As the G20 leaders’ summit of November 3-4 approaches, different streams of thought have taken hold. First, there is a divergence over the utility of the process that has turned out to be relatively slow in achieving consensus on mutual assessments among countries. Second, there is continuing disagreement over the relative importance of artificial exchange rates, loose fiscal stance, and reluctance to provide support in, broadly speaking, Asia, America and Europe. Be that as it may, G20 is still the vehicle that a group of economically diverse, advanced, large and emerging nations have put together which, at present, is the only vehicle that offers the potential of leading the way out of a deep and continuing global economic and re-emerging financial crisis. And, within G20, Brics – Brazil, Russia, India, China, South Africa – have appeared as a formidable bloc from which greater contribution is anticipated.
The G20 Mutual Assessment Process (MAP) is designed as a reasonable, multilateral process to develop a set of indicators for noting internal and external imbalances and indicative guidelines for assessing those imbalances. Will an Action Plan be adopted at the Cannes summit that would draw up triggers for corrective action? A September 22 communique of finance ministers and central bank governors released at the G20 meeting in Washington promised to “commit to take all necessary actions to preserve the stability of banking systems and financial markets as required. We will ensure that banks are adequately capitalised and have sufficient access to funding to deal with current risks and that they fully implement Basel III along the agreed timelines. Central banks will continue to stand ready to provide liquidity to banks as required. Monetary policies will maintain price stability and continue to support economic recovery”. Interestingly, the emphasis is on domestic policy rather than on international agreed triggers that would compel domestic policy. Thus, whether there is scope for sharp changes in policy direction is to be awaited at Cannes but opinions are stacked in favour of slow progress. Even if it is “slow but steady”, advanced economies would be charting the right course and emerging economies would be delighted.
A second feature at Cannes should be the role and prevalent use of capital controls. Some countries have been, and some are contemplating, imposing them to contain surges in capital inflows caused by untamed quantitative easing elsewhere. However, such controls should only be a measure of last resort rather than a substitute for sound macroeconomic policy. Cannes should take a position on this. After all, there is broad agreement in research findings that capital controls cannot compensate for fundamental macroeconomic imbalances. Governments, however, could temporarily improve the quality of capital flows by curbing shorter-term, and encouraging longer, maturity flows. There is also built-in futility in using capital controls, for, unless quantitative easing or loose fiscal policy in advanced economies is directly addressed, capital is bound to flow, find locales offshore, and suffer increased volatility. Only progressive international co-operation in monetary affairs through MAP can counter this, not unilateral imposition of capital controls.
A third feature at Cannes has to be G20’s long-term agenda based on the Seoul summit’s Development Consensus for Shared Growth and the recent Washington communique of the G20 Ministerial Meeting on Development. In policy circles, however, there is the expressed preoccupation that G20 has overreached itself in defining nine pillars of development that will be addressed: infrastructure; human resource development; international trade; private investment and job creation; food security; growth with resilience; financial inclusion; domestic resource mobilisation; and knowledge sharing. These appear to challenge the singular focus that is needed to address the most crucial systemic faultlines that should be closed for restoring stability in financial flows. The broadening of objectives assuages the developing countries that claim recognition of their long-term structural concerns as a group. However, it carries the danger, and perhaps the reality, of diluting the immediacy of instituting strong and meaningful global indicators that should quickly enable automatic triggers for tightening, or loosening, macroeconomic – financial and fiscal – policies that most advanced economies should be implementing now or in future. Perhaps the development agenda is a way for the G20 to maintain its relevance beyond the present global crisis and to reach out to countries beyond its own membership. In turn, the question that arises is, how should G20 relate to G24, of which India has just taken over the chairmanship for a yea?
Finally to Brics. Advanced economies are interested in what they can do proactively as a group. Some within the group are keen to make a contribution in terms of financial resources. Thinking out of the box, however, would it not be more helpful it Brics took a combined position in advancing their agendas over remaining aspects of liberalisation of their economies, an issue that advanced economies harp on during ordinary circumstances? In the case of India in particular, financial sector liberalisation including banking and insurance would help buttress supply opportunities for mature economies, improve the allocative efficiency of investment, and reduce expenditure in mature economies through a scaling back of global demand for their government securities.
Liberalising the retail sector would help advanced country firms find a new source of unmet demand and improve their global supply chain. This would, in turn, rationalise the cost of production and enhance net exports of these economies. That would act as a catalyst in reviving global demand. In the process, Brics, and India in particular, would reap the benefit of organised retailing, investment in local supply-chain management and storage capacity, areas in which improvement is required immediately. An efficient service sector would make a better enabling environment for more foreign investment, thus engendering a second round of correction in global imbalances. Making a contribution towards redressing global imbalances through domestic policy reform by Brics, rather than through making a token contribution of financial resources that can at best represent a drop in the bucket, would be a more proactive, albeit deeper and more challenging, route for them to adopt. Let us await Cannes.
All opinions are exclusively those of the author.
His book, Modernising Tax Administration: Championing Analysis and Specialisms is forthcoming this winter