One step forward

No slide back in Toronto but that's about it

The G20 summit in Toronto has sought to ensure that nothing will be done to threaten the global recovery process, described by some as “feeble”, and create a double-dip depression. It is reassuring that the leaders of the economically most important nations have undertaken to carry out their adjustment processes in such a way that recovery in private demand is sustained. The concession made to political realities is that countries will adopt a “differentiated and tailored approach” in restoring their fiscal balance, meaning they will go about it the way it suits them best. If Britain wishes to undertake fiscal correction right away and Germany from next year, then they will be free to do so. But G20 members have also agreed that they will progress towards “rebalancing” global demand. Rich countries whose citizens have been acquiring a mountain of debt should boost national savings and surplus countries should boost domestic growth. This means that the Germans and the Chinese should spend more and Americans and most Europeans less. To oversimplify it a little, the US will have to partially pass on to the Chinese the role of being the primary engine of growth that it had performed in the post-war period. The summit was fortunate that the Chinese announced just before it began their willingness to let the renminbi float a little.

Interestingly, while the G20 is jelling together as a group, the G8 remains in place and new sub-groups have become active, pointing to persisting divides. Perhaps this is why the G20 have in good part agreed to disagree, particularly with respect to fiscal consolidation and financial sector reforms. Countries have agreed to follow different paths to levying a tax on banks to pay for future bailouts. While it is true that Canadian banks, for example, should not be penalised for the sins of US banks, the final shape that the US financial sector reform Bill has taken leaves much to be desired. There is no clear signal on what is really the crux of the matter — large banks which accept public deposits whose security is effectively guaranteed, should not be able to use these deposits in speculative chasing of super profits. Against this there are two positive signs. One is the clear commitment to strengthen and reform multilateral financial institutions. Multilateral development banks will get $350 billion more of capital so that they can nearly double their lending and, even more important, the resources of concessional lenders like the International Development Association will be replenished. Plus, there is a commitment to finalise new IMF quotas by the next meeting in Seoul in November and a move to appoint the heads of multilateral institutions on the basis of merit. As for India, it is significant that Prime Minister Manmohan Singh and US President Barack Obama are on the same page on many global issues. The India-US strategic partnership is clearly acquiring an economic dimension, even as India’s interaction with BRIC, IBSA and the EU remains robust.