What exactly will the Group of 20 countries do in Washington which they have not so far? Going into the meeting, most of these countries have slashed rates of interests more than once and have taken a raft of other measures. The common theme of all of them, once past the initial days, was they were all taken in concert. Given the massive pressure of the downturn, the countries will certainly take more actions.
So, what more would they achieve at the table in Washington? If the expectations are that the countries will now up the ante on fiscal stimulus, China has already done so. It has announced a $586 billion package that would run through 2010 to push demand in the economy and others in varying degrees will follow suit. That much has been made evident in the statement issued by the G-20 after its preparatory meeting in Sao Paulo.
?We stand ready to urgently take forward work and actions agreed by our leaders to restore and maintain financial stability and support global growth. Countries must use all their policy flexibility, consistent with their circumstances, to support sustainable growth.”
So far in the present global financial crisis, the one clear refrain has been the way the national governments have restrained from attacking each other for the mess, endorsing coordinated steps instead. Hardly anyone for instance has criticised the governments and the central banks for the way they have moved in from September 22 and which are beginning to make a difference.
That synchronicity is now in danger of unravelling with the end of the global crisis nowhere in sight. The items on the agenda like the development of a multi-polar world economic architecture to clip away the role of the International Monetary Fund are bound to prove divisive. Asian countries have for long insisted on a regional arrangement including a currency union, blessed by the Asian Development Bank.
But that will not help emerging economies in other continents like Brazil at all. To the extent Brazil, Russia, India and China account for 17% of world trade and almost 30% of the global growth rate as per Goldman Sachs estimates, any move by them to shore up spending in their economies is bound to be significant. The only impact of the meeting, at present, is to formalise the dissolution of the club of G-7 by the new order.
This weekend?s meeting of the countries that account for 90% of world GDP at market exchange rate is thus unlikely to achieve anything much beyond this. There is a risk that political leaders more prone to sign on popular at the cost of pragmatic policies may instead take upon something that would cause more harm than benefit.
For instance, the current mood in most world capitals is to find out a set of villains for the downturn. The financial sector in general and the CEOs of companies in particular are nice targets. The era of protectionist government order could rapidly develop from such conclaves. Already there is discussion, led notably by France, on how to rein in the flow of global speculative finance. Very few are likely to point out at this stage the disastrous experience France itself went through, when it nationalised large sections of the economy in the 1980s.
Fewer still would point out that the generational change in poverty levels in China and India was partially the result of the global flow of finance. The amounts that India has been able to set aside to chase down poverty were tax sourced from mega companies and the rapidly expanding middle class. The global movement of finance into emerging markets was the follow-through of this flow.
At the same time, the world leaders went through two torturous rounds of negotiations to make the seamless flow of global trade a reality. This did not work. Well before the present financial crisis developed, almost every country that has anything significant to trade has walked into a sub-optimal trade arrangement with its important partners.
If you think this is crazy, just check out the length of debate in the course of the Doha round on the treatment of foreign direct investment. Imagine the chaos that would loom if political leaders sat down to define portfolio investment or the role of sovereign wealth funds or hedge funds.
The current spell of extending government guarantees to banks in the US and Europe has been an emergency measure, expected to be removed once the crisis eases. But a conclave of political leaders could see virtue in the present order, and ring in a straitjacket of controls that would take decades to unravel. The beginnings of such restrictions are already here.
It is worth remembering that the two most important outcomes of the Bretton Woods meetings were the Special Drawing Rights and the IMF. The SDR did not replace the US dollar as was hoped and the IMF by general consent has been nowhere in the picture as far as Europe or the US were concerned since 1948. Where it has got involved, as in East Asia in 1996 or Mexico in 1989, the countries are unanimous that they could have done without its prescription. Let us hope the meeting agrees to let central bank governors treat the economic emergency, as you would get qualified doctors to treat a sickness.
subhomoy.bhattacharjee@expressindia.com
