The Hindu Business Line : What Asia should expect from G-20

Free movement of capital, goods and services across borders fuelled the economic rise of the emerging markets and raised affluence in the developed world. The G-20 must ensure that the current financial turmoil does not unravel that, says JASPAL BINDRA

Asia has come of age. The region’s rising powers — China, India, Korea and Indonesia — will sit at the global high table to decide on ways to reshape the world’s financial and economic order. There are expectations that the outcome will include concrete steps to revive economic growth, a boost in funding for the International Monetary Fund, and an understanding on the new financial architecture to restore trust in the financial system.

Asian policy-makers are looking for two other critical assurances from the meeting — one, that the developed countries will keep their markets open; and two, that global capital flows needed to finance trade and investment will remain unchecked. No one doubts the difficulty of reaching a consensus. But the stakes have never been higher. Amidst frenetic attempts by individual governments to tackle the biggest economic crisis since the Great Depression, it is easy to forget that the progressive dismantling of barriers against international trade and investment contributed to the world’s biggest economic boom.

More than 200 million jobs were created worldwide between 2000 and 2007, according to the Institute of International Finance, and millions of people in the developing world were lifted out of poverty, as a result of free flow of capital, goods and services.

Yet, as the crisis continues, governments and businesses in Asia are increasingly worried that the world’s biggest and most developed economies will explicitly or implicitly legislate to encourage manufacturers to keep production onshore and, banks and insurance companies to keep money within their borders.

Any such protectionism comes at a dark time. Although Asia remains fundamentally robust, thanks to high private savings, conservative balance sheets of companies and financial institutions and mammoth foreign reserves, the ongoing financial turmoil has caused consumers and lenders in developed countries to tighten their purse strings.

Fallout for Asia

Exports from Asia have declined sharply, bringing down economic growth. Meanwhile, many borrowers are struggling to refinance their debts or to access trade finance at reasonable costs. In addition, the International Institute of Finance estimates that net private capital flows to emerging markets could drop to $165 billion this year, from over $925 billion in 2007. Steps to ensure that trade and capital keep flowing ought to be at the top of the agenda for the G-20 leaders. The G-20, whose member countries account for over 80 per cent of the world’s output and two-thirds of the world’s population, is a forum which truly represents the global economy. But will it produce real benefits for Asia?

The London meeting will be only the second time that G-20 leaders have held a summit meeting. The first was just recently, in November 2008 in Washington, as a direct response to the economic crisis.

At this second summit, the emerging Asian powerhouses are expected to assert more leverage due to the relative strength of their position. Though weakened, the economies of China, India and Indonesia are still expected to show reasonable GDP growth this year of 6.8 per cent, 5 per cent and 4 per cent respectively, according to Standard Chartered economists’ forecasts.

Meanwhile, China has the world’s largest currency reserves, ahead of Japan, with India, South Korea, Taiwan, Singapore and Hong Kong also ranking in the top 10.

The emerging powers have already notched up some gains. The G-20 finance ministers, meeting in London in March, agreed to expand the Financial Stability Forum — a body which will set new standards for global financial institutions — to include developing country members. These countries will also join global forums that will create new international accounting and risk regulatory frameworks.

Ironically, it is the financial upheaval in the West that brought to the forefront the systemic importance of emerging markets. It is now clear that the imbalances between the high saving nations in the East and overspending economies of the West led to the asset bubbles in the US and Europe.

Domestic spending

To correct the imbalances, the big savers, particularly in Asia, will have to find ways to spend more to boost domestic economies. Higher local consumption will help the economies reduce their dependence on exports. Domestic spending will also help ameliorate the slowdown in investments from the West.

China has made a decisive move on this front, with its stimulus plan to spend almost $600 billion, largely on infrastructure projects. It has also pulled out all stops to make foreign direct investments easier for domestic companies. As a result, Standard Chartered economists estimate that overseas investment by Chinese companies is estimated to have touched almost $65 billion in February alone, after doubling to $52 billion in all of 2008. A significant part of those investments went into acquiring raw material assets in Africa, Latin America and Australia, injecting substantial liquidity into these markets.

Other countries in the region have also taken unprecedented fiscal and monetary steps to stimulate local consumption. Meanwhile, Asian governments, including the capital-surplus nations of Japan, China and Korea and their South-East Asian counterparts, have agreed to a $120-billion pool of foreign exchange reserves to defend their currencies.

Asian economies will need to trade more among themselves and with the Middle East and Africa. That is already happening in some trade corridors. Trade between China and Africa has expanded twenty-fold in just over a decade. For some countries in the region, China has replaced the US and Europe as the biggest export market. This process is likely to accelerate as western consumers cut back on spending and increase savings.

Recapitalising lenders

Asian members of G-20 are also looking to international financial institutions such as the International Monetary Fund (IMF) and the World Bank to revive investments into the region’s developing economies. But the IMF is cash-strapped after providing bailouts to several East European economies. It is hardly in any position to rescue another medium-sized economy in Asia, Africa or Latin America should the need arise. The meeting of G-20 finance ministers in London last month made some headway on this issue. The ministers agreed to substantially expand the IMF’s resources, possibly increasing the Fund’s emergency borrowing programme by $500 billion, so that the institution can once again be a lender of last resort in times of international crisis.

The Asian Development Bank also plans to triple its capital base to $165 billion, enabling it serve the poorest and most vulnerable sections of population in the region. Emerging Asian powerhouses such as China and Korea, apart from established members like Japan, are now expected to provide a significant part of the funding required to recapitalise these global financial institutions. However, greater monetary contribution from the rising powers would have to be accompanied by giving them a greater say in the running of these institutions. For instance, Korea has more than twice the economic output of Belgium, but Belgium’s representation in the IMF is 50 per cent greater than Korea’s. This is where developed countries will have to give up more ground.

At the upcoming meeting, G-20 leaders must accelerate the process of revising the quota allotted to IMF member-countries so that the emerging markets can get voting rights in the Fund that reflect their financial weight. It was the progressively free movement of capital, goods, people and services across borders that fuelled the economic rise of the emerging markets and raised affluence in the developed world. The risk is that this could unravel if the current financial turmoil leads to heightened protectionism, curbed capital flows and fragmentation of the global economy. The G-20 has a duty to ensure this does not happen.

(The author is Chief Executive( Asia), Standard Chartered Bank.)

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