So Brazil has triumphed over Mexico in the contest to provide the next Director-General of the WTO. Roberto Azevedo (pictured) beat Herminio Blanco to take over from Pascal Lamy, who will step down on 31 August after serving two terms as DG.

Brazil's President Dilma Rousseff declared that Azevedo's win was 'not a victory for Brazil, nor for a group of countries, but a victory for the World Trade Organization.' But as I noted last week, there are several possible ways to characterise the result:

• Despite Rousseff's conciliatory words, as a triumph for Brasilia over Mexico City in the continuing tussle for 'leadership' in Latin America, and for international diplomatic clout more generally.
• As a win for the preferred candidate of the BRICs and developing countries over the preferred choice of the US, the EU and the 'trade establishment'.
• And (perhaps) as a symbolic victory for Brazil's more restrictive approach to trade policy as opposed to Mexico's relatively more liberal one.

Regardless of the spin one chooses to put on the result, there is no doubt that the challenge now facing Azevedo is immense: to restore the clout of an organisation that has been losing credibility since shortly after the launch of the Doha Round back in 2001.

Doha now spans four failed WTO Ministerials (five if the failure to launch a round in Seattle in 1999 is included) and as each year has gone by, the degree of ambition has faded. The upcoming Ministerial in Bali in December will see WTO members make yet another push to deliver what is now a radically pared-down agreement (basically a deal on trade facilitation). Yet recent months have seen signs that even this might be out of reach. 

Mr Azevedo must be hoping that this isn't the case. Although the outcome is largely out of his hands, another failed WTO Ministerial would signal the WTO's continued slide into irrelevance as a negotiating body and represent a disastrous start for his term at its helm.

Photo by Flickr user Ana de Oliviera.

And then there were two.

The process of selecting a new Director-General for the WTO is heading to a conclusion, with the third and final round of consultations with members scheduled to start today. After the previous two rounds, the original nine-person shortlist has been whittled down to just two candidates: Mexico's Herminio Blanco and Brazil's Roberto Azevedo, meaning that a Latin American will get the top job for the first time. None of Asia's candidates, including Indonesia's Mari Pangestu, made the final cut, prompting some speculation that this showed the region's declining interest in the organisation.

For the next week or so, the focus will be on the differences between the Brazilian and Mexican candidates. For example, one view sees Azevedo as the preferred candidate of the BRICS and Blanco as that of the US and the 'trade establishment'. Another looks to the quite different trade policy stances of their respective nations. 

Whichever candidate wins is going to face an uphill task to restore the health of a body which, back at the turn of the millennium, was seen as the 'Great Satan' of globalisation but which now appears to be slipping into irrelevance.

The signs are not hard to find. Back in 1999, the prospect of another global trade round was enough to turn the streets of Seattle into a battleground. Today, more than a decade on from its launch in 2001, the Doha Round remains moribund – the trade round that time forgot. Just last month, the US warned that even the current attempts to salvage small elements of the Doha Agenda were going nowhere and that the WTO was headed for 'irrelevance' as a negotiating forum. 

A quick addendum to my earlier post. In that piece, the penultimate para is my best go at an objective (or at least as close as I can manage) assessment of the economic legacy of Thatcherism. It's also a classic economist's two-hander.

My own personal opinions on Thatcher's legacy have been shaped both by where I grew up and by where I live now. I did a fair bit of my growing up in what used to be a steel town in the Northeast of England. It's a part of the UK that's an example of the wrong side of that 'deep divide' in regional performance that I mentioned in my previous post. It's also not somewhere you would find many fans of Mrs Thatcher (in fact, it's a constituency that has never returned a Conservative MP in the postwar period). That environment has inevitably coloured my own memories of growing up in Thatcher's Britain.

Yet my overall assessment of Thatcherism today is probably more influenced by living here in Australia. In particular, when I look back to the economic reforms that this country underwent in the 1980s and 90s, it seems to me that Australia managed to deliver a similar (and similarly needed) economic transformation, but did so with what appears to have been rather less of the harshness and divisiveness that accompanied Thatcherism in the UK. Of course, that assessment might well be different if I'd lived through it here rather than through its British counterpart. And sure, there were obviously important differences in national circumstances that I'm almost certainly not taking into account. 

