The New Nation - Internet Edition

Hasnat Abdul Hye

A knight in white armour has appeared to rescue the damsel in distress, as in the legend. In the contemporary narrative the damsel is, of course, the global financial system and the white knight is the new-fangled G-20, group of 20 countries. The world has seen quite a few groupings of countries under the short hand 'G' in recent years and they seem to appear every time there is a global conference on some issues, demonstrating the alignment of countries according to their shared interests.

G-20 is unlike any of the groupings that preceded it. Participation in a conference or taking policy decisions as a group is not its raison detre. It has been hastily organised to address the great financial meltdown that has overtaken the world. It includes the powerful G-7, representing the rich developed countries and, in addition, has emerging and developing countries like China, India, Brazil, Mexico, Indonesia, Saudi Arabia, South Korea and others as members. President Bush has invited the heads of state and government in the first summit meeting of the group in Washington to exchange views on the financial turmoil that has almost upended the economies across the globe and now threatens to tumble into a global recession. The goal set for the G-20 has both short and medium terms. In the short term, the group wants to ensure the strengthening of the measures already taken by governments to bail out banks and financial institutions through a coordinated framework. For medium term, the G-20 will strive to reshape the international financial structure, giving emphasis on comprehensive regulation and regular supervision of the capital markets and application of a common set of principles for this purpose. Restructuring existing international financial organisations like the World Bank and the IMF or establishment of a new international body, as has been suggested by the French President, may also figure in the exercise in this phase. A consensus has already been reached that the recent financial crisis originating in America is a global problem, affecting almost all countries to the degree of their integration into the global economy. The crisis being global in nature and scope, its resolution requires co-ordinated intervention, it has been agreed. In order to make the co-ordinated measures truly global, representing all types of economies, the latest grouping (G-20) has taken emerging and developing countries on board. But the absence of Least Developed Countries (LDCs) which also stand to lose from the fallout of the crisis makes the new grouping incomplete. It should be made more broad-based by including a few countries from this category.

Even before the G-20 summit took place, the tenor and direction of the discussion and likely declarations were predictable. With the financial word still roiling, haemorrhaging banks and fuelling the bearish trend in the stock market, the immediate concern of all the affected countries is to expand and to fine-tune the stimulus package already put in place by most of them. The rescue packages have already been broadened to include buying of shares of vulnerable banks in addition to buying the toxic assets (mortgaged backed securities). Institutions in the real economy are also now clamouring for financial aid from the government and this may increase in number. A consensus on this is required to avoid a 'subsidy war' between America and the EU and between the developed and the developing countries in the near future. There has to be an agreement in principle about the type and extent of government intervention in different countries. Disagreement has already appeared within the developed countries about the role of the government in meeting economic crisis of the type currently in force. Even before the G-20 met in the summit, President Bush exhorted the world leaders not to impair the working of free market through adoption of protectionist policies. The European countries, particularly France, on the other hand, are in favour of a stronger role of government as a permanent feature and not just for crisis management. The strategy that they have in mind is not beholden to classical free market as understood by neo-liberals. President Sarkozy has bluntly observed that 'laissez-faire capitalism is over' Consensus on the controversial issues is not likely to be arrived at in the summit in view of the fact that President Bush's tenure will be over after two months. The President-elect Barack Obama has ideas on economic management, particularly in respect of free trade, that run counter to those of President Bush. In some respects, the trade policy favoured by the President-elect is more inclined to that of the EU. This, of course, is against the interest of the emerging and developing countries, not to speak of the LDCs. Reconciling the differences among the members of the G-20 on issues of trade will not be easy. But sharing the same concern for the global economy, the developed countries may now be more responsive to the needs of the developing countries.

In spite of the limited scope of the present G-20 summit it is important because it has on board both developed and developing countries for the first time to address the global crisis. Discussions on subsidy to industries will not only take into consideration the national needs but also those of other countries, as the members of G-20 struggle to reach a consensus. The financial stimulus already provided by the affected countries in the short term and its strengthening is likely to be more sensitive to is effect on the global economy because of the emphasis on co-ordination given by G-20. However, in a summit like the present, only agreements in principle can be reached, leaving the details to be worked out by committees. Already it has been indicated that a committee is expected to complete a plan of action by 31 March and the second summit may consider this by the end of April. This is pragmatic both because of the need to work out specific proposals, reconciling differences and to allow the new American Administration to reflect its views in the deliberation of the Group.

In the summit there may be discussion on reforms of the Bretton Wood institutions, the World Bank and the IMF. But for the present crisis these do not have crucial roles. None of these are in a position to coordinate the policies and actions of governments in the context of the present crisis. They are designed to address the need and problems faced by individual member countries, and not of a larger body. The committee on economic affairs of G-7 should now be expanded to take the responsibility of co-ordinating financial policies on a global scale. But to be representative it should have representation of the LDCs. G-20 is a timely initiative to bring countries together to meet a global crisis. This has to be sustained even after the present crisis is over. The lesson of the present crisis is that countries and the global system may be taken unawares if there is no vigilance. In the global context this can be ensured only if there is a permanent body.