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Prof.M.Guruprasad/ 12:26 , Feb 16, 2009

Economics for Everyone: G20- Gearing for Growth

Issue:Leaders of the world's 20 largest economies recently thrashed out steps to reverse a looming global recession and prevent future upheaval despite differences over how to remedy the crisis. President George W Bush, the lame-duck US leader hosting the emergency talks of the Group of 20 nations, warned against a relapse into trade protectionism as Wall Street's financial hurricane blows far and wide. 

US President George W Bush emerged from the G20 summit satisfied with having preserved the principles of free market economics. The final declaration of the summit expresses a clear resolve on the part of the global community to broad base the decision-making structures of international finance to include the major emerging markets like India and China. It also called for co-coordinated fiscal stimulation among the member countries that account for 80% of the world output, warned against protection and underlined the need for common accounting and regulatory standards that would bring transparency and regulation to those segments of the derivatives market that are today outside the scope of any kind of prudential oversight.

The summit identified immediate and medium-term action plans in strengthening transparency and accountability, enhancing sound regulation, prudential oversight, risk management, promoting integrity in financial markets, reinforcing international co-operation and reforming international financial institutions.

Background: The global economic climate worsened as the leaders convened. Friday brought news that the 15 euro zone nations were now gripped by recession after two quarters of economic contraction, and US retail sales tumbled a record 2.8 percent in October as worried consumers hunkered down. The International Monetary Fund and the Financial Stability Forum said they would cooperate to provide an "early-warning system" in an effort to prevent new financial crises.

The G-20 Leaders Summit on Financial Markets and the World Economy took place on November 14?15, 2008, in Washington, D.C. It achieved general agreement amongst the G-20 on how to cooperate in key areas so as to strengthen economic growth, deal with the financial crisis, and lay the foundation for reform to avoid similar crises in the future.

The Summit resulted from an initiative by French and European Union President Nicolas Sarkozy and United Kingdom Prime Minister Gordon Brown. In connection with the G7 finance ministers on October 11, 2008, United States President George W. Bush stated that the next meeting of the G-20 would be important in finding solutions to the economic crisis. Since many economists and politicians called for a new Bretton Woods system (a monetary management which was instituted after World War II) to overhaul the world?s financial structure, the meeting has sometimes been described by the media as Bretton Woods II.

Bush, facing the gravest financial crisis since the Great Depression of the 1930s in the last months of his presidency, had hesitated to call the summit. But as the meltdown worsened and economies plunged into recession, the free-market apostle Bush invited leaders to Washington.

G 20-Basics
The G20, which includes the major industrialized nations as well as emerging giants Brazil, China, India and Russia, has been locked in debate about what caused the crisis let alone how to escape from it.
The Group of Twenty (G-20) Finance Ministers and Central Bank Governors was established in 1999 to bring together systemically important industrialized and developing economies to discuss key issues in the global economy. The inaugural meeting of the G-20 took place in Berlin, on December 15?16, 1999, hosted by German and Canadian finance ministers.

The G-20 is an informal forum that promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe. The G-20 was created as a response both to the financial crises of the late 1990s and to a growing recognition that key emerging-market countries were not adequately included in the core of global economic discussion and governance.

The members of the G-20 are the finance ministers and central bank governors of 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States of America. The European Union is also a member, represented by the rotating Council presidency and the European Central Bank. To ensure global economic fora and institutions work together, the Managing Director of the International Monetary Fund (IMF) and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate in G-20 meetings on an ex-officio basis.

The G-20 has progressed a range of issues since 1999, including agreement about policies for growth, reducing abuse of the financial system, dealing with financial crises, and combating terrorist financing. The G-20 has also aimed to develop a common view among members on issues related to further development of the global economic and financial system.

This includes providing political momentum for reform of, and strategic direction to, key international economic and financial institutions, like the IMF and World Bank. It also provides support for clear analytic work on key issues, such as demographic change, progress toward regional integration, and understanding international markets, including markets in goods and services, finance, and energy and resource commodities.

Views of World Leaders
While Bush wants a limited tinkering with global financial rules, and no new trade barriers, Some experts have  has declared that "laissez-faire capitalism is over" as banks crippled by toxic mortgage assets are forced to turn to government aid. But any such deal would have to be implemented by US president-elect Barack Obama, who takes office in January and is not at the summit, and is not bound to implement commitments made by Bush. 

In the Democratic Party's weekly radio address, Obama said the US economy was already in "recession" and welcomed Bush's convening the summit "because our global economic crisis requires a coordinated global response." A commitment to coordinate economic stimulus plans was seen as one possibility at the summit, with governments synchronizing tax-and-spending initiatives to boost flagging confidence among investors and consumers. French officials said the G20 leaders, whose countries represent 85 per cent of the world economy, were to commit in a communique to three principles: stimulus efforts, reform of financial regulation and global governance changes.

World Bank Chief Robert Zoellick hailed summit of world leaders for working to "lay a productive foundation" for recovery but warned that the financial crisis will not be solved if poorer nations are "left out in the cold." The International Monetary Fund chief Strauss-Kahn welcomed the outcome of the Group of 20 Summit, calling it a step toward resolving the world's financial crisis. He welcomed the world leaders' commitment to boosting IMF resources, including Japan's offer to provide 100 billion dollars to the IMF to support lending to countries hit by the crisis. United Nations Secretary General Ban Ki-moon has welcomed the declaration of the G-20 summit in Washington where the world leaders pledged to work jointly to resolve the ongoing financial crisis.

Describing the G-20 summit as "very successful", Prime Minister Manmohan Singh said that this had marked a shift in balance of economic power in favour of emerging economies. There was one important significance which is clear that the balance of power is shifting increasingly in favour of emerging economies.

In all this, the outcome of the meet fully meets the objectives set for it by New Delhi and articulated by Prime Minister Manmohan Singh. Prime Minister more or less, fully endorsed his call at the summit for governments to step in when markets fail, whether in providing a stimulus to growth, maintaining the flow of credit, preventing the world from lapsing into beggar-my-neighbour policies of protectionism or transparent, prudential regulation.  In his speech at the summit, Singh had called for fiscal stimulus, particularly in building infrastructure, to sustain the growth momentum deflated by recession in the developed countries. He had also laid great stress on reforming the governing structures of IMF and other global financial agencies.

India?s concerns at the G-20 were three-fold. One, the global financial system must become more inclusive; two, growth of the developing economies must be protected and, three, the leading economies of the world must guard against protectionist tendencies.

Dr.Singh told a galaxy of world leaders who attended the one-day summit on the global economic crisis that there was a need for a credible system of multilateral surveillance that can signal the emergence of imbalances. The Prime Minister asked the West to refrain from protectionism and pave way for multilateral regulatory supervision to avert the recurrence of crisis that has led to the world economy to the recession. He also made a prescriptive address covering various areas needing urgent attention like reforms of the multilateral financial institutions to enhance concessional flows, a caution against protectionist policies and changes in the global financial architecture to avoid recurrence of the crisis.

Analysis:Leaders of the Group of 20 largest economies agreed on an action plan for restoring the financial system and restoring growth. But what is important is the follow up actions. The challenge is whether the proposed G20 action plans agreed by the leaders, can be achieved in a short time. World over people are looking to leaders for a global, coordinated and fast response. There is a real need for starting fiscal stimulus plans. And there is also a need to work on new short-term liquidity facility. There is a need for agreement on the international coordination for stimulus package, market regulation to avoid future crises, and a more inclusive new economic governance.

Aicar Business School


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