Still down and out

Apr 05, 2009 Features / Columnists, Ravi Dev

Well, the second grand meeting of G-20 – the conclave of the leaders of the twenty countries that account for an astounding 85% of the world GDP – came off in London on April 2nd. Unlike the first one in November 2008 in Washington, there hadn’t been any hype about this one possibly being a new Bretton Woods that would break radical ground in dealing with the world economic tsunami. The four months of preparatory work had obviously revealed enough divergences of approaches to preclude the “Grand Bargain” promised early in the day by PM Gordon Brown.

What are some of the acts of commission or omission by the grand conclave that may have some impact on us? An indication from where the breeze is blowing came early in the G-20 statement when it spoke about: “developed countries …emerging markets and the poorest countries of the world too”. So the old tripartite division of “1st, 2nd and 3rd Worlds” – the communist bloc was 2nd world – is still with us. Especially so for the 170 odd countries not at the G-20 table but which have 37% of the world’s population and only 15% of its total GDP – “the poorest countries of the world”.

For us, it’s the “same ole same ole” – down and out.
President Jagdeo has expended a tremendous amount of energy in promoting the REDD approach in dealing with global warming. Sadly, green issues received very short shrift from G-20 in getting just a cursory mention at the very end of the communiqué – no numbers, no quotas and no percentages of stimulus packages for this area. The “commitments” are all aspirational – and we all know how much we can count on that: zilch.

For a small economy like ours, it is literally a matter of national life and death that international markets remain open to our products – we just cannot generate the economies of scale to become viable within our miniscule domestic market. Protectionism in the largest economies would sound our death knell.
While the G-20 statement is fulsome in stating its commitment against protectionism, it ignores the fact that in at least 17 of the stimulus packages announced by the major economies – especially the US – there are significant protectionist elements that were glossed over. This does not bode well for the future. To declare that the WTO will monitor lapses is a tautology since it is already supposed to be doing that and yet there has been the surge in transgressions by G-20.

The biggest winner from the summit is the IMF. But while this is being touted as a great victory for the “developing world”, we’re not so sure – time will tell – but it certainly is a greater victory for the institution itself. Just a few months ago, the IMF was literally down and out with its funding at an all-time low and preparing to lay off staff. It had overplayed its hand as a proselytiser of the creed of liberalisation and the dogma of marketisation – especially in Latin America in the 80s and East Asia in 1997-98. In response, Argentina and Brazil had bought out their loans and withdrawn from its ministrations while the East Asian economies built up reserves so that they would never again have to return into its grasp. Sentiments against the IMF still run deep in these and other “graduates” from its various “stabilisation” programmes.

Part of the willingness to triple its funding may have to do with the fact that in the last year the major recipients of its funding has been the Eastern European economies – six as of the last count and climbing – which their developed western cohorts are balking at bailing out. These same “developed” economies are very fragile: George Soros, the billionaire financier and even David Cameron, the leader of the Conservatives have suggested that Britain might have to seek the IMF’s help in the near future. Part of the scepticism about the IMF also relates to the universal lip service given to the need to democratise its governing structure – Europe is still vastly over-represented – but with no action to acknowledge the new global realities. This, the Statement has placed ambiguously into the future: it will certainly precipitate some tensions then.

The decision to increase the quantity of Special Drawing Rights (SDRs) – essentially the international creation of money, to the equivalent of US$250 billion held by the IMF – for the rest of the world that has no reserve currencies (such as Guyana) is positive. If in trouble, each country can draw on its quota. It was accomplished mainly at the urging of China, which along with many in the developing world had proposed the utilisation of SDRs as a new world reserve currency – as was envisaged by Lord Keynes in 1945 at Bretton Woods. This proposal was resisted by the US, which does not want to lose the advantage conferred by the use of its greenbacks as the de facto reserve currency.

On the vital matter of reintroduction of a robust regime of financial regulation, the Europeans, which favoured going that route with a global regulator, lost out to the US and Britain that had led the disastrous march into unfettered financial (and other) markets. The statement’s commitment to financial regulation will be watered down during implementation, especially in the Anglo-American axis, since the persons assigned to execute the mandate – Rubin, Geithner and Summers – are the very ones who led the deregulatory spree to begin with under Clinton. It was just released that last year, Summers – Chairman of Obama’s Council of Economic Advisors – received US$5.2 million from a hedge fund that he is now supposed to reign in.

Finally, the US lost out in persuading others to ratchet up their stimulus plans – especially a sceptical Europe – and the announced US$5 trillion is simply a total of already announced and committed plans. It’s a measure of the new global realities that the US was unable to unilaterally dictate the terms of the G-20 agreement as it did with 45 countries in attendance in 1945 at Bretton Woods. Maybe in this not inconsiderable shift lies hope for a more democratic, and equitable, distribution of the global pie for countries like ours in the future.