus or forswearing protectionism. They also say that Obama will have a tough time getting Europe to sign off on the White House's proposal to substantially boost funding for the International Monetary Fund, and giving emerging powers like China and India more influence at the IMF.
But Simon Johnson, the former chief economist of the IMF, has a sharply different take this morning at The Baseline Scenario. The summit may not achieve much, writes Johnson, but Obama is still demonstrating leadership, particularly with respect to the IMF.
If the summit will make essentially no progress on the big three topics of fiscal, monetary and regulatory policy, how exactly is President Obama showing leadership and making a difference? Here's the creative surprise -- it's by raising a great deal of money for the IMF and proposing fundamental changes in the way that organization operates.
The IMF currently has about $250 billion to lend; this is not enough to really make a difference in a world of trillion dollar problems. The Europeans proposed to raise this to $500 billion, which seems still low -- particularly as it's mostly European countries that have a pressing need to borrow; you guessed it, the Germans don't want to put up more. The Obama Administration is pushing for closer to $1 trillion in total IMF funding and, after a lot of hard work, seem likely to get close to this target.
Johnson goes on to predict that the U.S. will be successful in "de-Europeanizing" the IMF and opening up its governance to the rest of the world, with potentially major implications.
By forcing open the leadership selection process of all International Financial Institutions (e.g., so this means no more guaranteed job for an American as President of the World Bank), the Obama team has jumped over major roadblocks around IMF governance. It has also formed a natural alliance with large emerging markets (Mexico, Brazil, India, China, South Korea, South Africa, etc), who are also members of the G20; the natural next step would be to support a new managing director from one of these countries. Emerging markets lending to struggling Europe, through the IMF, is something we should all get used to thinking about.
The shift -- from a U.S. that pushed Goldman Sachs as the answer to all economic problems to a U.S. that understands it is no longer the arbiter of global economic rules, and decides to learn how to work with others -- is major. And it's been a long time coming.