The G20 is meeting again six months after the outbreak of the financial crisis. What is the meeting expected to achieve?
By now it is evident that the crisis is going to be deeper and wider than what was initially thought. It is also clear that the downturn is affecting different parts of the world in different manners. The US and Europe are worst affected. It is going to be a long time before the faith of economic agents in US and European economic institutions recover.
The long term outlook for the Asian region is better than that of the West. The current year will witness sharp contractions. Major Asian economies have plunged into recessions. However, the region is showing signs of a coordinated response to the downturn. This is likely to bear fruit from 2010.
The G-20 will focus on coordinated response on a global scale. The crisis demands closer synchronisation of counter-cyclical policies across the world. The biggest threat to such synchronisation is the advent of protectionism. In its last meeting in November, G-20 had agreed to shun protectionism.
However, some G-20 economies, particularly the US, do not seem convinced by the ability of markets to engineer recovery. Though high tariff walls of 1930s are yet to reappear, inward-looking labour market measures such as curbs on H1-B visas have come into force. So have moves discouraging outsourcing of business. These are protectionist policies designed to improve prospects of local work forces. However, they discourage trade in services as well as cross-border movement of professionals.
These protective measures will certainly not go down well. India has already voiced its unhappiness. The meeting is also likely to reflect on the capacity of multilateral institutions particularly the International Monetary Fund (IMF) in responding to the crisis. The IMF?s role is expected to come under close scrutiny. The institution?s capacities to predict and prevent financial contagions have been under the scanner since the Asian crisis of 1997. The IMF could not predict the onset of the Asian meltdown. On the contrary, its aggressive emphasis on abolition of capital controls was underlined as one of the key factors precipitating the crisis.
Availability of adequate credit will be a key determinant of global recovery. Can the IMF provide enough credit to a world thirsty for funds? As of now, no. The global credit requirements are enormous. Reform of multilateral institutions, particularly Bretton Woods institutions such as the Fund and the Bank, should figure prominently in the talks.
Reforms of multilateral institutions are expected to be discussed in the larger perspective of strengthening the global financial architecture. Toxic assets still dominate banking systems in most parts of the world. While bailouts and injection of liquidity will cleanse these systems over time, where is the guarantee that these assets won?t surface again?
There is an urgent need to revisit issues regarding exposure of banks and financial institutions to high-risk portfolios. The global inter-bank lending processes also need to be discussed. The faith of the world in the global banking system has been shaken badly. Unless the faith revives, a lasting recovery is unlikely to begin.
It appears that Asia will have a major say in the decisions taken at the G-20 meeting. China and India are exceptions to the battering taken by major economies. Both are key members of the G-20 along with some other members of the East Asian Summit (EAS).
Asia holds the key to global economic recovery. The US and the rest of the world are fully aware of this. Unlike in the past, when G-20 views were dominated by the US and Europe, the situation is different this time. The importance of the G7 members in the G-20 grouping has gone down in terms of influencing major decisions. The balance has shifted markedly towards Asia courtesy China and India. It will be surprising if the meeting does not reflect this shift in the global balance of economic power.
?The author is a visiting research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views