El-Erian On G20: A Non-Cooperative Game

Pimco’s Mohamed El-Erian considers whether the G20 Summit in Toronto created a constructive compromise on financial stability, or generated a losing plan to turn around a slowing global economy. The chief executive of the worlds largest bond fund see the last alternative as most likely.

“The result is what game theorist label a “non-cooperative game,” with a very high likelihood of sub-optimal outcomes.”

Mohamad El-Erian

“We are digesting this morning an unusually long communique from the G20 Summit in Toronto. This self-congratulatory statement is worth reading for what it says and how it says it-both of which make me worry even more about the future of a post-global financial crisis world that is in desperate need for better cross-border policy coordination and harmonization,” Mr. El-Erian writes in today’s edition of Financial Times.

Some will attribute the length of the “G20 Toronto Summit Declaration”-49 main points and another 82 in 3 annexes-to the pronouncement in the very first paragraph that this was the “first Summit of the G20 in its new capacity as the premier forum for our international economic cooperation.” And we should have no doubt that the G20 is a much more representative global policy forum than the outmoded G7/G8.

Yet, there may be much more to the unusual length of the communique.

I suspect that many veterans of multilateral gatherings will see this communique as typical of those drafted by a committee whose members have different views and priorities, and speak to different national audiences.

Indeed, we are already seeing the G20 communique being spun very differently in national capitals.

If anything, the outcome of the G20 is a confirmation of what many expected and feared-namely, and in sharp contrast to the April 2009 G20 London Summit, an inability to reconcile divergent views of the world.

If anything, we are being exposed this morning to the realities of different national historical experiences, different national initial conditions, and different national views on how economies should and do work.

The differences are most visible in the sections on fiscal adjustment and growth. They are also evident in the discussion of financial sector reform. Indeed, there is something for everyone!

Before we rejoice too much about the ability of the G20 to deliver constructive compromises, we should think carefully about the consequences of leaving major issues unresolved and, thus, essentially kicking the can down the road when it comes to serious analysis and courageous decisions.

Consider the following three points as a partial illustration of this risk:

First, the communique illustrates the extent to which we now live in a multi-polar world with no dominant economic party and with excessively weak multilateral coordination mechanisms.

The result is what game theorist label a “non-cooperative game,” with a very high likelihood of sub-optimal outcomes.

Second, taken at face value, the communique speaks to a relative world in which the US will be the only major country to pursue expansionary policies while others focus on addressing budgetary consolidation-either because they have to or because they wish to.

This is yet another factor that points to an increasingly unstable global configuration over time.

Third, we will likely face growing bilateral frictions due to the inability to use this weekend’s G20 gathering to properly address what I argued in a Friday FT column to be an incomplete and narrow characterization of the “growth now” versus “austerity now” debate.

The bottom line is as follows: I worry that, absent some urgent mid-course corrections, this weekend’s G20 gathering has failed to mark a much needed turning point for a slowing global economy with persistently high unemployment in industrial countries.

Instead, it reinforces the concern than we are in for a future of muted growth, deleveraging, periodic debt dislocations in some countries, and higher protectionist pressures.

Populations in Europe and the US may have much more to worry about than seeing so many of their teams knocked out early from the World Cup tournament in South Africa.


Mohamad El-Erian is chief executive and co-chief investment officer of Pimco. El-Erian’s previous commentary on the G20’s earlier Busan summit is available here.

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