Even so, my impression is that Australia's experience suggests it was possible to get many of the benefits of major economic reforms without suffering from quite as many of the downsides associated with the Thatcher years. That seems to me to have been the better deal.

In the years of economic turbulence that have followed the onset of the global financial crisis, a common lament has been the absence of effective economic leadership and an unwillingness to take tough decisions. The early obituaries and assessments of Margaret Thatcher offer a potent reminder of what determined economic leadership actually involves, along with the associated benefits and costs.

A quick scan of the pieces by Martin Wolf and Chris Giles in the FT, Larry Elliott in The Guardian and Nicholas Crafts at VoxEU, for example, brings home just how dramatic were the changes Thatcher brought to the UK economy: the liberalisation of exchange controls; financial deregulation and the 'Big Bang' that transformed the fortunes of the City of London; labour market reform and the effective defeat of the trade union movement; the taming of inflation; large-scale privatisation; the rejection of old-school Keynesian fiscal policy; an abortive experiment with monetarism; major tax reforms, including a significant shift in the income tax regime and a rise in the VAT; opening up to foreign investment; deregulation of the housing market, including the sale of council housing stock; and wide-ranging and often painful industrial restructuring, along with a retreat from traditional-style industry policies and subsidies.

The results of these policies were equally dramatic: on the one hand, a marked and positive transformation in the UK's relative economic performance that lasted almost three decades. On the other, big increases in inequality, deep divides in regional economic performance, and – looking back from our post-GFC world – a dangerous over-dependence on what turned out to be a risky financial sector.

No surprise, then, that to this day she remains a deeply divisive figure in UK politics.

Photo by Flickr user cseeman.

In a blog post earlier this year I asked whether emerging economies had been lucky or smart. I also suggested that one way to start answering this question was to look at their performance during the major stress test provided by the global financial crisis.

Of course, it's possible to ask much the same question about Australia's economic performance. Is our incredible run of more than 21 years of economic growth the result of good policy or just a product of good luck? In an essay for the new issue of Pacific Standard magazine, I suggest that there are two ways of thinking about Australia's relative economic performance over the past couple of decades.

First, there is the 'Australian model' approach. This view says that Australia offers a good example to the rest of the world of how to thrive in turbulent global economy. Then there's the alternative interpretation which says that Australia has done little more than ride its luck and a temporary (but very large) boom in global commodity markets. Eventually and inevitably, the boom and the luck will run out. You could call this view the Australian bubble.

My essay looks at which view is closer to the truth. Given the popular stereotype about economists, you probably aren't going to be surprised to learn that I end up giving some credit both to good policy and to good luck. However, I also take some comfort from the fact that we have survived three major economic and financial stress tests in our recent history. To me, that suggests we must be doing something right.

Photo by Flickr user tarotastic.

We now have a new deal for Cyprus, one that looks a fair bit closer to what the first deal should have been and what the IMF originally proposed. In particular, it backs away from the attempt to impose a levy on depositors covered by the EU-wide €100,000 deposit insurance and instead puts the burden on large depositors and also bails in bank bondholders.

Despite this belated shift to a — relatively — more sensible plan, the outlook for the Cypriot economy remains grim, with forecasts of GDP losses of 10% or possibly much more.

Moreover, in a now familiar pattern, not content with stuffing up the original deal, the authorities seem to have once again managed to bungle the message accompanying the new deal. Initially, the head of the Eurogroup of eurozone finance ministers, Dutch Finance Minister Jeroen Dijsselbloem, said that the Cyprus agreement would serve as a model for dealing with future banking crises. Then he quickly changed his mind, deciding that Cyprus wasn't a model after all. So much for policymakers delivering a clear and consistent line.

Meanwhile, the debate has moved on to the implications of Nicosia's (almost inevitable) decision to impose capital controls in an effort to stem depositor flight. 

Cyprus, Aphrodite's Island, is in trouble. And it's trouble that could further set back sentiment in a eurozone that's already been damaged by last month's inconclusive Italian elections. Now Cyprus' parliament has rejected the terms of a €10 billion bailout from Brussels and instead may have turned to Russia for financial assistance.

