Will the G20 meeting help resolve the crisis?
Saturday, 21 March 2009 23:23
THE G20, REPRESENTING 20 of the world’s most influential economies, is to hold a summit meeting early next month. There have been intensive preparations for this summit and hopes have been raised in financial markets that joint international action will be taken to halt the spread of the crisis and lay the foundations of recovery. Our view is that internationally co-ordinated policies are a vital part of the policies needed to bring this crisis to an end but investors should be realistic about what can be achieved at such international summits.
WHY INTERNATIONALLY CO-ORDINATED POLICIES ARE VITAL
The current global slowdown is the worst we have seen since the post-World War II global economic order was established in 1945. Moreover, the global crisis is unprecedented in the speed of the economic declines many countries are suffering, its geographic spread and the complexity of understanding and resolving its roots because of the new-fangled financial innovations which lie at the heart of the crisis. The scale and global nature of the crisis alone calls for joint action but there are other reasons why coordinated actions are needed to resolve the crisis:
First, substantial amounts of monetary stimulus are needed to kickstart a recovery. Yet, if some countries are far more aggressive in this area than others, then any recovery could be thrown off-track by currency turmoil. For example, if the US is prepared to literally print money to ease its way out of the crisis but the European Central Bank is not, then at some point, holders of US dollar assets are likely to lose confidence in the dollar and switch to the euro. Already, the Chinese — now the world’s largest holders of US dollar securities — have signalled their discomfort with the risks associated with the US dollar. Premier Wen Jiabao noted in an important speech to the National People’s Congress recently that he was quite “worried” about China’s investments in the US dollar.
Related to this is the fact that so far policy makers have not used one monetary tool that could prove to be highly potent — getting the International Monetary Fund (IMF) to issue new Special Drawing Rights(SDRs). The latter are a form of global money which the IMF, acting as a sort of global central bank, is allowed by its statutes to issue. Technically, if 85% of IMF voting shares opt to do so, the IMF can simply “print money” by allocating each IMF member country with new SDRs. For the past 30 years though, the US has opposed such SDR issues. It will require a highlevel agreement among the world’s top economies to allow an SDR issue to materialise, something which could be a strong positive for the world economy.
Second, the global crisis is widening. Several countries in eastern Europe stand on the brink of a crisis that could be as bad for them as the Asian financial crisis was bad for this part of the world. Hungary — one of the countries at risk — has estimated that US$230 billion ($350.5 billion) worth of aid is needed to contain this threat. Such massive rescue packages can only happen if there is joint agreement to share the burden of such aid.
Third, an important reason why trade flows have collapsed so precipitately is the disruption in trade finance. So far, individual or bilateral efforts to get trade finance flowing again have not worked. Here, too, international co-operation is crucial.
Fourth, we need global agreement on avoiding mutually damaging actions, of which two are critical:
There are increasing signs that, despite all the rhetoric about preserving world trade, many countries are resorting to disguised forms of trade distortion to protect their producers. If there is no firm resolve to prevent this spreading, we could still see the breakdown of free trade which most people agree is important to maintain global economic growth.
There is also a temptation for some countries to engage in competitive devaluations. Again, joint agreement is needed if to avoid this.
DON'T HOLD YOUR BREATH
So, can the G20 economic co-operation process deliver the results we want? Here is where we cannot be fully confident. There are several reasons why we need to be cautious.
First, the structure of the G20 is not amenable to quick decision-making. While it is supposed to be restricted to just 20 countries sitting around the table, in reality, the number of actual participants has soared in recent weeks. For example, while Indonesia is the Asean member in the G20, Thailand as the chairman of the Asean summit this year will reportedly be there to represent Asean. Similarly, other countries are being added, as are several international agencies. We understand there might now be 48 people sitting around the table, not just 20. That size does not make for easy or quick decision-making.
Second, there are fundamental disagreements which can at best be papered over, not fully resolved. We saw this with the recently concluded G20 finance ministers’ meeting. While the US was keen to secure agreement among all nations there for aggressive fiscal pump priming, there was not sufficient consensus on this, forcing the Americans to drop their demand that all countries commit themselves to fiscal stimulus equivalent to at least 2% of GDP.
Nevertheless, the G20 process is still useful. Bringing together key world leaders in this format will help ensure that some governments do not follow through with mutually damaging policies. So long as all these countries see themselves as having a stake in the G20 process they are bound to avoid the trade-destroying policies that led to the Great Depression of the 1930s. Not only will the G20 process help avoid bad policies, the sharing of experiences at such meetings can also help individual countries craft solutions to their national problems by learning from others.
Moreover, only such gatherings of a large number of countries can secure agreement on the way forward on some key areas — such as the expanded resources to be given to the IMF and other multilateral agencies such as the Asian Development Bank, an agreement that was the product of the G20 finance ministers’ meeting.
So, what is the bottom line? The good news is that multilateralism is alive — so we can almost certainly avoid the foolish mistakes of the past such as blatant protectionism. The bad news is that the decision-making process will not be speedy and that means that the bottom to the crisis is still some way off.
Manu Bhaskaran is a partner and member of the board of Centennial Group Inc, an economics consultancy
Back to TopQuote this article on your site
To create link towards this article on your website,
copy and paste the text below in your page.
Preview :
Will the G20 meeting help resolve the crisis?
Saturday, 21 March 2009 © 2009 - The Edge Singapore
<< Prev - Next
Last Updated on Sunday, 22 March 2009 13:56
http://www.theedgesingapore.com/blogsheads/1000-manu-bhaskaran-2009/3137-will-the-g2o-meeting-help-resolve-the-crisis.html
No comments:
Post a Comment