Prime Minister Manmohan Singh’s line against ?competitive devaluation of currencies? became the stated theme of the final position taken by the G20 on Friday. The contentious plan to introduce caps on current account deficits, a shorthand measure of how much countries should borrow from the rest of the world, has been swept off the G20 table, said Montek Singh Ahluwalia, India?s key interlocutor. The step suits India and other emerging economies which aim to borrow deep from global savings to finance their infrastructure projects. G20 countries have also decided to set up a market-linked mechanism to finance infrastructure that addresses the other problem of the post meltdown world overwhelmed with huge capital flows searching for returns, while countries find difficulty in sourcing long-term funds.
The final communique also specifically asks the US to refrain from measures (like quantitative easing) that would create ?disorderly movement? of the reserve currency, viz the dollar. The Planning panel deputy chairman said G20 economies have decided to leave it to individual countries to decide on deficits and surpluses they are comfortable with and then match their impact on the global economy. Ahluwalia said this mutual assessment process will be unique and move the world away from IMF-led projections. It is expected to be over, in time for the next summit, a year from now at France.
The US had led a chorus, opposed by China and India to make countries agree on a cap, which it claimed was building up to another crisis. Prime Minister Manmohan Singh in his speech said: ?It is not easy to reach agreement on what are sustainable current account balances for individual countries? It is even more difficult to agree on a particular combination of policies to achieve these targets.? The communiqu??s position is an endorsement of Singh?s line, supported by Chinese president Hu Jintao and German chancellor Angela Merkel.
Singh reminded that ?reserve currency countries (like the US) have a special responsibility to ensure their monetary policies do not lead to destabilising capital flows.? Ahluwalia added that a currency war is not the right way to describe the situation between China and the US, since the major issue was how to ensure the large economies kept their deficits and surpluses in sync with global growth needs.
While the G20 has no coercive role in shaping tax and monetary policy of member countries, after the financial meltdown, its position has carried the day everywhere, including India. G20 also approved a global infrastructure finance mechanism, which will channel excess savings in economies with massive forex reserves to buy bonds from multilateral financial institutions like the World Bank. An official privy to the developments said the Bank can then finance either a government which wants the money to build infrastructure or lend directly to projects. Both private and public sector entities will be able to buy bonds from the multilateral institution. This would essentially multiply World Bank?s funding limits by billions of dollars to accommodate the surplus in global savings. ?At present, savings ? especially in developed economies ? are searching for good returns, which the infrastructure projects can generate?. The G20 plan expects to focus on infrastructure investment, to be funded through private and public finance and through the market mechanism, as part of the Seoul Development Consensus.
Singh said in his plenary speech that a way to mop up the capital rushing into emerging markets is to ?recycle surplus savings into investment in developing countries (infrastructure)?.On Thursday, OECD chairman Angel Gurria said the plan to link infrastructure development with capital flows will be the biggest achievement at the Seoul summit.
This is a new way to reach funds for infrastructure development in developing countries, instead of going through aid channels. G20 will set up a panel to work out ways of mobilising ?private, semi-public and public resources for infrastructure investment?, Singh said. Global economies must work towards correcting current account imbalances, avoid competitive devaluation and resist protectionism, Singh said in his address.
Manmohan supports continuing stimulus
In an indication to keep tax rates benign in India’s Union Budget, due next February, Prime Minister Manmohan Singh pitched in favour of continuing with stimulus. ?Fiscal correction need not be front-loaded everywhere,? he said in his speech at the plenary session of the G20 summit in the morning.