Published: Sunday, Nov 16, 2008
November 16, 2008
It is a great way to say good bye to an outgoing US President. With caviar and $300 bottle wines on the menu, George W. Bush, the lame-duck President of the United States, is playing host to the heads of 20 rich nations and emerging economies of the world at the summit which is under way this weekend in Washington.
Close observers now believe that not much thought went into the planning of this summit before it was called. It is almost like the hastily prepared $700 billion bailout package hashed by the US Treasury to shore up the US financial system which was on the brink of collapse. Its focus had to be changed twice already. First, it was targeted at the removal of bad assets with banks and financial institutions, which Paul Krugman described as "trash for cash". Then it changed focus and went for capitalisation of banks.
According to the latest development, Mr. Paulson, the US Treasury Secretary, has decided to address the problem of frozen credit markets instead.
Anyway, the pressure coming from the French President, Nicholas Sarkozy, and the British Prime Minister, Gordon Brown, was too great for President Bush not to act. What is clear is that, given the predicament in which the world economy is in, finding effective solutions for a sustainable global financial order will be no mean feat, one that would certainly require much more serious deliberations than what is on offer at the hurriedly called summit of heads of states.
The notion that this summit would become a Bretton Woods II is fading fast. President Bush would be happy if the summit laid the "foundations for reforms". At best, the hope is that they would at least agree on some basic guidelines on which to move the technical summits that are being planned down the road. Together with the follow up summits, something concrete and lasting might emerge.
The summit already started when this paper went to press. There is no denying that the stakes are high. But the first damper to the events is placed by the fact that there is a President-elect in the US who does not see eye to eye on fundamental economic issues with the current administration. Barack Obama has intelligently chosen to sit out the summit which will be attended by his chosen representatives who are only peripherally involved with his core transition team.
As such, come January 2009, the new administration might not be inclined to follow through on all the policy commitments of the Bush era, particularly on policies relating to resuscitating the US economy and the global economy with it. That makes it all the more likely that the European leaders, in particular, would rather wait for the follow-up meeting which the French President is already signaling to convene shortly after Obama's inauguration.
There is a clear divergence of views between the US position and that of the Europeans on the issue of what reforms are absolutely necessary. The US Treasury - and the IMF with it -- has taken the view that existing shortcomings of the financial sector need to be fixed and there is no need for a Bretton Woods type overhaul of the system. Contributions from China, Saudi Arabia and gulf oil-exporting countries are being sought to bolster IMF's $250 billion reserves.
Understandably, a grand overhaul of the global economic order is hardly the task for an outgoing administration. European Union (EU) countries, on the other hand, have formed a common position, the core idea of which embraces the need for complete overhaul of the old financial order requiring the advent of a multilateral regulatory commission with cross-border authority. Fundamental reforms are called for in the following areas: risk management practices, compensation structures, oversight of securitised mortgages, credit rating agencies, and infrastructure of derivatives markets.
Indeed, there is a mismatch in the current financial system. While financial markets have gone global, regulatory agencies are national. This needs fixing, but that requires sovereign commitments across borders.
An emerging challenge that the summit will have to address is the matter of growing imbalance in saving and spending in different parts of the globe. This imbalance has been a thorn in the global order. The challenge is to get the Chinese, for instance, to adjust their exchange rate, spend more and reduce their current account surpluses. At the same time, Americans and Europeans have to spend less and save more.
Then there is the big question of the greater role to be played by some emerging market economies. There are the big emerging economies of China, India, and Brazil, jockeying for a seat next to the rich nations' club of G7, which, for the past thirty years, accounted for 50% of global GDP. The rate at which emerging market economies have been growing, G7 domination could be history.
Already the balance of economic power is showing signs of shifting. The point is that if China and the Gulf countries are called upon to refurbish IMF funds, will they not ask for a change in their shareholding positions at the IMF?
Be that as it may, the complexity of issues and the absence of a towering economist figure like John Maynard Keynes with his epochal ideas make it hard for the summit at hand to deliver what the world needs most at this juncture -- confidence. It seems almost certain that the world must wait for the follow-up meeting in Europe when the Obama administration will be in the saddle. At the very least, it will bring more confidence at the table, which is lacking for now. Meanwhile, the G20 world leaders would do well to bask in the cherry blossoms of Washington.
(Dr. Sattar, a former civil servant and World Bank economist, is Vice-Chancellor, The Millennium University.)
Last Updated on Wednesday, 05 January 2011 11:49