The origins of the problems facing Cyprus have some striking similarities with the events that brought down Iceland and Ireland during earlier phases of the global financial crisis. More specifically, Cyprus is yet another example of a small economy made vulnerable by an outsized financial sector. As of mid-2011, the assets of the Cypriot banking system were the equivalent of 835% of GDP, while the assets of commercial banks with Cypriot parents amounted to some 500% of GDP. What made matters worse was the large exposure of those same banks to the crisis-hit Greek economy, in the form of holdings of Greek government bonds as well as loans to Greek residents, which stood at an impressive 160% of Cypriot GDP. Oops.

A further — and it turns out, rather important — part of the story is the fact that Cypriot banks have relied heavily on overseas deposits to fund their operations, with a hefty chunk of that money coming from Russia. Some estimates put the sums involved at considerably more than the current value of Cypriot GDP.

Last weekend, the EU and the IMF agreed a bailout deal with Nicosia which managed to leave nobody happy. The big problem was the proposed treatment of depositors, with the plan stitched together in Brussels providing not only for large depositors (that is, those with deposits bigger than the €100,000 deposit insurance cut-off) to be subject to a one-off 9.9% levy but also — and much more surprisingly — for small depositors (whose money is covered by the insurance scheme) to pay a 6.75% levy. Bailing in of small depositors has been widely and in my view quite rightly seen as a potentially dangerous policy blunder.

Earlier this month I noted that, after several years dominated by bad economic news, the start of the current year had brought hopes that we might finally see a degree of stability return to what has been a demonstrably unstable global economy. While some of this shift in sentiment could be put down to sheer 'risk fatigue', it also reflected a sense of bullets dodged and pitfalls avoided, as some of the most feared tail risks facing the world economy have (so far, at least) failed to materialise.

This view is broadly consistent with the latest IMF assessment of global economic prospects as presented to the recent meeting of G20 finance ministers and central bank governors in Moscow. In particular, while noting that 'important downside risks remain', the Fund judges that (p.6):

Risks have become more symmetric in the short term. The ECB’s OMT has lowered important tail risks relating to the viability of euro. The US fiscal cliff has largely been avoided, while latest developments suggest that the risk of a hard landing has receded in China. Accordingly, the improved financial conditions and confidence could trigger stronger-than-projected global investment and growth.

After a period of prolonged gloom, we have started to see the emergence of some cautious optimism about the world economy. Still, as I pointed out in that earlier piece, it's important not to underestimate the persistent nature of many of the risks still facing the global outlook.

Last December, in a post on the future of global growth, I posed a set of questions related to the future performance of emerging markets. Will catch-up growth be sustained at pre-GFC rates or will it continue but at a slower pace, reflecting a tougher external environment? Or will the 'convergence' process stall altogether? The future of emerging market growth is also a recurring element in my 13 for 2013 series on the outlook for the world economy.

One way to approach these questions is to think about the difference between good luck and good policy. If emerging markets' success in the pre-GFC period was mainly a product of good luck (for example, due to an unusually convergence-friendly international environment) then we might expect that a less friendly international environment will see that luck run out, with growth suffering accordingly. 

Alternatively, if strong performance was largely driven by good policies, then provided those policies are sustained, we should be more optimistic about emerging markets' growth prospects in the post-crisis era.

This important distinction between good policy and good luck is highlighted in a nice paper by Easterly, Kremer, Pritchett and Summers published in the early 1990s. Country characteristics and policies such as educational attainment and political stability are often thought to be among the key determinants of economic growth.

But the paper's authors pointed out that, while all these factors have tended to be relatively stable over time, growth rates have tended to be much more volatile, making it less likely that the former were key drivers of the latter. Instead, they found that shocks (especially shocks to the terms of trade) tended to be as important as policy in determining growth performance.

Back in mid-2010, I wrote a lengthy post looking at the possible link between labour unrest in China and the so-called 'Lewisian turning point'. Last week, we got another critical data point on China's demographic profile when the country's National Bureau of Statistics announced that China's working age population shrank by 3.45 million people in 2012. According to the Bureau, this drop marks the start of a trend that will see annual declines in China's working age population until at least 2030.

These demographic headwinds would be expected to have important consequences for China's sustainable growth rate over the medium term, as well as for the nature of the Chinese growth model. A major complication in making these kinds of assessments, however, is the quality of the available data on population and fertility, as set out in this piece by the ANU's Jane Golley.

