The virtual reality G8 summit Our leaders indulge in denial as WorldCom's timebomb explodes
Larry Elliott Thursday June 27, 2002 The Guardian T he timing was perfect. As the jets bringing the leaders of the G8 to their annual powwow were landing in Calgary, news was breaking that WorldCom was on the edge of bankruptcy following the discovery of the biggest accounting fraud in history. WorldCom is no one-off. A corporate cancer is spreading through America, bringing share prices and the dollar tumbling as investors take a long, hard look at the balance sheets of the one-time darlings of Wall Street. What they are uncovering is a combination of accounting fiddles, deceit and outright criminality designed to inflate short-term share prices by vastly over-stating profits, and maximise the value of stock options granted to executives. American capitalism, exported ruthlessly in the 1990s as the only way to do business, is sick. But if the US totters, the linkages of the global economy are now such that the rest of the world could come down with it. The financial instability that has marked the past decade has worked its way to the core of the capitalist system. A chance, you might think, for the G8 - the rich man's club (plus Russia) to show leadership. And one that they will almost certainly spurn. Stuck away in their Rocky Mountain retreat, the G8 will have plenty to say about terrorism, the failings of Arafat and the need for Africa to pull its socks up, but little to say about the defects in their own economies. This is the virtual reality summit. Seasoned G8 watchers know what to expect. On past form the summit will conclude that "economic prospects remain good" (Birmingham 1998); "progress has been made in addressing the crisis and laying the foundations for recovery" (Cologne 1999);"the world economy will grow strongly" (Okinawa 2000); "the most effective poverty reduction strategy is to maintain a strong, dynamic, open and growing economy" (Genoa). N one of this was remotely true. Within two months of the Birmingham summit, the Russians had defaulted on their debt, the hedge fund Long Term Capital Management had gone belly up, and Bill Clinton said that the global economy faced its biggest threat since the Great Depression. In the six months following Cologne, foundations were laid for a colossal stock market bubble, the full ramifications of which are only now becoming evident at Enron and WorldCom. The world economy did not grow strongly in the year after Okinawa; it slid towards the first synchronised recession in the big three economies of the US, Japan and Germany in a quarter of a century. And whatever happened to that strong, open and growing economy we were promised amid the tear gas cannisters of Genoa? Anyone for some steel tariffs? Originally, when Giscard d'Estaing came up with the idea for this annual shindig, it was a world economic summit. But the economic bit was downgraded years ago, and now that finance ministers are no longer invited it has all but disappeared. These days, the emphasis is on fighting terrorism, curbing the trade in drugs (but not arms) and sorting out the developing world. These are important issues, fully deserving of attention. But you would be right if you thought the G8 was missing something. This is a more accurate account of the current state of affairs: The market reaction to the biggest fraud in history at WorldCom is a wake-up call. The global economy is stumbling from crisis to crisis. Our biggest member, the US, foists painful policies on indebted developing nations but is the world's biggest debtor itself. Correcting the record trade deficit will hurt, and it will hurt not only America but Europe, Japan and the rest of Asia who have become far too economically dependent on feeding the US's consumption habit. We need to think very hard about whether deregulating financial mar kets with so much gusto in the 1970s and 1980s was such a good idea. It has helped create the conditions for the stock market bubble and the distortion of corporate values at home, and put immature economies at risk abroad. We are making a mistake in forcing the people of Argentina to adopt austerity policies that we would never foist on our own people. It is true that Argentina has been woefully mismanaged, but have we really got much room to talk ourselves? Unless we address these steps, there is not much hope that things will be better in a year's time. Each short-term recovery seems to be a bit weaker and a bit shorter than the last. Argentina's contagion is spreading to Brazil; the export-led recovery in Japan and Europe will not last if the US sags. We need intervention to manage currency instability, reforms of corporate governance, the restoration of the division between consumer and investment banking. When we've put our house in order, then and only then should we start dispensing advice to the rest of the world. Don't expect any of that to come out of Kananaskis. Repeat after me: the fundamentals of the global economy are sound. They are sound. Larry Elliott is the Guardian's economics editor [EMAIL PROTECTED]
