G20 - London summit’s burden of expectations

. 4/2/09

The London summit is expected to come up with concrete proposals to boost aggregate global demand, strengthen financial regulation and increase resources available for poorer countries.

The London summit of the leaders of the world’s 19 largest economies and the European Union has been described variously as the beginning of a global new deal, as a conference to create a new international financial architecture and as the start of the process to kick-start the global economy that has stalled. Even if the countries representing 60 per cent of the world’s population and 90 per cent of the world Gross Domestic Product have the ability to reshape international financial arrangements, the will to do so is not apparent, fuelling scepticism in the media. In recent weeks, there have been attempts by both the United States and the United Kingdom whose Prime Minister Gordon Brown is chairing the summit to play down expectations, pointing out that the summit can only agree on a set of principles and is the beginning of a process that will have to continue for a longer period. On the other side, civil society groups are appalled that such a summit should take place at all, for they view it as an attempt to save the bankers and the financial institutions from the consequences of their folly at the expense of the taxpayers.

In the weeks after last November’s Washington summit, sharp differences in the approaches of the U.S and the U.K on the one side, and the Europeans, notably Germany and France on the other had come to the fore. The Obama administration and Mr. Brown were keen that the London summit should come up with declarations of commitments from the participants on specific fiscal stimulus packages and proposals for monetary easing. On the other hand, Germany and France wanted the financial mess to be set right first through tighter regulation and better oversight. This difference in approach is apparent in the national policies as well. Though Europe as a whole is expected to go into deeper recession and experience higher unemployment than the U.S, the stimulus packages in the Euro zone countries are estimated at just 1.5 per cent of their GDP in contrast to the Obama administration’s proposals that would total 6 per cent over the next two years. Nor do the Europeans favour monetary easing or pumping new money into the economy.

This divergence had even raised fears that the April 2 summit may go the way of a similar conference of 66 nations held in London in June, 1933 to pull the world out of the Great Depression. That conference collapsed following European insistence on currency stabilisation even at the expense of domestic contraction while the U.S was firm on continuing with its huge spending plans to boost the domestic economy, ignoring the currency value. The month long conference was abandoned after a strong message from the American President Franklin Roosevelt warning that it would be “a catastrophe mounting on a world tragedy” if the conference were to focus on currency stabilisation and noting that “the old fetishes of so-called international bankers are being replaced by efforts to plan national currencies.” The collapse of the conference led to competitive raising of tariffs all round and worsened the Great Depression.

There is no danger though that the forthcoming London summit will end up with such disastrous consequences. The imperative of not worsening global sentiment by bickering and ending a summit without agreement aside, there has been a convergence of views of the main protagonists. The American President Barack Obama had even dismissed as a myth the sharp divergence in approach with Germany and France reported in the media, saying that both the stimulus and better regulation were needed. German Chancellor Angela Merkel, one of the more outspoken critics of stimulus packages, for her part welcomed the American declaration that it was not a question of one or the other and that they needed both. In the preparatory negotiations, the original suggestion in the draft declaration that the leaders commit to a $2 trillion global stimulus was dropped to gain wide agreement. Mr. Brown summed up the goal of the summit as building “a new consensus for our times” and went on to say, “we will do whatever it takes to create the growth and the jobs we need.”

Concrete action plans
It is not that a mere papering over of the differences or broad rhetoric is all that is going to emerge from the summit but concrete action plans to set the financial system right and get the world economy moving. The first area would be the financial system, with the summit addressing the issue of strengthening the banks with recapitalisation and lowering the burden of their “toxic” assets. How to get trade credit flowing again and measures to strengthen financial regulation are expected to be outlined. Already, the broad contours of an agreed approach are visible, and the broad elements would include regulation and oversight of all systemically significant financial institutions including hedge funds and private equity firms and compensation systems that would not encourage excessive risk taking but would reward long term performance. In addition, the leaders are expected to stress the need for better international coordination to monitor the cross border impact of financial events in any country as well as an early warning system under the International Monetary Fund.

Boosting global demand through fiscal stimulus and through monetary easing would be the second focus area. Here, rather than commit to specific figures, the summit is expected to generally stress the need for boosting demand and leave it to the national governments to follow what would suit them. The third and important area would be a strong declaration against protectionism. At the Washington summit the leaders declared “we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports.” Yet, in the period after the summit, 17 nations have introduced new forms of protectionist measures including raising of tariffs, restrictions on entry points for imports and subsidies to the automobile industry. The London summit while reiterating the call to avoid protectionism is also expected to stress the need for an early conclusion to the Doha round of trade talks — a new agreement is estimated to boost world trade by $170 billion annually.

Reform of financial institutions
The fourth area of action would be a specific set of measures to strengthen and reform the international financial institutions. There is a general consensus on having to increase the resources of the IMF substantially though it is unclear whether any specific figure would be agreed upon. The Obama administration has proposed that an additional $500 billion be put into the IMF, and the Deputy Chairman of the Planning Commission Montek Singh Ahluwalia has suggested that the allocation of Special Drawing Rights in the IMF be tripled. There is broad agreement on moving the review of the quotas in the IMF forward to January 2011.

The fifth area that is of particular interest to the developing countries is the reform and strengthening of the resources of the World Bank and other multilateral institutions including the Asian Development Bank. The World Bank President, Robert Zoellick, has proposed a vulnerability fund to protect the poorest, and has suggested that the developed countries set aside 0.7 per cent of their stimulus packages to enable multilateral institutions to set up safety net programmes for the poor including health, education, infrastructure and microfinance. He has also called for a $25 billion facility for short term trade financing.

Some new ideas have been floated in the run up to the summit, and these include the Chinese proposal for transforming SDRs into an international reserve currency in place of the dollar. The summit, however, is not expected to go into any detailed discussion of totally new proposals but stick to areas where discussions and preparations have advanced to a stage of consensus. For India, apart from the general interest in boosting global demand, the move against protectionism is of particular interest. Restrictions on procurement from outside as part of stimulus packages adopted by some countries and new restrictions on the movement of natural persons (including workers in factories, construction and services and software professionals). With a lame duck government in office, any follow up of the summit decisions would be left to the successor government. Nevertheless, continuing to engage in the global discussions is of vital importance for India, and it is in economic summits such as the one in London that Dr. Manmohan Singh will be in his element.
Source: The Hindu

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