Photo by Flickr user triplefivechina. 

This is part 3 of Mark's thirteen suggestions (in no particular order) of things to look out for in the global economy this year. Part 1 is here, part 2 is here. 

9. Keep an eye on oil prices

Despite some signs that the world is less sensitive to oil price hikes than it used to be, the price of oil continues to be a critical variable for global growth.

Last year's IEA World Energy Outlook emphasised what it described as the emergence of a 'new global energy landscape', one shaped by rising oil and gas production in the US and the expansion of non-conventional supply more generally, changing attitudes to nuclear and renewable energy, and the possibility of a major shift in Iraqi oil production. 

Combine those factors with continued uncertainties over the global growth outlook, plus the risks of a geo-political shock in the Middle East (traditionally Iran has been the favoured candidate here and with Washington and Tehran still at loggerheads over Iran's nuclear program that theme is still very much alive), and we are left with plenty of scope for both upside and downside surprises in the oil market.

10. Russia (and Australia) and global economic governance

Russia took over the chair of the G20 in December last year and Australia joined the G20's leadership troika at the same time. Russia has now set out its priorities for 2013, and the new presidency faces some significant challenges over the coming year, including the need to deliver on the G20's most important agenda item: strong, sustainable and balanced growth for the world economy.

11. Southeast Asia's recent economic success

This is part 2 of Mark's thirteen suggestions (in no particular order) of things to look out for in the global economy this year. Part 1 is here.

5. China's growth prospects

We spent quite a lot of 2012 on The Interpreter debating China's growth outlook, wondering whether last year's significant slowdown was mainly cyclical, mainly structural, or a combination of the two. After all that analysis, it will be important to peer through the smog to see which theory gets the most support from 2013's growth performance, and hence try to gauge just what the new normal is for Chinese growth.

6. And India's...

Last year was more a case of India tarnished than India shining. The financial press was filled with stories of the failings of Indian infrastructure (including the largest electrical blackout in history), political gridlock and corruption scandals. Growth has disappointed, to the extent that the current fiscal year is now likely to deliver the lowest outcome in a decade. There have also been warnings of sovereign ratings downgrades. 

Stung by all the criticism, last year did see New Delhi make an effort to reinvigorate the reform process, but with elections due in May 2014, delivering more progress could be tough.

7. Geo-politics and geo-economics in the East and South China Seas

It feels like a long time since we had a boring year in the world economy. Financial crises, debt crises, food crises, natural disasters, geo-economic power shifts, social upheaval and revolution have all shaped and reshaped the economic environment in recent years. 

So will 2013 change the trend and give us a restful year? Or even just one where the downside risks are matched by some nice upside ones? Since Steve Grenville has recently reminded us of economists' failure to forecast, I'm going to do the cowardly but sensible thing and avoid making any predictions. Instead, I've put together thirteen suggestions (in no particular order) of things to look out for in the global economy this year. Here are the first four:

1. Fiscal follies in the US

We sorta, kinda avoided the fiscal cliff, but did so in part by creating a series of other tripwires for the dysfunctional US political process. Prominent among these is a pressing need to raise the debt ceiling, which potentially poses a worse problem than the so-called cliff did. For a while, it seemed like the sheer absurdity of the current US debate was going to get the recognition it deserved in the form of its very own trillion dollar commemorative coin. Sadly, that option has now been ruled out, but there's still scope for more fun and games before the (almost) inevitable compromise.

2. The longevity of eurozone optimism

After spending much of the past couple of years wondering whether the eurozone was doomed, financial markets have turned much more sanguine. Indeed, what was once thought to be a near-extinct species – euro bulls – are now again being found in the wild. 

Greece is not the only economy suffering from the absence of an effective international framework for dealing with sovereign debt problems. Over the past few months, the financial press has been tracking Argentina's travails as Buenos Aires struggles to deal with the legacy of its own December 2001 default. It was the largest sovereign default in history, at least up until this year's Greek record, and many observers have noted the parallels between the Greek and Argentine experiences.

