*Dr Arvind Kumar
The recently concluded summit meeting of the G-20 countries in London in the wake of ongoing global financial crunch was never going to be allowed to end in a fiasco because such an eventuality would have sent world markets into a tailspin. With the conclusion of the London Summit on 4 April, the question being raised is as to what kind of success the member countries of the Group-20 – with often sharply contrasting views – would be having. In the flurry of spin that followed the final communiqué, American President Barack Obama declared the summit “a historic turning point.” Nevertheless, that very much remains to be seen.
The money pledged, more than $1.1 trillion is enormous but nonetheless requires to be taken in context. While the $500 billion extra money for the IMF to lend to stressed economies looks good, the $250 billion to improve world trade seems a paltry sum. International trade flows were running at between $14 and $15 trillion prior to the advent of recession. With trade volumes now having declined for some countries, by up to two thirds, it is difficult to see how a part of the original flow is going to give a boost to global commerce.
However, if it is closely directed at export credit guarantees and payments insurance, with 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 or may not have some impact, especially for the majority of countries which, unlike the U.S., Japan and Europe, cannot print currency without an almost instant and devastating impact on local inflation.
In a way the G-20 leaders have stimulated the IMF’s power to generate money and commence international quantitative easing, and doing so, they are putting a de facto world currency into circulation which will be outside the control of any sovereign authority.
In due course of time, SDRs are likely to evolve into a parking place for the foreign holdings of central banks. The tentative proposal for the creation of a Financial Stability Board looks like the first step towards a global financial regulator or a global central bank.
Viewed in a broad spectrum, the very notion of a global currency and global central bank seems to be authoritarian in its very nature, as it removes any vestiges of oversight and accountability away from the people of the world, and toward a small, increasingly interconnected group of international elites.
The $100 billion put aside for international development banks also looks good on paper. However, these institutions tend to fund massive infrastructural items in the developing world, for example power stations, where key high-price pieces of equipment such as turbines, are sourced from multinational companies of developed world. Thus unless the equipment costs are in some way underwritten or guaranteed by the relevant government, the real benefactors, at least in the short-term, are likely to be the international equipment contractors.
The IMF’s capability as indeed the right organization to be dispensing all this new money is to be seen. It is noteworthy that the IMF’s 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 stalled home-grown economic development.
The good news is that at least the G-20 has displayed unanimity on its opposition to protectionism. There is also to be tighter regulations of banks and investment funds and a clampdown on most, but not all offshore financial centres. The initial indications that regulators will act in concert do not look good. Even as the G-20 summit was in progress, authorities in Washington 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.
The China Factor
China has displayed its willingness to take its place at the top table of global economic governance. The London summit was perhaps the moment when China finally emerged from its shell to assert its own interests in the economic realm of which it has become a central part. However, the final communiqué of Summit did not reflect this shift openly. Nevertheless, it was certainly evident in the discussions leading up to the actual summit and it was clearly present in the final result.
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 privilege of the US and Europe as at present. It has been something that China, along with India, Brazil and other emerging economies have long pressed for. Now they have it. Moreover, while the G-20 was not in a position to reform IMF voting rights itself, the British Prime Minister 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 U.S. dollar.
In the aftermath of the conclusion of the London summit of the G-20, the U.K. Prime Minister, Gordon Brown started his major media briefing announcing that the Washington Consensus has been declared dead, and suggesting the dawn of a new consensus era – similar to a London Consensus.
Without deriding some concrete achievements at the London Summit, beyond expectations in fact, there was always a significant dose of political rhetoric, such as in this case declaring the Washington Consensus dead, and the advent of a new paradigm.
In reality, the most substantial outcome of the London Summit is the empowerment of the IMF as a global financial supervisor, stabilizer, and aid provider, through a revamped mandate and a vastly larger resource base. There is a tinge of irony in this, since historically the IMF and the U.S. Treasury Department were inextricably linked to the Washington Consensus.
A counter-argument to this apparent paradox would point to the expected shift in internal governance and in the menu of prescriptions, if there are any left, at the IMF. This line of thinking would argue that such changes would be expected to distance the future ‘revamped’ IMF from the main “Washington Consensus” mantra of combining prudent fiscal and monetary policies with liberalized markets.
Yet there is little doubt that in the coming years one can expect a move toward broadened voice and representation by governments of powerful emerging economies within the IMF, so to redress the current over-representation of (mostly) Europe. The head of the IMF will be selected according to merit and not nationality. Its ability to assess and warn prior to a large scale financial crisis would need to dramatically improve. Such efficiency and governance reforms are likely to result in some changes in how the IMF operates. An inkling of this is already in the offing through the recommendations of the Tervor Manuel Commission.
But other than abandoning orthodox dogma and embracing more pragmatism, it would be a mistake to expect a dramatic substantive shift in terms of what works for an economy, and what does not—particularly once the global economy steadies. After all, the IMF will still reflect the collective (economy-) weighted will of its shareholders. Rather than a mirror of a G-1, G-2 or G-7, its mantra may move closer to some weighted average of the G-20.
Ideology Sidetracked
The world at large, proxied by the G-20, currently lacks a real counter-ideology to the Washington Consensus on economic matters. Rather, the process leading to the two recent G-20 Summits, and a close reading of the agreements just reached in London, suggests the end of ideology in the global economy arena, and the advent of pragmatism instead. Despite political expedient grandstanding, the end of ideology is occurring in the economic policy-making approaches within the main individual countries in the G-20 as well as in the G-20, collectively.
