The Hindu Business Line : Bush’s last hurrah!

The post-summit communiqué reflects an insufficient response by the G-20 to the seriousness of the present crisis involving the jobs and livelihood of millions of people around the world.

S. Venkitaramanan

The Conference of G-20 held recently at Washington saw, in effect, one of President Bush’s ambitions coming to a grievous end. He had perhaps expected that he would leave his office with a resounding message of international cooperation as an answer to an unprecedented financial crisis.

It was unfortunate for him — not for the world at large — that his Party lost in the elections held recently. Further, the financial crisis was quite serious and the economists and politicians of the world almost unanimously agreed that the crisis was of American origin with global implications.

To use the analogy of global warming, the US turned out to be an economic polluter, and if polluters have to pay for the harm inflicted on others, Bush’s Administration must pay for its share of the responsibility.

The G-20 conference came amidst great expectations as to what it could accomplish. Some experts and politicians around the world had imagined that it would be a replay of Bretton Woods. The argument was that the emerging market economies had come to have their own say in international policy-making and the crisis was an opportunity to restructure the financial system of the world. There were hopes that the emerging market nations would be given an equitable place in the governance of the IMF and the World Bank.

The quotas of IMF had been reset only recently and could not be altered. He poured cold water on the idea that the IMF would be reorganised to perform a useful role and the World Bank reflecting the importance of the emerging market countries. The conclusions of G-20 conference, which did not cover this issue, confirmed that his warnings were realistic.

Consensus on reform

What the Conference achieved is, however, a consensus on the direction of reform and important issues of concern to the world economies arising out of the recent financial crisis. On the question of the origin of the crisis, the Conference communique indicates that there was consensus that the crisis arose partly because of wrong macro-economic policies and partly because of defects in regulation.

Without conceding that the American Federal Reserve’s low interest policies were primarily to be blamed, the Conference lays the responsibility on the nations of the world for future restructuring of regulations, transparency and management of risk mitigation.

There is a reference in the communique to the need for establishing a College of regulators, which would try to ensure that regulations of different countries do not miss obvious loopholes. When Dr Manmohan Singh spoke of the need for global governance, he had in mind a radical restructuring of financial institutions. The G-20 meet settled instead on expansion of Financial Stability Forum, as part of its attempt to make international financial governance more inclusive.

Humdrum agenda, no new lines

The communique of the G-20 conference draws a detailed work plan, which visualises a series of meetings of G-20 nations with time limits laid for different tasks.

While the details of the work plan need not concern us here, it is sufficient to remark that the document leaves us cold in its response to the seriousness of the present crisis involving the jobs and livelihood of millions of people around the world.

The outcome is essentially a technician’s document, which spells out the necessarily humdrum agenda of regulatory reform and does not strike out any new lines. It does not show any good vision as to how financial institutions can be reformed for the future. Maybe, the task is too complicated to be accomplished in one meeting. We have to await a detailed work plan of the Expert Groups. The G-20 is to meet again in April 2009 and I hope by that time the outlines of the proposal for regulatory reform will be clear.

The Conference communique also calls for a heightened role of the IMF and the World Bank. It admits the IMF does not have resources and the communique has called for efforts to reduce this gap. Obviously, this will need contributions from the emerging market nations, who hold a substantial chunk of the world’s reserves.

In this context, it is relevant to quote Dr Arvind Subramanian’s citing a ditty that was commonly heard at the time of the first Bretton Woods Conference. The ditty said, Lord Halifax said to Keynes, “the Americans have all the money bags and we (the British) have all the brains”.

The situation, however, seems to have been reversed now. The emerging market nations have all the money bags. Although Dr Arvind Subramanian believes the emerging market economies, such as India, have all the brains, the US seems to have a surplus, that too in designing weapons of mass financial destruction, such as derivatives and hedge funds, which attract resources from other countries.

The communique of the Conference covered issues, such as regulation of rating agencies, hedge funds and the like. It also encompassed a discussion on the need for fiscal impulses for ensuring that growth is restored.

To what extent the fiscal impulses can be reasonably expected in the current crisis and a resulting credit crunch, is not clear. But China has shown a way out for fiscal impulse. Whether India will follow with a similar policy initiative remains to be seen.

Obama’s absence

The G-20 Conference was particularly handicapped because the President-elect Barack Obama did not attend it. The initiatives announced at the Conference are basically focused on actions initiated by countries in the advanced world, especially the US.

If Mr Obama chooses not to adopt the consensus announced by the G-20 Conference, then we will be in serious trouble.

The expectation is, however, that the President-elect may not find anything serious to quarrel with the document of the communique of G-20 because it essentially incorporates good intentions instead of spelling out specific policies. There is perhaps virtue in ambiguity, especially in matters of economic and financial policies covering the globe.

In conclusion, it must be said that the G-20 Conference held recently in Washington was nonetheless a break-through, in the sense that it brought together different nations of the world at the Head of State level to discuss the world economic issues.

It could have been a worthy successor to the Bretton Woods Conference if there had been an agenda similar to what Lord Maynard Keynes and his American counterpart had placed before it.

The circumstances arising from the present financial crisis were different from those in 1944. But, the present crisis has a more far-reaching implication than even the post-War crisis of the 1940s.

It is to be hoped that in the subsequent meetings of G-20 there will be a greater sense of urgency about the looming slowdown, which the current crisis has brought about and the need to evolve measures to prevent the crisis from expanding and being repeated.

There is a heavy burden of responsibility of the G-20 conference task force. May they be equal to the challenge!

( blfeedback@thehindu.co.in)

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