In the aftermath of that 2001 default, Argentina restructured its debt through two debt exchanges, in 2005 and 2010, switching the defaulted bonds into new paper with lower face value and longer terms. Despite the punitive nature of the terms on offer, creditors owning about 93% of outstanding private external debt eventually accepted the deal. But a group of holdouts, led by hedge funds that specialise in chasing defaulting governments (so-called vulture funds), have pursued Argentina in the courts.

In October, the holdouts won a legal victory that has thrown the details of Argentina's debt restructuring into doubt. If upheld, this ruling will raise the possibility of another (technical) Argentine default and have potentially significant implications for other sovereign debtors.

Back in 2009, I wondered whether Brazil's adoption of capital controls was a portent of a shift in international attitudes towards regulating capital movements. Later posts by Stephen Grenville tracked the way in which the IMF was changing its own views. That rethink has continued; the latest paper setting out the Fund's view is here. The IMF is now adopting the institutional position that controls have a potentially useful role to play in managing volatile capital movements. Another sign that the times, they are a changin'.

Steve Grenville covered the problems of volatile capital flows at greater length in a recent article in the ANU's policy-focused journal Agenda. He noted that the IMF had shifted a long way but still had a fair distance to go before they had operational answers.

Photo by Flickr user .Martin. 

Back in the heady days before the GFC, we got used to a world economy marked by strong annual growth rates plus a rising trend rate of growth.

A key driver of both developments was the growing share in world output of faster-growing emerging markets. Between 2003 and 2007, for example, world real GDP growth averaged an impressive 4.8% when output is measured on a PPP basis (which gives a relatively greater weight to fast growing emerging markets), and a more-than-respectable 3.6% when market exchange rates are used.

In contrast, according to the latest IMF World Economic Outlook, growth this year will perhaps be 3.3% on a PPP basis and 2.6% on a market exchange rate basis. The Fund judges that 'prospects are for sluggish and bumpy growth', with a significant risk that 'global activity could deteriorate very sharply.' More recently, the OECD's latest forecast update reckons that the global economy faces 'a hesitant and uneven recovery' over the next two years. Like the Fund, the OECD is warning of the threat of renewed recession.

Of course, this gloomy outlook for the world economy is largely a legacy of the GFC and the eurozone crisis that followed. And there are more than enough short-term risks, from the looming US fiscal cliff through to continuing eurozone fragility, to keep expectations subdued. Not surprisingly, the subdued growth performance of the developed world has helped drag down activity in emerging markets. 

But is there anything more going on?

Take a really simple model of world growth, where the pace of global activity is a combination of growth at the frontier in the world's advanced economies (driven mainly by productivity growth and innovation) and growth behind the frontier in the world's emerging markets and developing economies (driven mainly by a process of catch-up or convergence). Now think about what's happening in each of those groups.

As the IMF has recently pointed out, these are tough times for the global economy, with a range of international economic risks including the ongoing crisis in the eurozone, the looming US fiscal cliff, the deterioration in sovereign creditworthiness across much of the developed world, and questions over the future growth trajectory of some of the big emerging markets all combining to cloud the world economic outlook.

Meanwhile, the recent Asian Century White Paper has arrived with a lengthy list of the economic policy challenges Australia will have to meet to prepare for what the Government thinks is the likely shape of our economic future. Then there is the debate over whether we in the lucky country might be in the process of seeing some of our luck run out. 

All of which makes it a good timing for Cameron Clyne to deliver this year's Lowy Lecture on funding Australia's future tomorrow evening. The National Australia Bank's chief executive will take a look at the fallout from the Global Financial Crisis and ask what we need to do to better insulate the Australian economy from future international shocks. Stay tuned for a link to his speech and video recording.

Photo by Flickr user darkmatter. 

Last week, Japan's finance minister expressed concerns over reported customs delays for Japanese companies in China. Some observers have described disruption to Japanese trade as a form of economic sanctions imposed by Beijing to signal its displeasure with Tokyo over the Senkaku/Diaoyou Islands dispute. With world trade already slowing – the WTO recently cut its forecast for world trade growth this year to 2.5% from 3.7% – this is a particularly bad time for a trade dispute between East Asia's two economy heavyweights.

If the sanctions diagnosis is correct, it wouldn't be the first time China has chosen to use international trade to pressure Japan. In 2010, there were claims that China had blocked the export of rare earths as part of a dispute over Tokyo's detention of a Chinese fishing boat captain. 

