Taekwondo stunt in Seoul, South Korea. (photo: Oxfam International via Flickr)

The Group of 20 industrial nations and emerging economies is presently meeting in Seoul in an attempt to deal with the prevailing chaos of the global economic situation. The outlook at the moment is that when the meeting ends tomorrow the situation will not have changed very much as a result of the meeting.

This diary is an over simplified view of a very complex situation. However, the major economies do tend to fall into interest groups in terms of their relationship to the global economy. There seem to me to be three basic groups. The nations in each of those groups share some common views and objectives.

Export Oriented Nations

The main players in this group are Germany, China and Japan. They all maintain a possitive balance of trade and have economies that are heavily oriented to exports. They all have an interest in keeping their currencies down in exchange rates in order to make the prices of their exports more competitive on international markets. They are strongly opposed to other nations adopting protectionist measures that would limit the market for their exports and to any other policies that would in a devaluation of currencies, particularly the U.S. dollar.

High Import Nations

This is the U.S. and the U.K. Both nations have exported large portions of their manufacturing sectors and have increasingly become service oriented economies that regularly run a substantial negative balance of trade. While both countries give lip service to developing exports that would help correct their imbalances, they don’t have any major prospects in that direction. They are pushing for international agreements that would limit balance of trade deficits to 4% of GDP. The idea appears to be a non-starter with the other nations.  . . .

Other Emerging Economies

These are nations with growing economies that don’t yet rank among the top players. Brazil and Turkey are the largest of them. Their biggest problem with the present global economy is the flow of hot short term capital into their economies. As the major nations such as the U.S. and Japan continue to have stagnant economies with interest rates near the zero lower bound, aggressive investment capital is seeking higher returns. It has begun to flow to these emerging economies. It is generally short term investment that risk creating asset bubbles that promote inflation and drive up exchange rates without providing any help with long development needs such as infrastructure projects. These countries are beginning to institute various forms of capital controls to stem the flow of such capital.

This picture represents a potential international face off. At the beginning of 2009 there was such widespread panic that the G20 was willing to engage in some superficial cooperation, but not willing to take the plunge into serious structural reform. Now the panic has subsided enough for the nations to dig their heals in to protect their own interest and to look for solutions to their multiple economic problems with beggar thy neighbor policies.

One could easily write whole books exploring the details of this situation. However, that is the picture in a nut shell as I see it.