The Hindu Business Line : The G-20 meets again

Far from the heady days of the Washington Consensus, the rich nations’ club is grappling with internal divisions over ways to beat the global slump. One hopes the April meet will give a voice to all countries, big and small, and bring concrete benefits to the world economy, says S. VENKITARAMANAN.

The G-20 concluded its London Summit recently. Observers have been quick to contrast it with the previous G-20 meeting held in Washington, in November 2008, when British Prime Minister, Mr Gordon Brown, and his French counterpart, Mr Nicolas Sarkozy, had taken a central role. Mr Brown, in fact, was then enjoying high poll ratings. He even expressed hopes that the 2008 meeting would turn out to be similar to the Bretton Woods Conference initiative after World War II. He was also, at that time, claiming credit for attempts to rescue British banks in distress.

The situation has since changed dramatically. The 2008 meet was far from being a repeat of Bretton Woods. Similarly, Mr Brown’s solution for the distressed banks did not work out as anticipated in the UK. Several domestic pressures militate against Mr Brown’s acceptance of proposed financial sector reforms, including, in particular, restrictions on offshore tax havens and emoluments of banking executives.

As host of the latest G-20 meet, Mr Brown had been put in an embarrassing position, mainly by Washington DC. Observers wait with interest to see how events will unfold during the G-20 scheduled for April 2009.

Brief and decisive?

The Economist of London has acerbically observed that the only thing certain about the coming conference is that it will be mercifully brief and there will hopefully be conclusions within a day. Contrast this with the international conference held in the 1930s, which lasted for weeks and did not deliver any conclusions. In the meantime, the dollar had declined and protectionism increased.

One hopes the G-20 in April will be a conference with a difference and brings more concrete and beneficial results to the world.

Last week’s G-20 conference in London was obviously a precursor to a more elaborate meeting of the same group to be held next month. The preparatory meeting brought out the sharp conflicts and tensions among the advanced economies on both sides of the Atlantic.

In this context, the plea put forward by Mr Lawrence Summers, the Chief Economic Adviser of US President Barack Obama that all countries should contribute to the fiscal stimulus packages — he was obviously referring to Europe’s reluctance, brought forth an angry reaction from Ms Angela Merkel, Chancellor of Germany, as well as from other European countries.

EU members were unwilling to fight the slump by spending, as they had agreed to limit their fiscal deficit to 3 per cent of GDP.

Demand for regulation

Mr Summers’ plea to increase fiscal deficit spending by 2 per cent of GDP was resisted with the argument that it would lead to spiralling debt. Observers have pointed out that this difference among the rich nations is illustrative of the tensions in a partially globalising world.

The EU has its compulsions, which partly reflect a resentment with the US — the original sinner in respect of lax regulation of financial intermediaries and which was nowsuggesting heterodox solutions.

The communiqué issued at the end of the G-20 meeting expertly papers over most of the differences. It is, however, obvious that the US will have to give up its stance on continued lax regulation of financial intermediaries, particularly hedge funds. This matters also for the UK, which is close to the US model in respect of lax regulation of financial intermediaries.

‘Emerging’ irony

There was also unmixed glee at the discomfiture of the leader of the developed world, namely the US, asking emerging market economies for increased contributions to the IMF. The targets for this appeal are the Asian countries and the petro-rich countries with high reserves.

Mr Timothy Geithner, the US Treasury Secretary, has said this would enable the IMF to lend more to countries in distress. In return for this, he may have to assign greater voting rights and share in management to the emerging market economies, including greater participation in the choice of the Chief Executives of the IMF and IBRD.

The irony of the present situation has been remarked on by many observers. The situation is far different from the heady days of the Washington Consensus of the 1990s. For one thing, the US finds itself advising poorer countries to increase their fiscal deficits rather than decrease them. Second, it is advocating monetary easing in contrast to its earlier emphasis on tightening.

The irony is not lost, especially on the Asian countries which, following the Asian crisis, were lectured by the Bretton Woods twins on the need to balance budgets and allow capital flows.

Restrictions leading to tighter regulation of hedge funds would have, indeed, solved some of the problems that afflicted Asian economies, such as Thailand and South Korea, during the crisis. It is an irony that the first crisis of the 21st century, manufactured in the US, has brought on a realisation of the danger posed by hedge funds to advanced nations. They should realise that their earlier advice was flawed.

The IMF itself went on record recently advocating increased fiscal stimulus packages. The latest G-20 meeting in of London has reinforced the conviction that economists of the dialect world still have still a lot to learn about how the real economy works. It is a pity that a crisis of this magnitude today has been necessary to make the economic policymakers of the West aware of the gap between their academic learning and real-world economy.

Mr Obama will have exposure to the international community when he participates in the April meeting of the G-20. One hopes that he will be able to reconcile the conflicts in his own camp in time to make an impact on policies for the economic betterment of the world economy.

It goes without saying that this is a unique opportunity for India to get its voice heard. One hopes the Government of India, in spite of the political preoccupations with polls, will act on a well-crafted brief for the upcoming G-20 conference.

blfeedback@thehindu.co.in

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