And it's not the first time that China has wielded the trade weapon this year: a few months ago there were claims China was imposing restrictions on banana imports from the Philippines in retaliation over a dispute relating to contested waters around the Scarborough Shoal in the South China sea. The Philippines tourism industry also suffered fallout in the form of canceled visits. Last year, when the Nobel Peace Prize committee announced it was going to honour a prominent Chinese dissident, exports of Norwegian salmon to China were targeted in response. Likewise, researchers have found empirical evidence that Beijing has punished countries that officially received the Dalai Lama with a reduction in their exports to China.

As my colleague Linda Jakobson has written, the recent burst of anti-Japan protests in China tells us some interesting things about sovereign sensitivities, Chinese domestic politics and resource security. I wonder whether they might also have some implications for the dense and complex network of regional supply chains that are sometimes described as 'Factory Asia'?

One of the defining features of our current era of globalisation has been the emergence of global supply chains or global value chains. In a process that economists have variously described as the disintegration or fragmentation of production, the rise of vertical specialisation, or the second great unbundling, production has been 'sliced and diced' into different stages of production distributed across a range of economies.  

Source: Asian Development Bank.

Several factors have driven this trend, including policy-led declines in tariffs and other trade barriers (in part through specific agreements like the ITA and regional arrangements like ASEAN), technological innovations in transport and communications which have reduced coordination costs by increasing the speed and quality of communications, and a combination of strong demand growth in the developed world with a strong supply response from emerging economies.

East Asia in general (and China in particular) has been at the heart of this process, with supply chains in the region more integrated, and national export structures more closely intertwined, than is the case in North America or Europe.

In the (almost) three weeks since it was announced that we are establishing a G20 Studies Centre here at the Lowy Institute, I reckon the most common reaction from interested observers (following on from some initial wishes of good luck) has been some variation on the statement, 'but the G20 is in trouble, isn't it?' 

While I think some of the G-pessimism is overdone, there's also no doubt that, for example, the FT's warning that the G20 risks irrelevance is pretty representative of widespread concerns that the grouping has lost a degree of credibility and momentum. I still remember last year's Cannes Summit being described as 'comically irrelevant' in the same newspaper.

In fact, as I noted in my first post on the announcement of the Centre, observers have been warning that the G20 was struggling since at least the Seoul Summit. In my view, a big part of the G20's perception problem is that, by getting off to such a good start, the grouping raised unrealistic expectations about how it was likely to function. Forged in crisis, the G20 benefited from the 'hang together or hang separately' environment that surrounded its initial meetings at leaders' level. Given the diversity of its membership, however, it was inevitable that this consensus would evaporate and be replaced with disagreements and conflicting national interests.

After talking to some participants, it seems clear that there is a sense of disenchantment about how some G20 meetings are run: too much process and too little substance; too many agenda items and too little action; too many pre-prepared positions and too little meaningful discussion. There are a range of explanations for this, including the apparently still growing number of those involved (the G20 is in reality a G20+) and the ever-present pressure to come up with new 'deliverables' or 'announceables'.

It follows that a critical objective for future G20 chairs, including Australia, is to make sure that participants continue to value their attendance at G20 meetings, rather than viewing them as an unfortunate imposition on their time.

Back in 2009 I wrote a post for The Interpreter suggesting that, in the aftermath of the GFC, big was beautiful when it came to Asia's growth prospects, citing in particular optimism about China, India and Indonesia. For the next couple of years, that looked like a good call, but now two of those three are experiencing growth problems.

I discussed the ongoing debate over China's growth performance in two earlier posts, but China is not the only Asian giant with growth worries. India's recent growth record – accompanied by, and in no small part a product of, a truly depressing political situation – has turned hopeful Indians into worried ones.

India's first quarter 2012 GDP reading (also the final quarter of India's 2011-12 fiscal year), which saw growth dip to just 5.3% over the previous year, was the lowest result in almost a decade. Only a couple of years ago, some observers were daring to wonder whether India could reach double-digit growth for the first time. With 5% now looking the more likely alternative, some observers have started to pen their obituaries for 'Incredible India' and wonder whether India could be the 'first BRIC Fallen Angel'. 