The fiscal and monetary policies in the U.S. and the U.K. have vastly deviated from the strictly conservative neoclassical and monetarist mantra, and are squarely in a very Keynesian corner of the spectrum, not too far are Japan and China. All four differ from Germany and France, who have taken a more conservative fiscal stance, although even they have engaged in a non-trivial fiscal expansion. Keynesian fiscal expansion is being implemented in different degrees around large countries, virtually without exception.
Yet once the global economy is clearly in a recovery path, expect the mantra to turn quickly to fiscal and monetary conservatism. This will most notably be evident in the U.S. in the medium term, given the country’s onerous debt burden and the recognition that its historical dis-savings and lax past fiscal policies contributed to the crisis. No other country is likely to take issue with such a medium-term conservative turn in U.S. economic policy-making.
The risk is in the reverse: that some countries may go too far in aping the U.S. in its medium-term conservatism. This is a risk because the global macro-economic structural imbalances that were a determinant of the crisis still loom large and remain unaddressed globally. The U.S. and the U.K. need to move away from their status as a large financial deficit country, while the large financial surplus countries like Germany and China need to move toward overall financial balance.
So the fiscal and monetary policies of countries such as Germany and China should not be as tight. Addressing such structural imbalance challenges will require political leadership and global coordination. It is not a matter of ideology.
On trade policy, commitments to conduct global trade devoid of protectionism were already made during the Washington G-20 Summit in November 2008. Those commitments were in consonance with the old Washington Consensus. Yet the promises were not honored, even if the protectionist “damage” over the past few months was not large. At the London summit, while proclaiming the demise of the Washington Consensus, the G-20 leaders restated their commitments to retreat from protectionism and extolled freer global trade. In practice, some kind of creeping, but not fatal, low-grade protectionism can be expected and continuing delays in concluding the Doha Round.
On financial regulation, as compared with the U.S. and the U.K., Europe has been insisting on more of a mandate to be given to global regulatory institutions, and also for more regulatory intervention at the country level. But despite the expansion in representation in the Financial Stability Forum, and its renaming as the Financial Stability Board, and in spite of the renewed mandate of the IMF, these are not becoming global regulatory institutions, and there are no others in the offing.
Moreover, the U.S., through the recently revealed Geithner regulatory reform blueprint, has sent a clear message of financial regulation reform convergence to Europe and beyond. There seems to be consensus that the laissez-faire era of financial sector regulation is over. As an interesting aside, in the economic development field it was accepted wisdom long ago that the systemic characteristics of the financial sector set it apart from the enterprise sector, and thus justified some regulation.
The pending questions and debates on financial regulation are more in terms of crucial details, mostly devoid of ideology: how best to attain an improved regulatory system with proper disclosure, oversight and supervision? What is the proper balance between transparency and disclosure-related measures, on the one hand, and regulatory control by fiat, on the other? How to regulate across financial institutions, products and jurisdictions in a manner that avoids perverse incentives and a race to the bottom?
In terms of the pending bank clean-up and restructuring, the G-20 London communiqué is rather circumspect. But the evidence is already clearly pointing to a major new role for government intervention and ownership, albeit temporary. Paradoxically, this major deviation from the Washington Consensus model, at least in the short term, is taking place in a particularly pronounced fashion in the Anglo-Saxon countries and preceded the London Summit.
It was particularly telling that the most contentious issue at the London G-20 Summit had nothing to do with any overarching ideological mantra: the closing down of tax havens and publishing a list of offending jurisdictions. This issue almost derailed the overall G-20 accord. At the last instance, it was “solved” by somehow ensuring that no jurisdiction linked to any G-20 member stayed on the list of offenders.
Prospects of a New York Consensus
It is expected that the G-20 will meet again in the fall for a summit in New York. By then there may be further consensus on some of the pending issues, such as regulatory reform and the approach to clean-up the banks, although countries will tailor their actions to their needs. Given the track record of some aid donors, the pledges to help the poorest and most afflicted countries will need monitoring, and actual progress on trade policy will also require close scrutiny and, where needed, recourse.
At the same time, two large issues that have remained unaddressed will need particular attention. Neither is ideologically laden, rather they are both politically sensitive. First, tackling the challenge of macro-economic structural imbalances alluded to above. And second, beginning to put in place at the national level, priority governance reform measures that mitigate future prospects of regulatory (and state) capture and corruption. It would be fitting that the very site of much of the capture and legal corruption that took place prior to the crisis becomes the venue for a “New York Consensus.”
In fact, the current suggestions being offered to tide over the ongoing global financial crisis are likely to benefit those who caused the crisis over those who are poised to suffer the most as an outcome of the crisis: the disappearing middle classes, the world’s dispossessed, poor, indebted people.
The proposed solutions to this crisis represent the manifestations and actualization of the ultimate generational goals of the global elite; and thus, represent the least favourable conditions for the vast majority of the world’s people.
At this crucial juncture, it is essential that the developing countries throw their weight against these ‘solutions’ and herald a new era of world order, one of the People’s World Order; with the solution lying in local governance and local economies.
The people should have greater roles in determining the future and structure of their own political-economy, and thus, their own society.
There is a need for activating individual’s internalization of human power and destination, and a refusal of submission to a global authority of which all but a select few people have access to.
Nevertheless with the availability of the option of localized political economies, in concurrence with an unprecedented global population and international democratization of communication through the Internet, there are the means and possibility of forging the most diverse manifestation of cultures and societies.
The human mind and spirit entail capabilities of overcoming the present and future challenges to humanity.
Article published in Third Concept/May 2009/Vol.23/No.267/P.No.7/
