The Hindu Business Line : A guest at the G(7) in London — And India's role in the unfolding Asian Century

The Finance Minister, Mr P. Chidambaram, was invited to join the latest meeting of G(7) at London, albeit at the breakfast table. It was an invitation with a difference, most of the other participants being full members.

The Group of Seven, Eight or Ten countries has been named and expanded from time to time depending on the financial exigencies of the "richest" and most indebted nation of the world, the US.

It is a fact that the new entrants represent the biggest creditors of the US in its present state of external fragility. No wonder they were invited to the meeting, though not as full members.

The idea of groups such as the G(7) arose primarily in the 1960s and the 1970s. One of the first occasions was related to the drawing up of the General Agreement to Borrow (GAB) to enable the IMF to have enough resources when Japan was called in.

There followed a series of such conferences, including the famous one at Hotel Plaza in the 1980s. These conferences were motivated primarily by the US' desire to stem its currency outflows by "pressuring" other countries to stop cheapening their currencies.

It was at one of these conferences that the US Treasury Secretary, John Connolly, famously said "The dollar is our currency, but it is your problem".

The situation remains the same. Dollars are today the world's currency and the world's problem. It also boils down to where the buck stops perhaps it is destined that buck stops with a fall. The latest episode in the G(7) serial also coincides with the decline and fall of the buck, although there is a temporary respite in the fall.

The fall has serious repercussions on the rest of the world, which holds debt paper denominated in the dollar.

If any other country were so indebted and so extravagant as the US, the pundits on the banks of the Potomac would have preached tomes of budgetary virtue and Calvinistic self-control.

But now the boot is on the leg of the preacher of fire and brimstone. Physician, heal thyself is what one feels like saying. But was it said at the G(7) meeting in London?

What happened at the enlarged G(7) meeting is not clear from media reports. It appears the South African leader, Mr Nelson Mandela, was also invited to the G(7) meeting at the instance of Chancellor Gordon Brown of the UK. Mr Mandela must have made his appeal for special assistance to the African continent, including debt relief.

As expected, the G(7) meeting endorsed this request in part and announced sizeable debt relief. But Chancellor Brown's radical proposal for an international financing facility to securitise the debt obligations of poorer countries to raise additional resources for aid did not find support from the US.

The London conference must have been yet another of the talking shops that are part of the international financial landscape.

As expected, it endorsed the appeal of the US' Treasury for greater flexibility in exchange rate management, which amounts to a request to China to revalue and float the remninbi.

This is an oft-heard plea from Washington, which amounts to passing the "buck" to other nations for the US' own faults. The US imagines that if China revalues its remninbi, Chinese goods will be costlier for US consumers and imports will fall. Chinese policy-makers are particularly sensitive about the suggestion.

If the remninbi is revalued, it will hurt the Chinese manufacturing sector sharply. There is no way China is going to accept the US proposal, G(7) pressures notwithstanding.

The increasing exposure of the rest of the world to dollar debt is also becoming a cause for worry.

A recent editorial in the Financial Times, London cites a survey of central bankers, which suggests that central bankers are beginning to ponder whether it is in their interest to carry on buying dollars. There is the danger of capital loss as the dollar falls.

The fall in the dollar has already resulted in large losses in value for countries with large reserves.

Typically, the impact is greater in countries whose reserves are a large proportion of GDP, such as Malaysia, whose reserves account for 54 per cent of the GDP. A loss of 10 per cent in the dollar's value can amount to a hit of 5 per cent of GDP to the country.

It is, however, an inarticulate major premise of today's financial architecture that no country thinks of ditching the dollar. A collapse of the dollar will hurt the very country that tries to initiate it.

This is the perverse power of the richest debtor country of the world, which subsists on the basis of its bonds being purchased by the other nations.

The arrogance of the legacy of power the richer countries have is such that they still dictate to their creditors what policies they should follow in regard to their economic management.

The battle of ideas is clearly starting as to how to solve this conundrum. The continuing high deficit of the US is the problem. But no G(7) or G(8) conference is by itself going to solve the problem unless the US decides to restructure its economy, reduce its fiscal deficit and make for higher savings.

But, given the fact that the rest of the world is happily financing the consumption demands of US consumers with the US' own IOUs, the solutions are not easy.

It is an established pattern of behaviour that the US depends on other countries to adjust in order to make up for its own defaults — a point made forcibly by a Deputy Governor of China's central bank recently in a riposte to the US' continuing pressures for remninbi revaluation.

In this context, an interesting idea — or a revised version of an older concept — has been floated by Mr Philip Sutton of J.P.Morgan. This proposal calls for China and its Asian neighbours to tie their currencies together and create an Asian currency unit that would gradually be allowed to float freely against external currencies.

In the author's view, this proposal would allow Asian currencies jointly to strengthen without losing their competitiveness because of the inter se stability in the region.

The proposal builds on a similar idea floated last year by Haruhiko Kuroda of Japan. Mr Kuroda's proposal had included Japan in the list of countries while Sutton leaves it out. It is interesting that the Asian Currency Unit is reemerging at a time when the euro is showing signs of strength.

We are a long way from realising the Asian Currency Unit concept. The one augury in its favour would be that Mr Kuroda is stated to be the President of Asian Development Bank, beginning this week. Given such influential backing, it is quite likely that Asian Currency Unit may become a reality at least in the next decade or so.

Readers may recall that a similar idea was floated by former Prime Minister, Mr Atal Bihari Vajpayee. But the idea did not move ahead, given that it was a casual suggestion, not underpinned by much detailed work.

But the latest proposals for an Asian Currency Unit are more likely to be translated into reality, given their sponsorship and the fact that the currency imbalances of the world call for such out-of- the-box thinking.

It is true that there are many stages to be crossed before such a euro-like unit emerges. First, a system like the European currency mechanism — that predated the coming of the euro — must be set up.

Also, there is the question of Asia's version of Europe's Growth and Stability Pact to ensure that the participants in the currency mechanism behave responsibly in the fiscal dimension so as not to create inflationary conditions.

We have to learn a lot from Europe's difficult encounter with its Growth and Stability Pact, which has proved a Procrustean bed for many nations of the Union, not excluding Germany and France.

The point to note is that being a member of the expanded G(7) or G(8) carries with its own added responsibilities. We have to be ready with solutions not only to our problems, but the problems of the rest of the world. It is time that North Block puts on its thinking cap and examines the various possibilities that are unfolding, including the Asian version of the euro.

Will we be trying to be the Britain of Asia, keeping out of the Monetary Union, while savouring the benefits of the proposed integrated trade community?

The debate is joined and the issues deserve to be debated in extenso — both by enthusiasts and opponents of the new ideas that are being floated. We have to be fully prepared to play our part in unfolding Asian Century.

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