G20 has a brush with reform
By Fariborz Moshirian | theage.com.au | 10 November
The G20 finance ministers' meeting in Scotland coincided with the 10th anniversary of the formation of this global forum that emerged in response to the Asian currency crisis.
In St Andrews, the finance ministers agreed to continue with their stimulus measures due to the uneven process of recovery in recent months.
The pace of recovery in the US is still slow, with its unemployment rate more than 10 per cent. Germany and France are doing relatively well, but the British economy remains in recession.
On the other hand, Asia is almost facing the threat of another financial bubble as house prices and other assets are rising rapidly in some of the East Asian economies.
The South Korean central bank could follow Australia and Norway and increase interest rates to slow the rise in house prices.
As half-hearted stimulus measures in the US during the Great Depression led to a double-dip recession in the 1930s, the policymakers, including the International Monetary Fund, are concerned that winding back some of the stimulus measures may slow the global economic recovery.
But our generation has no experience in how low interest rates and huge public spending could be contained in the medium and long terms without leading to further global financial challenges.
While the US was the largest creditor country during the Great Depression, it is now the largest debtor country, with a projected budget deficit of more than $US9 trillion ($A9.8 trillion) over the next decade.
China is now the holder of the largest foreign exchange reserves and is one of the key investors financing US Government debt.
Trade imbalances between the US and China continue to concern policymakers and investors. Surprisingly, despite considerable discomfort regarding the sharp decline in the value of the US dollar in recent times and the continued low value of the yuan, this issue was not even placed on the agenda of the G20 finance ministers' meeting.
This may indicate how seriously some of the key players see the effectiveness of the G20 as a way of tackling some of the major structural issues that contributed to the current global financial crisis.
It isn't then surprising that some of the finance ministers didn't even wish to discuss issues related to the coming Copenhagen Summit.
It was even reported that some finance ministers didn't want to include any statement regarding the Copenhagen Summit in their communique.
The G20 finance ministers also discussed the “framework for strong, balanced and sustainable growth” promoted by the G20 leaders when they met in Pittsburgh in September.
The G20 finance ministers agreed to submit their three to five-year national and regional economic plans to the IMF by January.
The IMF, with the help of the World Bank, will then consult with all member countries about better co-ordination and harmonisation by April.
It would then be up to the G20 leaders, when they meet in June and November next year, to refine and co-ordinate their national and regional plans and ensure sustained global economic growth.
Such a level of information sharing and co-ordination is a remarkable achievement. But whether the G20 member countries will be willing to follow a co-ordinated global approach for their national economic planning over the next three to five years remains to be seen.
The new framework requires US consumers to spend less and save more, with the view to improving the US budget.
China, in turn, will be asked to increase its domestic consumption and its imports and probably reduce exports.
The framework also requires the European Union to speed up labour market reform and ensure EU markets become more attractive for investment.
The history of co-ordination among nations, in the absence of an effective and binding international institution, suggests such a global approach may not deliver the expected outcomes — the G20 does not have any power to enforce its agenda on any member country.
Despite the goodwill among the G20's member countries and their attempt to tackle some of the pressing issues facing our generation, it is like asking Australia's state and territory leaders to meet twice a year, in the absence of a Federal Government, and expect them to be able to deal with all the economic, financial and even environmental challenges facing Australia.
Fariborz Moshirian is professor of finance at the Australian School of Business, the University of NSW.
First published by TheAge.com.au on November 10 2009
Visit theage.com.au for the latest news updated throughout the day
