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G20 meet presages new global economic order

By Liu Junhong (China Daily)
Updated: 2009-04-07 07:47

The recently concluded London G20 financial summit released a communiqu vowing to wield all policies to ensure the world economy gets back on track by the end of 2010.

The summit also promised to raise aid through the International Monetary Fund (IMF), beef up financial regulation, curb protectionism, and together assume responsibilities to deal with the crisis.

Amid waning global economy, heavyweight international organizations, including the IMF, the World Bank, and the Organization for Economic Cooperation and Development (OECD), all forecast that the world economy will shrink this year, the first contraction since World War II.

The developed world is still mired in recession, while once-robust emerging economies are also being battered by the slowdown, threatening the world with the grimmest economic plight since the Great Depression.

Facing severe challenges, the G20 member states, which possess 90 percent of global output, left aside disagreements, coordinated policies, raised positive plans to overcome the crisis and addressed the post-crisis world order. It should be dubbed as a milestone in history.

The day-and-a-half London summit efficiently discussed three topics, pointing out the direction of global economic development after the crisis. The paramount mission of the summit is to coordinate measures to surmount the crisis and jump-start the global economy.

In the run-up to it, the US proposed that G20 members apply proactive fiscal policies and guarantee stimulus packages amounting to two percent of GDP. Though the core economies of the Euro Zone, especially Germany and France, expressed reserved attitudes to the spending sprees, the communiqu of the summit still emphasized the positive effect of fiscal stimulus plans.

The G20 promised stimulus packages worth $5 trillion by the end of 2010, amounting to four percent of global GDP.

It indicates that the member states have reassured the interdependence of the world economy despite the current turmoil.

The second topic was to enhance international aid.

One of the greatest achievements in London was the collective promise to reinforce international aid institutions, including the IMF and the World Bank. China, Japan and Europe, among others, promised to contribute more capital to the IMF.

Meanwhile, the World Bank also agreed to expand the scale of trade credit and inject $250 million to revive world trade.

Supplementary aid to the IMF and the World Bank amounted to $1.1 billion, which will definitely help stabilize the global financial, trade and investment systems, and make recovery quicker.

The third issue is protectionism.

All member states unanimously denounced protectionism, called for the resumption of the Doha trade negotiation, a boycott of currency devaluation measures, and vowed to extend the promise of the Washington G20 summit "not to set up new protectionist measures for a year" to the end of 2010.

However, a few disputes remain.

Member states did not achieve consensus on reforming the international financial system.

The stability of the global financial system, the arteries and veins of the world economy, is the core issue for economic recovery and development. The Washington summit emphasized that one of the origins of the credit bubble and the financial crisis was the lack of international financial regulation. It vowed to strengthen financial regulation and reform the international financial system. Fixing the leaks, getting rid of toxic assets, and recovering the health of the financial system, are undoubtedly the premises for overcoming the crisis and reviving global finance.

Before the summit, the US proposed a policy funded by both public and private money to deal with the toxic assets. However, it hesitated in offering more bailouts to the financial institutions. When handling the ailing enterprises in the real economy, the US government did not set up an "industrial revival" regime to facilitate the bankruptcy and restructure of enterprises. The protection measures to keep the dying enterprises alive made the cancer cells rampant in the real economy. In Europe, the euro zone economies refuse to bail out the Central and Eastern European countries, which are battered by financial chaos. The inaction may bury landmines in the European banking system.

The US, Europe and Japan all want to preserve their own strategic superiority and maximize self-interests in the international monetary system. Thus the summit did not achieve a consensus on international financial regulation.

German Chancellor Angela Merkel argued that, if a decision could not be made then to beef up international financial regulation, it would not be made in five years. Germany and France advocated strengthening the regulative power of the IMF, and exerting stricter regulation on financial tax havens. Though the US agreed to the registration of hedge funds and surveillance on financial derivatives, it opposed "regulation that may handicap the freedom and efficiency of the market". Japan ambiguously argued for encouraging the "financial elites", seeking "smart regulation", restructuring the Financial Stability Forum to add a seat for Japan, and building a "self-disciplined regulatory system".

Since the financial crisis broke, the cohesion and power of the G7 financial minister conference have been in decline. The G20 summit, which incorporates emerging economies, now serves as the main stage of the world economic order.

The rise of emerging markets and the relative decline of developed countries indicate the reorientation of global economic order. Developed members at the summit had to listen to claims proposed by China, Brazil, India, Russia, and other emerging economies. The promise of China to inject fluidity into the IMF and curb protectionism generated a righteous aura. As the power of the emerging economies grows and their voices become louder, new hope of a fairer and more just international order looms on the horizon of the global economy.

The author is a researcher with the China Institutes of Contemporary International Relations.

(China Daily 04/07/2009 page8)