President-elect of the USA, Barack Obama, manifestly cast a long shadow on the outcome of the just-concluded Washington summit of G20 developed and large emerging economies. He chose to sit out the meeting, sending, instead, his emissaries who were peripheral to his core transition team. Making the argument that there can be only one US President at a time, he conveyed the message to the leaders assembled that "our global economic crisis required a globally coordinated response". From what we have learnt of his temperament, he is not one to hastily jump into a firestorm without serious prior reflection.
Nevertheless, Obama has made it plain that he places the topmost priority on handling the economic crisis and, following his inauguration, he will do all it takes to see this crisis resolved and the health of the economy restored. Was this enough of a confidence builder that the markets and investors around the globe were looking for?
Calling a spade a spade, the G20 summit, by most accounts, did not live up to the high expectations that were raised going into the meeting.
First, it was no path-breaking summit like Bretton Woods.
Second, it did not come up with immediate solutions to the crisis but made commitments to an action plan to be rolled out in the next few months culminating in a decision-making summit in late April, when the Obama administration is well ensconced and decisions emerging from the US team can be counted on.
Third, some sharp cracks were evident in the thought process of the two dominant players - US and European Union (EU) - particularly on the issue of cross-border regulating authority. While agreeing to the need for greater monitoring and regulation of financial markets and instruments, the Bush team was reticent over the idea of global governance, preferring the continuation of national coverage of strengthened regulatory authorities. The Europeans were in favour of cross-border authority in light of the greater coupling of economies and financial markets under globalization. They were also more comfortable with the notion of greater public intervention in financial markets than exists today, something that is anathema to Bush who made perhaps the last of his impassioned defense of capitalism and pro-market principles. In the end, there appeared to be general agreement on broad principles, though not on specific actions.
On the plus side, there were a few notable developments.
First, it was a summit of G20, not G7 or G8. Thus it was a more inclusive global parley which clearly recognizes that a global economic crisis can no longer be contained by the unilateral albeit coordinated action of the developed countries alone. It recognized the pivotal role of large emerging economies like China, India and Brazil, amongst others, in lifting the global economy out of a deep recession. There was agreement on including these economies in the membership of an expanded Financial Stability Forum (FSF), a hitherto closed body made up of financial institutions and central banks of rich nations. The idea of giving large EMEs greater voting powers at the IMF was mooted without a clear decision emerging.
Second, the summit put to good use the lessons from the 1930s when beggar-thy-neighbor policies of protectionism helped to prolong the depression. This time around, there was unanimous agreement to stay away from any new protectionist move. They agreed not to raise any barriers to trade and investment for the next twelve months and to kick start the Doha Round of free trade talks and bring it to closure. Thus all but dead Doha Round gets a new lease of life!
Third, there was wide consensus on adopting economic stimulus packages across countries. It recognized the close integration and interdependence of economies in a globalized world order. USA or Europe alone could not stimulate the global economy out of recession. They needed the full participation of China, India and other large emerging economies to generate global demand for goods and services that has become the biggest casualty in the present crisis.
Rich economies one after another are slipping into recession. Japan has just joined the Eurozone countries and USA. Summit leaders therefore agreed to shore up growth in these economies. Indeed, the summit gave credence to a new idea of Global Keynesianism - globally coordinated economic stimulus.
That is easier said than done. As far as monetary stimulus is concerned, the central banks of G7 countries have responded with a near simultaneous reduction of interest rates to ease liquidity and credit in their markets with only modest success so far. Fiscal stimulus on the other hand is largely national. Tax cuts, increased public spending, and consequent larger budget deficits, are the domain of political governments. Each country faces a different degree of challenge in this area.
Americans are already alarmed at having to face a trillion dollar deficit this year thanks to the addition of a $700 billion bailout package to their existing deficit of over $300 billion. A fiscal stimulus in these conditions will result in a budget deficit of historic proportions nearing 8.0-10% of their $14 trillion GDP, while piling up another trillion dollar of public debt on top of the current amount of $10 trillion. Getting this past Congress under the new Obama administration would be no mean task. Barack Obama has already learnt about the high costs of such a fiscal stimulus but justifies them by saying that the costs of not acting now would impose severer pains on the American people.
As for the EU countries, it remains to be seen if there will be some adjustment to the fiscal deficit criteria for member countries should they pursue a fiscal stimulus package. Clearly, under the summit guidelines, this one criterion might have to be kept on hold for several new EU members.
A point hardly mentioned is that relating to the stability of financial markets with large infusion of public debt. While highly leveraged private debt was admittedly the root cause of the current crisis, the pursuit of a strategy (fiscal stimulus) that is likely to substantially augment public debt across countries will not contribute to economic instability in the long run is questionable at best. Perhaps the prevailing mindset in the current debate corresponds to the famous Keynesian doctrine: In the long run we are all dead.
Another subject that was brought to the table was the matter of global imbalance of savings and spending, a situation that partly contributed to the crisis. If allowed to persist, it would have the makings of another crisis, sooner or later. Some emerging market economies like China and Saudi Arabia were running persistent current account surpluses and accumulating huge reserves on the back of heavy spenders in US and Europe who are piling up debt. What policies could be adopted to make the Chinese spend more and save less while making Americans and Europeans do just the opposite? Quite predictably, no clear decision on this issue came out of the summit.
Finally, what was apparently not mooted but is of the utmost relevance is the subject of a global currency as an instrument of financial stability. The current crisis did create gyrations in currency markets though falling short of becoming a classical currency crisis, like the one experienced in East Asia in 1997. Instability in currency markets can be observed from the quick movements in and out of alternate reserve currencies. When the subprime crisis began to unfold, the dollar came under extreme pressure. Soon when the crisis engulfed European economies as well, there was a rush out of the pound sterling and Euro.
Nobel Laureate Professor Joseph Stiglitz has argued that such speculative movements between currencies - contributing to financial instability -- could be avoided if there is a global reserve currency. Again, the idea of a global currency could have been mooted in this summit but, minus Obama, even an action plan that examines such a radical prospect appeared unlikely.
To sum up, the G20 summit had all the trappings of an internationally coordinated response to a global economic crisis. In the absence of a US President-elect who holds many of the trump cards that could shape the future global economy, the summit ended as a high profile event with agreement on broad principles, but came short on specifics that could have had immediate impact on the global economy.