Gyeongju: Unwinding of imbalances is a stupendous task requiring co-operation of all countries
Expectations from the just concluded G-20 summit were muted. Its outcomes were, therefore, not disappointing.
A month before the Summit, G-20 Finance Ministers met at the South Korean city of Gyeongju.
The meeting was expected to yield a reasonable formulation for the leaders of the world economies to build upon. Unfortunately, there were more signs of discord, especially on currency rates, where the two principal protagonists, the US and China, appeared to have dug in their heels and refused to compromise. There was a wide chasm between the positions adopted by the two countries, which even a summit did not seem capable of bridging.
Complicating the currency issue has been the US Federal Reserve action to undertake “$600 billion of quantitative easing,” a process of retiring long-term government bonds with money freshly minted. This action was prompted by a desire to bring down long-term interest rates and, hence, boost investment. Short-term rates have already been at near zero. Other countries, notably China, naturally saw the Fed move as further evidence of easing the already ultra-loose monetary policy, which will depreciate the dollar (by increasing its supply).
With such a wide divide between the stated positions of the two leading countries, the summit could not possibly have delivered more. Another reason, though largely unstated, is that since its formation more than two years ago to collectively address issues connected with the global crisis, the G-20 appears to have not fully geared to take on the problems of a recovering global economy. The crisis strengthened their bonding, which found expression in several ways. The G-20 countries agreed to co-ordinate their monetary and stimulus packages. With the crisis waning, there has been much less enthusiasm.
What did the Seoul summit achieve? There have been welcome compromises but the communiqué is so worded that the positive outcomes will take a long time to materialize.
The G-20 countries agreed to take action to seek more balanced growth but delayed until next year the contentious issues of defining problems that threaten the global recovery. Global imbalances, the phenomenon of some countries such as the US running up huge external deficits matched by surpluses in China and other countries, pose the biggest threat to a sustained global recovery. Unwinding of the imbalance in an orderly manner is, therefore, a stupendous task requiring the co-operation of all countries. An orderly winding down seems the plausible way to avoid trade and currency wars.
With so much at stake, it is disappointing that the G-20 has deferred all key decisions to next year or possibly even later.
One bright spot was the approval given to IMF reform, which was mooted earlier. On the contentious issue of currency rates, there was limited compromise between the US and China. The US has pushed China to let the yuan raise more.
China, on its part, has convinced many other members that the lax US monetary policy is weakening the dollar and pushing destabilizing capital to emerging markets.