The meeting of the G-20 heads of government, comprising the leading industrial economies as well as some prominent emerging market economies (like India), scheduled for the coming week-end in Washington, will see the emergence of conflicting pulls and pressures. On the one hand, President Bush is now a lame-duck figure since his successor has already been appointed. On the other, the perspectives of the different countries represented are likely to differ quite significantly. The European countries have already had a preparatory meeting to agree on a common platform. This was not entirely successful (Britain is keen to protect London as a financial centre, whereas continental Europe has other priorities). Still, there was general agreement that the International Monetary Fund (IMF) should be at the centre of any global financial superstructure. The IMF is of course in no shape to take on any meaningful role, chiefly because its resources are extremely limited (a total of about $250 billion), whereas the size of a serious problem could be in trillions of dollars. The IMF’s resources can be expanded of course, but its ability to create liquidity through the issue of Special Drawing Rights (SDRs) on the scale required will mean an amendment of the IMF charter, which has to be signed on by over 180 countries and will be a time-consuming process.
The United States, which would not like any external constraint on its freedom to act (which is what a stronger IMF would imply), has already been changing the landscape by getting into dollar swap arrangements with a dozen other countries. The initial swaps were with developed countries that have fully convertible currencies, so the step was clearly designed to generate liquidity. The deals then took on a different colour when the US extended the swap arrangements to include countries that do not have fully convertible currencies and which have large dollar reserves instead — the issue here cannot have been one of creating dollar liquidity. Indeed, Reserve Bank has started offering dollar swaps to domestic players without any help from the US. So the effort goes beyond just enhancing liquidity, and could be aimed at retaining the central position of the dollar, and obviating the need for SDRs which would then become an alternative. Whatever the reason, it is clear that the US would like to take unilateral steps to deal with the global liquidity squeeze and not have the IMF emerge with a more powerful role. Indeed, the US has so far refused to subject its financial regulatory system to a detailed check, as most other countries have done. So the Atlantic divide on a basic issue to do with the global financial architecture is clear. However, the US and Europe are likely to come together to put pressure on China to reform its currency policy and allow the yuan to gain value. But Beijing is already dealing with the pressures of a slowing economy and is unlikely to pay much heed.
The emerging market economies, in turn, will want a global financial system that does not lay waste to their economies because of the backwash effect of troubles originating in the developed economies. This will mean providing better regulation of the rich economies (which the US will continue to resist) and extra finance to both the IMF and the World Bank — the latter, with augmented resources, could in fact help channel investment into infrastructure areas and thereby make possible a Keynesian solution that could ward off the threat of a deflationary cycle. Manmohan Singh is best positioned to deal with these issues, and it is to be hoped that he will be able to make a strong case for what the emerging economies need, at a time when there is western recognition that the decision-makers have to include countries like India and China. But it should be clear that the G-20 meeting will lay bare the differing interests of the countries present — and in that sense will mirror what happened at Bretton Woods in 1944.
