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G-20 was promising, but short on substance
US President Barack Obama came to London with a mission. His primary goal was to ensure the participation of other countries in the US effort to pump money into the global economy. His intentions were announced beforehand during his frequent media interactions. There had also been protests from the EU, led by France and Germany, who had rightly asserted that the institution of robust regulations in the global financial system must precede any further efforts to sustain the old world financial order by injecting funds through bailouts and stimuli. However, in the end Obama had his way, aided to a large extent by the emerging economies led by the Asian giants. While India eagerly supported the American line, the Chinese clearly lacked original voice, enmeshed as they are in the ‘Made in America’ mire.
The pre-summit dinner witnessed ‘Obamaspeak’ that was followed by the complementary and supportive remarks of the Indian Prime Minister, a noted economist and a credible voice of the Third World. These initial views seemed omnipresent in the final communiqué that was circulated at the conclusion of the summit. While Dr Manmohan Singh’s suggestions on protectionism, regulation and surveillance, IMF reforms and credit flows were a part of the final G-20 declaration, even he would be the first to admit (as he did at a press conference later), these key aspects formed part of the Rhetoric or future promise, even as the US endeavour to ensure global participation in the bail out efforts and recapitalization of institutions formed the substance of the agreement.
The Committee of 20 has agreed to infuse capital into the IMF without any immediate reform in its constitution and operations. The current $250 billion at the disposal of IMF would be increased by $500 billion. Japan and EU have agreed to provide $100 billion of additional funds while China will contribute $40 billion. The IMF will also increase the amount available to each country by way of Special Drawing Rights (SDR) by $250 billion. This allows distressed economies to literally print additional currency and convert it to tradable notes in extreme circumstances. There is also a suggestion that IMF would deploy more effective surveillance; hopefully implying it will watch the West as closely as it does the developing world. However, in the absence of regulations and regulatory authority it remains to be seen if this surveillance would amount to much. The world was expecting a reform of the IMF to be initiated and an urgent change in its governance; these measures have been relegated to the list of future efforts and promises.
The other major disappointment was the lack of progress in instituting a global financial regulator. As a consolation the G-20 agreed to strengthen the Financial Stability Forum and enlarge its membership to include India, China and Brazil (and have rechristened it as the Financial Stability Board). Though it aspires to serve as a watchdog and advise national regulators on activities of individual companies/organizations, the lack of defined powers will clearly undermine its ability to serve the role of a global regulator that is so urgently needed.
President Obama had unequivocally sought the participation of EU, India and China (read funding from) on the rescue efforts through government bailouts. His intention to get commitments from these countries was thwarted by the French and German governments. British Premier, Gordon Brown, though stitched together a compromise that restated the $ 5 trillion stimulus already announced by countries along with the possibility of further bail-outs in future if needed. Though this aspect was meant to be at the core of any G-20 resolution, it remains unresolved primarily due to the ‘Regulation Versus Stimulus’ divide between the US and continental Europe.
The Indian position has also supported the need for regulation though the conviction of its position will be tested in the days ahead. India needs to integrate with the global financial systems in order to access capital that it urgently needs. It is important that India argue for the early establishment of a supra-regulator so that the global risks to its banks and institutions are minimized.
India and other countries have also agreed to participate in recapitalizing financial institutions on the belief and with the stated intention of reviving global credit flows and have also agreed to jointly agree to the treatment of ‘toxic assets’. In fact treatment of ‘toxic asset’ in the declaration does not cut any new ground and the responsibility for the same still rests with local governments though a commonality in the mechanics is proposed. One of the great impediments for bank credit is the presence of these bad loans. Unless these bad loans are purged from the balance sheets it remains to be seen if banks could resume regular lending again and this important challenge still remains unaddressed.
President Obama made it clear at a post-summit press conference that his primary mandate is to serve the American citizens and this was evident in the discussion on protectionism and its articulation in the summit agreement. While the wordings have asked countries to desist from protectionist tendencies (trade barriers) till 2010 (12 months), there is skepticism as 17 nations have already breached trade practices since November last, when a similar agreement had been endorsed. The suggestion of this 12 month time-frame itself is suspect. Why should any time-frame be mentioned and why should not all trade at all time respect the WTO arrangements? Wouldn’t this special emphasis on a time period actually encourage countries such as the US to operate outside of the WTO claiming special circumstances? This summit will also strengthen Obama’s hand as he defends his position on the issue of executive salaries and bonuses at home. New rules and best practices agreed to by the G-20 crack down on the multi-million dollar cash bonuses doled out as reward for risky investment and trading calls.
In conclusion it would seem that the while the current crisis may see the end of the ‘Washington Consensus’, the overwhelming dominance of President Obama at the summit underscores that Washington would firmly remain the architect and the driver of the new world order through, and on the other side of, this crisis. The outcome of this summit can be summed up as ‘No Stimulus and No Regulation’ declaration, though with plenty of promises on both fronts.
The author is Vice-President-Development and Outreach at the Observer Research Foundation (ORF) in New Delhi. His area of expertise is Regulation/Policy, Corporate Communications and Media Studies. An electrical engineer by training, Mr Saran is a Masters in Media Studies from the London School of Economics. Frpm 1994 onwards he has had a rich and diverse experience in the Indian private sector and was actively engaged with regulators and policy-makers during the 1990s as India undertook economic reforms. Since October 2008, Mr Saran is developing and implementing the outreach and development programmes at ORF. His current projects are in the domain of "globalisation" and include studies on Islam, Radicalisation, Climate Change and the Global Financial Crisis. He continues to contribute in various fora on regulatory aspects and on the political economy. The views expressed in this article are his own.