Part 1 of this post, which asked 'What's the story with China's growth?' and 'Why has growth slowed?', is here.

Q3. OK, but does all that mean that China's high growth days are over?

A. The honest answer is: we don't know yet. The mix of factors at work means that we can't really be sure what proportion of the current slowdown is cyclical, and what part is structural. Given that uncertainty, the China bulls and bears will both be eager to stick with their own stories, not least since there is a very human tendency to place a lot of weight on not only our priors but also on the most recent data point.

For the optimists, the story is one about a cyclical downturn prompted by the combination of tough global conditions and a perhaps too-slow shift by Chinese authorities from a restrictive to a stimulative stance. In the longer term, they can fairly point out that there is still plenty of scope for more catch-up growth given the persistent and sizeable gap in output and capital per head between China and the countries of the developed world.

For the China (über) bears, on the other hand, this is a chance to emerge from the cave they retreated to after repeated past predictions of disaster failed to materialise, and predict that the crash they have been waiting for has finally arrived.

Q1. What's the story with Chinese growth?

A. Something interesting does seem to be happening. Back in March, Wen Jiabao said China's growth target for 2012 was just 7.5%. That implied a sizeable change for an economy that had averaged roughly 10% growth for the past three decades and 11% growth for the past ten years. It also meant a drop below the almost magical 8% number that many analysts have seen in the past as providing a floor for Chinese growth.

As a result, many China watchers chose not to buy in to the new projection and kept their forecasts above the old 8% floor. Now, they are scrambling to revise their numbers downwards. In fact, China's economy has been slowing since early 2011. In the first quarter of 2011 the economy grew by almost 10% on the previous year. By the second quarter of 2012 the headline growth rate had slipped to 7.6% from a year earlier, its slowest pace in three years and a fall of more than two percentage points. 

Since then, below-consensus economic readings for July and August suggested that activity has continued to ease into the third quarter as well, to the extent that even the official 7.5% growth target is now at risk. As a result, many analysts have started downgrading their forecasts for this year to accept the likelihood of sub-8% growth.

Q2. So, why has growth slowed?

A. At least three distinct factors are at work.

Yesterday, the UN's Food and Agriculture Organization (FAO) released its food price index for August, which showed the overall index of prices unchanged from July's reading. That offers some comfort to those who were worried about a looming food crisis following a 6% jump in the index in July. In real (inflation-adjusted) terms, food prices remain below the highs reached in previous peaks in early 2011 and in mid-2008. But that still leaves them at high levels by the standards of the past two decades:

Just a few days ago, the FAO, IFAD and the World Food Program issued a joint statement warning of the dangers posed by the situation in world food markets. The three bodies have emphasised that the world is now dangerously vulnerable to adverse supply shocks like the drought and heatwave now punishing the US corn belt. That's because 'even in a good year, global grain production is barely sufficient to meet growing demands for food, feed and fuel – this, in a world where there are 80 million extra mouths to be fed every year.' See this infographic from the WFP describing the food price roller coaster since 2008.

Meanwhile, commentators such as David Frum warn that rising prices could turn 2013 into a year of crisis and social unrest.

This is the third major international food price spike in the past five years, with prices rising sharply over 2010-2011 to reach a record high in early 2011. Many commentators have suggested that the high prices of that year played an important role in helping to trigger the Arab Spring.

This morning, Treasurer Wayne Swan announced that the Government has given the Lowy Institute a grant to establish a G20 Studies Centre. There will certainly be plenty to study.

We've been tracking the ascent of the G20 to its current role as the 'premier forum' for international economic cooperation since the early days of this blog, and I've written several times on the challenges to global economic governance the grouping has had to grapple with.

This is an important time to be thinking about the future of international economic governance in general and the role of the G20 in particular. Despite the battering that trade and financial flows took during the global financial crisis, globalisation continues to tie the world's economies closely together, with the result that spillovers from things going wrong – or right – in one part of the global economy quickly have important implications for the rest of us. 

This is all the more so given that the world has not only just suffered one major economic crisis but remains at risk from another in the shape of the ongoing eurozone mess. As the IMF emphasised in its July 2012 spillover report, a 'world of highly correlated asset prices, ubiquitous financial shocks, and limited policy space is a world ripe for spillovers.'

