Effective demand clearly equals power. Such has been the lesson of the G-20?s Pittsburgh Summit. Cut through the details and you will find that even if top billing went to how the summit would curb financial sector exuberance, greater urgency was accorded to the massaging of emerging economy egos, and to bolstering their purchasing power. The last two G-20 summits also mark epochal changes in the way that emerging economies might get to steer IMF policy making.
That also explains why the Pittsburgh Summit Declaration was the announcement that the G-8 is no longer the primary international economic forum. On Friday, G-20 leaders declared the G-8 has been superseded by the G-20 as the main economic council of wealthy nations. This illustrates the ascent of emerging markets. China will soon overtake Japan as the world?s second largest economy while Russia, Brazil, India, and other ?second-tier? economies are catching up fast. Meanwhile the G-20 comprises 85% of global production, 80% of world trade, and 66% of the world population.
India, China and Brazil, for instance, want greater voting power, and a change from the current dispensation. And the trio?s reasoning is watertight. They want an enhanced part of system governance since it is they who would be assisting the rest out of the trough. Yet, more than 50% of the clout is currently held by just a handful of western economies. The rest (172 of them) must settle for a division of the remaining half.
As for the OECD, the US might well be eager to share the driving seat, but not so the smaller, richer economies of Europe. That explains why the G-20 was unable to go beyond a resolve to discuss matters further; the best they could attain at Pittsburgh was to announce a January 2011 deadline for the new proposals.
What will be changing rather earlier, however, is the Fund?s demand-stifling ?conditionalities?! The new-era quota increases promise to be a nod-and-wink affair. In fact, developing economies should no longer expect to get lessons on the reformist virtues of domestic abstemiousness or export-led growth; they will be asked to accelerate the pace of internal demand and open up further to imports instead.
That, in fact, explains why the IMF, and the G-7 component of G-20, have been so eager to amass a critical minimum sum that would suffice to impart the initial lift to emerging economy import demand. That the final figure peaked at $250 billion may not seem large enough, but it is a good enough, and apparently sincere, mark of Fund intent. It should also be read in the context of the $1.1 trillion in overall financial sector-plus subventions, decided on during last April?s London Summit.
But that is only on the current account. Apropos of the capital account, etatist old-timers who still do not see the light are instructed that FDI could target exports as well as the domestic tariff area: that newly defines ?import substitution?. Disbelievers please note that China?s annual FDI inflows average $80 billion or thereabouts, and that it also has $2 trillion-plus in forex reserves. Also, China?s 2008 per capita income lay between $3,315 (IMF estimate) and $2,912 (World Bank), compared to India?s $1,016 (IMF) or $ 1,068 (World Bank).
And a revisit of the current account also shows that the recession?be it ?V?-shaped, or the dreaded ?W??looks like it is losing its stranglehold. That is strongly hinted at by some figures that are reported to have been have been released by The Netherlands Bureau for Economic Policy Analysis. The numbers there say that the aggregate ?volume of global merchandise trade shot up by 3.5% in the single month of July, its biggest jump in more than five years.? Better still, that expansion was the second one following in a row?after a more muted jump in June.
Yet, there is a downside. It is that the recovery in trade might take a very long time indeed, especially if it is to re-attain anything resembling pre-recession figures. For example, the recent commercial implosion has blown such a deep hole that even the recent gains pale and remain 16% last year?s peak (in the April of 2008).
Yet another downside is that this is just the time?before the finalisation of the Doha Development Round?when economies will be doing their best to wriggle out of prior commitments (very few have been made!), and cite the deleterious effects of the recession to do just that. The verdict in such cases will clearly be that the economies which will remain open will also be the ones that are best placed to reap the gains of their greater role in decision-making and trade-access. Meanwhile, the Chinese are also a role model from the manner in which they have been redirecting the engine of demand?away from exports, towards the domestic tariff area. That, along with the $586 billion stimulus that Beijing has imparted to the economy, has not only ensured an orderly retreat from peak manufacturing activity, it also laid the groundwork for the recovery that is imminent.
Finally, on whether India is on the same footing as China?the jury certainly seems to be out on that one. For, although everyone looks happy at the prospect of quota increases and extols low external indebtedness, still, the global financial crisis lifted India?s stock of external debt to $229.9 billion by the end of March 2009. That may have been just a fraction of earlier increments in the corpus of debt, but it is just possible the fresh IMF funds could only delay the process of export-oriented, market-based reforms.
The author is a fellow at the Maulana Abul Kalam Azad Institute of Asian Studies, Kolkata. These are his personal views