No global game plan coming

Apr 02, 2009 Editorial

From the beginning of the year, we have been intermittently utilising this space to highlight the meeting of G-20 – the twenty economies that account for almost eighty percent of world’s GDP – that convened today in London.
With the worldwide reach of the financial crisis evident by mid-2008, President Bush enlarged the invitation list beyond the elite G-7 club that usually cogitated on “global” issues and summoned the largest “emerging” economies to Washington last November.

They issued an impressively detailed “to do” list, but with only two time-bound commitments: “modalities” by December 2008 for completing the WTO DOHA Round and meeting again in London in April 2009.
An impressive agenda has been prepared, but if the complete failure to meet the first objective from their November meeting and the signs of mounting disagreement between Europe and the U.S. are anything to go by, we should not get our hopes up too high.
This is not good news for small developing economies like ours that are so dependent on the G-20 to purchase our primary products.

The major issue on which the G-20 would want to have unanimity would be the type of state intervention that is necessary for their economies to resume growth. The U.S. favours the sustained and heavy stimulus through fiscal intervention that they have embarked on – even to the extent of financing their burgeoning deficits through the printing of money – while Europe, led by Germany is leery of the inflationary import of going down that road.

It is evident that the different historical experiences of the two sides, with inflation, are playing themselves out and will ensure no agreement on this issue.
Another concern that may prove contentious would be the restructuring of the International Monetary Fund (IMF) to better deal with exactly some of the issues that have precipitated the present financial imbroglio.
There has been a venerable school of thought going back to the 1944 Bretton Woods meeting, which sought to make the world safe from future Great Depressions, that it would be the height of folly for the currency of any one nation to be the world reserve currency again. Some, like Lord Keynes, proposed the creation of a world currency, consisting of a basket of major currencies and issued by the IMF. The U.S. overrode that position and the U.S. dollar has played that de-facto role ever since.

That, of course, gives the U.S. a tremendous advantage in world trade since all those who accept either U.S. greenbacks or other U.S. securities are in effect providing loans to that country.
Right now that account runs into the trillions (with China holding a great chunk) and some creditors, including China, are balking. A world currency was created in the IMF back in 1968 before another U.S.-induced crisis – Special Drawing Rights (SDR) – and it has been proposed that this be expanded exponentially at this time.

It is unlikely that the U.S. will agree, or that China will rock the boat too much for fear of jeopardising the value of its U.S. reserves, so we can see the status quo continuing.
Then there is the matter of consummating the DOHA Round, which as a development round, is important for us. This will receive very little shrift – even with the presence of the BRIC nations (Brazil, Russia, India and China) at the table, since they are all more concerned with protecting their own economies.

Their best bet would be to all agree to eschew protectionist policies – but even this is unlikely to go beyond rhetoric, since they all – especially the U.S. – have already embarked on that course.
Finally, there is the matter of the financial regulations (or rather the lack thereof) that actually brought down the house of cards in the U.S. and Europe after the financial sector was allowed to let greed run wild – and run the real economy aground.

Apart from some tinkering, no fundamental change will be engendered: it is the same financial masters, after all, who have been put in charge of fixing the system – and the real economy.
Imagine the irony of a financial maven in charge of fixing GM! We are on our own.

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No global game plan coming

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