Meanwhile, and just to make the policy challenges even more interesting, the rise of new economic powers (and the return of some old ones) as a result of the Great Convergence means that today's global economic governance needs to reflect the fact that we now live in an increasingly multipolar world economy – a world where the views of a greater number of economic players needs to be taken into account.

The G20 represents world leaders' response to these challenges. It is arguably our first cut at building international economic governance fit for the twenty-first century.

Over the past few days, the financial press has reported on the return of the gold standard to mainstream US political debate (albeit hedged with a fair degree of [justified] scepticism).

For a recent critique of the gold standard, by the academic who literally wrote the book on the Gold Standard and the Great Depression, this 2011 essay by Barry Eichengreen is worth a look, not least for a reminder that history shows the Gold Standard was no remedy for financial instability or sovereign default.

I have vague recollections from my childhood of watching a cartoon series called The Perils of Penelope Pitstop. Each episode consisted of a plucky Penelope being placed in perpetual peril by the dastardly Hooded Claw and subjected to his elaborate plans for her destruction. Of course, each time she escaped, either by her own ingenuity or with the help of her protectors, the Ant Hill Mob.

The current travails of the eurozone are starting to resemble a series of Penelope's adventures. The poor old eurozone keeps falling into dangerous situations, onlookers start to worry that maybe this time luck has finally run out for the single currency and then, hey presto, the euro has escaped...only for the next peril to be waiting right around the corner. 

So now, after a brief period of respite, markets have spent the past week or so getting increasingly worried about developments in Spain and once again the euro is said to be on the brink. There are two ways to look at this.

Steve Grenville's recent post on democracy and Indonesia's economy brought to mind old debates about the relationship between a country's political regime and its economic growth performance.

The view that the absence of political and other civil rights can in some way be 'good' for economic growth and development has a long history. It's also an argument that is often heard in specific regard to East Asia's growth performance, where a series of countries have been able to combine spectacular economic success with non-democratic political systems, with China and the 'Beijing consensus' currently the most powerful example of this kind of story. 

Similarly, as India's economic promise has suffered an extended period of disappointment and setbacks, that country's democracy is once again being cited as an important bottleneck for growth.

As this classic survey of the democracy and growth literature suggests, it's quite possible to mount plausible theoretical cases as to why either democracy or autocracy might deliver superior growth outcomes. 

Democratic regimes are often thought to do a better job of protecting property rights, of constraining potentially predatory rulers, and of encouraging the kind of flexible environments that tend to be more supportive of technological development. Autocrats, on the other hand, are supposed to be superior at delivering higher investment rates (since they feel less compelled to produce high consumption rates for their people) and are thought to benefit from being relatively insulated from political pressures likely to be inimical to growth.

If the theory can go either way, what do the data actually say? The empirical literature seems to have generated two broadly accepted stylised facts on the relationship between the political regime and growth performance at the global level:

Next week it will be time for another meeting of G20 leaders, this time in Los Cabos, Mexico. The meeting will follow key elections in Greece this weekend, with financial markets fearing that the polls could be the trigger for an intensification of the eurozone crisis.

Indeed, there's a sense that the eurozone is approaching yet another potential tipping point, as was the case towards the end of last year, before the ECB stepped in with what ended up being almost one trillion euros of support. Since a eurozone disaster could be calamitous for the world economy, markets will be looking to the G20 to help calm the situation.

Unfortunately, as I noted in the aftermath of last year's Cannes Summit, while it's inevitable that the eurozone crisis will dominate G20 discussions, saving the euro is an incredibly tough ask for the group. My view hasn't changed.

Sure, there are useful and important things the G20 can do: the pledge by central bankers to step in and stabilise financial markets if needed is one example; doing a better job in pushing through the combined deal on IMF funding and representation would be another; and there is real value in keeping the pressure on the Europeans to do the right thing. But the solution to the eurozone crisis lies with Europe's leaders, and at Cannes, the G20 demonstrated its limited ability to force common sense on Berlin, Athens and the rest. Indeed, some are already writing off the G20's chances this time.

Still, while it's important to be realistic about what the G20 can deliver, it's also true that the group cannot afford for Los Cabos to be seen as a failure, if it wants to maintain its claim to be the world economy's pre-eminent international economic body. That's because the stakes are so high.