The G-20 London summit was never going to be allowed to end in failure. That would have sent world markets into a tailspin. The real question is what sort of success the world’s richest nations - with often sharply contrasting views - would be permitted. In the welter of spin that followed the final communique, President Barack Obama declared the summit “a historic turning point”. That very much remains to be seen.
The money pledged, more than $1.1 trillion is immense but nevertheless needs to be taken in context. While the $500 billion extra money for the IMF to lend to struggling economies looks good, the $250 billion to boost world trade does not. Until the recession struck international trade flows were running at between $14 and $15 trillion. With trade volumes now collapsed for some countries, by up to two thirds, it is hard to see how a fraction of the original flow is going to reinvigorate international commerce. However, if it is closely targeted at export credit guarantees and payments insurance (the latter has almost dried up), it might have some beneficial effect.
The $250 billion extra Special Drawing Rights (SDRs) that the IMF has been given may have some impact, especially for the majority of countries which, unlike the US, Japan and Europe, cannot print currency without an almost immediate and disastrous impact on local inflation. The $100 billion put aside for international development banks also looks good on paper. However, these institutions tend to fund big-ticket infrastructural items in the developing world, for instance power stations, where key high-price pieces of equipment such as turbines, are sourced from First World multinationals. Thus unless the equipment costs are in some way underwritten or guaranteed by the relevant First World government, the real benefactors, at least in the short-term, are likely to be the international equipment contractors.
The IMF is also to increase its liquidity by selling of $6 billion of gold reserves, a once mighty sum that in the current climate seems almost like small change.
It remains to be seen, however, if the IMF is indeed the right organization to be dispensing all this new money. Its past performance has included an inflexible insistence on wide reaching free market reforms, which have very often damaged local business to the benefit of international companies and thus actually hindered indigenous economic development. At least the G-20 was united on its opposition to protectionism, to the dangers of which the Kingdom forcibly added its voice in London. There is also to be tighter regulations of banks and investment funds and a clampdown on most, but not all offshore financial centers. On regulation, the devil will be in the detail. The initial signs that regulators will act in concert do not look good. Even as the G-20 were meeting, the US authorities loosened mark-to-market rules for American banks, enabling them to avoid the full impact of their toxic assets, one solution for which was noticeably missing in London.
An economic giant takes the stage
China has shown itself ready to take its place at the top table of global economic governance, said The Independent in an editorial yesterday. Excerpts:
This London summit may well go down as the moment when China finally emerged from its shell to assert its own interests in the economic world of which it has become a central part. This shift was not openly there in the final communiqué. But it was certainly in evidence in the discussions leading up to the actual summit yesterday and it was clearly present in the final result; as much in what was not done as what was.
China’s biggest success was the announcement that, from now on, the heads of the IMF and the World Bank will be chosen on merit instead of being the exclusive property of the US and Europe as at present. It has been something that China, along with India, Brazil and other emerging countries, have long pressed for. Now they have it. Moreover, while the G-20 was not in a position to reform IMF voting rights itself, Gordon Brown did assure China and the others that the institution would soon set about implementing the reform.
In exchange, China has agreed to put in $40 billion of additional funds into the IMF’s coffers to help the poor and the victims of recession. It was less than some had hoped. And it is less than the $100 billion being committed by the European Union and Japan. But it gives some idea of the relative weighting that China may, in time, achieve in the fund. But the biggest change is the extent of China’s participation in international affairs and its willingness to see transnational institutions play such a part in the new world order. Not that China does not have its own views, quite distinct from others. Only two weeks ago, its central bank chief published a paper urging the creation of a new world reserve currency by expanding the IMF’s special drawing rights, a development clearly aimed at lessening the world, and China’s, dependence on the US dollar.
