The Hindu Business Line : G-20: Taking stock at London

The G-20 is lukewarm to the idea of exiting from the stimulus packages initiated last year, as the outlook on growth and employment is still far from satisfactory. Its approach holds out lessons to advocates of fiscal stability in India.

S. Venkitaramanan

Financial crises are the outcomes of long periods of financial and economic mismanagement. It is difficult to say whether they arise as a result of a particular episode. This holds good for the recent recession as well. However, to the extent the origin of the current crisis can be pinpointed, it is best to trace it to the collapse of Lehman Brothers, the financial institution of Wall Street, which went bankrupt on September 15, 2008.

The result of this collapse of Lehman was that it precipitated a crisis in the banks which had relationship with them — virtually all of them. The G-20 has, therefore, been forced to take stock of issues of financial sector reform in a series of meetings that it has held over the last year.

The first major meeting was held in London in April. The next G-20 meet will take place at Pittsburgh on September 24-25. A preparatory meeting was held, once again in London, in the first week of this month.

CONTINUE WITH STIMULUS

In its recently held London meeting, the G-20 notes that there has been progress in delivering a global plan for recovery from the recession and structural reform. It further says that the economies of the world have, indeed, recovered, although the extent and pace of recovery are not adequate. Unemployment persists, especially in the advanced economies of US, Europe and Japan.

The G-20 meet is, therefore, lukewarm to the prospect of economies taking an exit from the stimulus policies initiated last year. To quote: “Unprecedented and concerted policy actions have helped to arrest the decline and boost the global demand, the financial markets are stabilising and the global economy is improving.

But we must be cautious about the outlook for growth and jobs and we are particularly concerned about their impact on many low income countries. We will continue to implement decisively our necessary financial support measures, especially monetary and fiscal policies, consistent with price stability and long-term fiscal sustainability until recovery is secured.”

While there are signs that the recession, the deepest since the Great Depression, might be past its worst phase, , it isnot yet time to celebrate. There is need for caution and care. Timing is all important when a patient under treatment is taken off resuscitation devices. It is appropriate that the G-20 has noted that there is need for continued resort to stimulus plans.

The G-20 in its resolution observes that it is necessary to continue the reforms that promote employment through structural policies, active labour market policy, training and education. The countries of the world will have to work hard to address excessive commodity price volatility by improving the efficiency of the financial markets and promoting a dialogue between producers and consumer countries.

The Group of 20 countries has further stated that the additional provision of $250 billion towards trade finance has been swiftly implemented. There is a ritual comment about the need for a balanced and speedy conclusion to the Doha Round. Time alone will tell whether the hopes will be realised. Protectionist forces are already active in the advanced countries.

The G-20 has reiterated the need for a transparent and credible process for withdrawing extraordinary fiscal, monetary and financial sector support when the situation is appropriate. This note of caution is significant since advocates of fiscal purity in both developed and developing countries are urging the early withdrawal of stimulus packages.

The group notes that the IMF and the Financial Stability Board will develop cooperative and coordinated exit strategies recognising that the timing and sequencing of actions will vary across countries and between the various types of policy initiatives.

LESSONS FOR INDIA, ASIA

This message is relevant for India. Advocates of fiscal stability have already started talking about the high order of fiscal deficit, implicit in the latest stimulus-oriented Union Budget. The G-20’s note of caution cannot have come at a better time. The same applies to the attitudes of the central banks in regard to withdrawing their accommodative policies.

It is relevant to note that the G-20 had also reiterated its determination to strengthen the international financial institutions, particularly IMF.

The last meeting of G-20 decided on trebling the sources at the disposal of the IMF. This included provision of an additional amount of $250 billion as part of the general agreement to borrow and $20 billion as special drawing rights. Corresponding to this increase in the resource availability for the IMF, it is also necessary to strengthen its governance. The Managing Director of IMF has promised action in this regard.

The Asian economies, particularly China, Korea, Taiwan and India, have recovered rather well. This has much to do with the fact that these economies have had a strong State role in economic management, even before the crisis. Importantly, their banks are well-regulated and have not resorted to irresponsible lending tactics, as was the practice prevailing in the advanced countries before the onset of the crisis.

The result has been that the Asian banks were in a position to start lending once the crisis broke out. Further, the stimulus efforts of Asian countries were proportionately higher in relation to GDP than that of the US.

The most impressive stimulus plan was that of China, which as a proportion of GDP was higher than even what was attempted in the US.

In spite of this turnaround in Asia, the fact is that we cannot depend on Asia alone to replace the US consumption demand as a driver of a world economic growth. Asia’s resurgent economies are, in spite of their turnaround, relatively small in proportion to the West.

The world still has to depend on the US economy to improve its position till such time as the economic imbalance between the West and the East is set right. Asia’s resilience notwithstanding, it is not decoupled from the US.

( blfeedback@thehindu.co.in)

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