Anil Kumar Satapathy
With the world recovering from one of the severest financial crises, in September 2009 prominent leaders of major economies called for better coordination among nations on economic issues. On September 25, they decided to replace G8 (congregation of eight top industrialised countries) by the G20 forum – recognising other emerging nations’ importance and valuing coordination among them.
But soon after, differences cropped up. A year has since passed, making it an ideal time to mull over the achievements and challenges of the forum.
G20 is a congregation of the Group of Twenty Finance Ministers and Central Bank Governors of major 20 economies: 19 countries plus the European Union, which is represented by the President of the European Council and by the European Central Bank. Their heads of government or heads of state have also periodically conferred at summits since their initial meeting in 2008. Collectively, the G20 economies comprise 85% of global gross national product, 80% of world trade (including EU intra-trade) and two-thirds of the world population. This means that the group almost represents the whole world economy.
Stimulus: If 2008 saw one of the worst financial crises since 1930s, the year 2009 saw one of the best coordination efforts among all the nations to revive the belligerent economies. In 2009, major countries gathered in a loosely held forum called G20 and inked agreements to continue with their stimulus to boost their respective economies – thus bolstering efforts to bring the world out of the economic recession.
But, with inflation and nations’ debts rising fast, countries were forced to rethink their strategy. Recently, the G3 — America, Europe and Japan — were caught in fierce policy debates on stimulus and exit strategies. At the heart of this debate are two issues that pit the short-term against the medium term. First issue is, whether additional fiscal stimulus at this stage will jeopardise medium-term fiscal sustainability; the second issue relates to whether continued expansionary monetary stance — QE2 in popular jargon — will be an adequate substitute for the waning fiscal stimulus and the implications an ultra loose monetary policy may have for medium-term inflationary trends.
As each country has its own financial authority, it is difficult to forge a concession on a common roadmap. Countries like US and Japan are still having their zero-rate policy which results in a heavy flow of foreign currency to emerging markets for better returns – fuelling inflation in these markets.
Many countries have recently put taxes on such money to discourage such flow of hot money.
Currency wars: The world in recent times is seeing an interesting battle between the US and China. While Washington accuses Beijing of deliberately devaluing its currency to promote its exports, China says it cannot opt for a free-float method for Yuan as it would send its mainly export-oriented industries into bankruptcy.
The row nearly threatened diplomatic ties between these countries. Europe has voiced similar fears while Japan, and other Asian countries, recently moved to weaken their currencies to protect exports, sparking concerns of a return to the `beggar-thy-neighbour` policies at the heart of the 1930s Great Depression.
Sensing the severity of the situation, the leaders of the European Union have urged their Group of 20 counterparts to avoid a damaging currency war so as to prevent any return of trade protectionism.
In a declaration, they insisted that the G20 countries use their summit in South Korea next month to "avoid engaging in exchange rate moves aimed at gaining short-term competitive advantage".
Will it affect trade (Doha round):
Concluding the nine-year old Doha round is definitely on the platter of G20 leaders this time. Started in November 2001, the aim of the Doha Development round is to lower trade barriers around the world, which allows countries to increase trade globally. However, talks have stalled over a divide on major issues, such as agriculture, industrial tariffs and non-tariff barriers, services, and trade remedies.
Last year, a G8 summit in Italy and a Pittsburgh meeting of the Group of 20 committed to a 2010 end date that now looks impossible to meet.
One of the major highlights of the G20 meeting is undoubtedly the protests held by climate activists.
Though previous summits of the Group hardly dealt with non-financial issues, of late there has been a heightened concern on climate change. The EU has already passed climate change laws which are considerably more ambitious than Kyoto. But with economic issues high on the agenda, it will be interesting to see whether G20 can talk on climate.
G20 was created as a multilateral forum for better coordination among nations. It is mostly a loosely held organisation. The European Union, which almost failed, is an important indicator of the limitations of such forums. Individual necessity and domestic political compulsions of leaders disable them to walk the extra mile in such forums.
The G20 is undoubtedly going through testing times. But, like a Chinese proverb goes – Journey of a thousand miles start with one step – there is some sort of initiation at the least. Hopefully, this would lead to a financially more stable world.