Seoul Summit: The Real Test for G-20

The fifth Summit of the G-20 was held in Seoul on November 11-12, 2010. Before that, the G-20 had met four times at the summit level in quick succession during a period of a little over a year- and-a-half. The Seoul Summit was the first meeting of the leaders of the G-20 held in a country other than the advanced industrial countries constituting the G-7. The first three summits held during the peak of the global financial and economic crisis had achieved notable success in collectively responding to the challenges of the crisis and minimising its adverse impact. The fourth Summit in Toronto was mainly in the nature of winding up the affair of crisis manage-ment and, hence, not of much consequence. The Seoul Summit was a real test for the G-20 leaders for making a transition from responding to a contingent situation to dealing with the structural problems of the world eco-nomy—its imbalances and inequities, and the sharp decline of institutions of global economic governance.

The Seoul Summit, therefore, had a very ambitious agenda, some items of which were inherited from the agenda of the crisis period. In addition to the traditional items like trade imbalances, exchange rates, financial regulatory system and reform of the international financial institutions, two more items, one on trade and development and the other on global financial safety nets, were added at the initiative of the host country. The outcome of the Conference is reflected in documents running into some 38 pages, consisting of the Summit Leaders’ Declaration, the Seoul Summit Document, Seoul Development Consensus for Shared Growth, Multi-year Action Plan on Development and G-20 Anti-Corruption Action Plan.

The Seoul Summit was held in the backdrop of two major controversies raging in the world today: first, the US campaign against the under-valuation of the Chinese currency; and second, the decision of the United States to inject 600 billion dollars of additional liquidity into its economy, also referred to as quantitative easing by the US Federal Reserve. The United States has for the past several years, particularly following the global financial and economic crisis, been campaigning against the under-valuation of the yuan, holding it responsible for China’s massive balance-of-trade surplus vis-a-vis the United States. It has, therefore, been pressurising China for an upward valuation of its currency. The US position is supported by the major European countries and important emerging economies, particularly Brazil. The Chinese, on the other hand, have argued that the yuan has, over the last few years, appreciated in value and that the US’ balance-of-trade deficit vis-a-vis China is not due to the exchange value of the yuan but on account of factors making for competitiveness in the world market.

The United States’ decision for quantitative easing is viewed by China and other countries, including India and Brazil, as a measure of devaluation in a different guise. This is bound to have an adverse effect on the competitiveness of their exports. In addition, it poses other problems for emerging economies and other developing countries. It is inducing capital inflows into these countries for speculative purposes in order to mainly take advantage of the prevailing interest rate differential between these countries and the United States. Such an inflow is also going to aggravate their problem of inflation and result in the appreciation of their currencies, thereby eroding the competitive advantage of these countries in the world market. That is why countries like Brazil, Thailand and some other East Asian and South-East Asian countries have adopted measures to restrict such inflows.

For the United States, additional measures for stimulating the economy have become indispen-sable in order to make a dent into the problem of unemployment which is persisting at the very high rate of over 10 per cent in spite of the recent signs of recovery of the economy. The ideal remedy would have been an ambitious stimulus package directly affecting the real economy, of the kind that President Obama implemented soon after being installed as the President of the United States. Apart from stimulating the economy in the short and medium run, this would have strengthened the foundations for sustainable development of the US economy and would have also steered clear of any adverse effect on the economies of other countries. However, in the current mood of the Congress, particularly after the recent elections in which the Republicans have regained control of the House of Representatives and significantly narrowed the majority of the Democrats in the Senate, it was not considered practicable by the US Administration to go to the Congress for the approval of another stimulus package to be financed from budgetary sources. The quanti-tative easing was, therefore, the only alternative available to the US Administration.

In these circumstances, it was futile to expect that at the Seoul Summit there would be any agreement which would have obliged China to undertake a hefty devaluation of its currency or obliged the United States to give up its plan for quantitative easing. There is, therefore, no mention of either of these two contentious issues in the Seoul Summit Document. However, the underlying factors behind these issues have been addressed in terms of policy guidelines relating to exchange rate imbalances and excessive volatility in capital flows. Regarding exchange rates, it has been agreed that the G-20 member countries “will move towards more market determined exchange rate system and exchange rate flexibility to reflect underlying economic fundamentals and refrain from competitive devaluation of currencies†. This agreement in principle is unlikely to make any difference in the situation on the ground. For, China will continue to claim that it is moving, though at the speed determined by it, towards a more market determined exchange rate system and the US will continue to argue that its quantitative easing does not amount to a competitive devaluation of the dollar. The Declaration further states that “advanced countries, including those with reserve currency, will be vigilant against excessive volatility and disorderly movements in exchange rates†. Their action, according to the Summit Document, “will help to mitigate the risk of excessive volatility in capital flows facing some emerging economies†.

•

IN the run-up to the Summit, at the Finance Ministers’ meeting preceding it, the United States had taken a major initiative to propose that an agreement should be reached on assessing the persistently large current account imbalances against indicative guidelines and on the identification of large imbalances that require preventive and corrective action to be taken. In reports that leaked out to the press from the Finance Ministers’ meeting, it was mentioned that an indicative figure of current account surplus amounting to four per cent of the GDP was proposed. If the current account surplus is more than four per cent, it will be regarded as excessive and the countries incurring such a surplus will be put under peer pressure to adopt a set of measures to bring down the surplus. As it happened, the Finance Ministers could not reach an agreement on the indicative guidelines. However, the Summit accepted the principle of assessing current account imbalances against indicative guidelines and identifying imbalances calling for corrective action. The text, included in the Summit Document, reads as follows:
Persistently large imbalances, assessed against indicative guidelines to be agreed by our Finance Ministers and Central Bank Governors, warrant an assessment of their nature and the root causes of impediments to adjustments..., recog-nising the need to take into account national and regional circumstances, including large commodity producers. These indicative guidelines composed of a range of indicators would serve as a mechanism to facilitate timely identification of large imbalances that require preventive and corrective action to be taken.

The Summit called upon its Framework Working Group to develop these indicative guidelines, with progress to be discussed by the Finance Ministers and Central Bank Governors in the first half of 2011.

The above formulation, with all its qualifi-cations and uncertainty regarding its being made operational, is a conceptual breakthrough of far-reaching consequences. This harks back to the Keyens’ Plan put forward at the Bretton Woods Conference in which it was proposed that persistently surplus countries should bear the main burden of the adjustment of imbalances. The Plan in fact envisaged an automatic flow of resources from the surplus countries to augment the liquidity at the disposal of the IMF which, according to the Plan, should have been at the level of 30 per cent of the global liquidity, and which would have been utilised to finance both reserve and capital requirements of deficit countries. At that time, the United States and other major developed countries enjoyed persistently recurring current account surplus and the developing member countries of the IMF were the chronic deficit countries. Therefore, the former countries showed little interest in the Keyens’ Plan which was set aside at the Bretton Woods Conference. Today the table has turned on these countries, particularly the United States, which is finding itself in a position of persistently recurring current account deficit. That is why it has pushed for a plan which will put pressure on the countries having current account surpluses to adopt a whole set of measures for restoring the balance. For the present, the target country will be China which is running a current account surplus of 4.7 per cent of the GDP. It will be very interesting to watch the progress that is made in pursuing this plan.

The kind of adjustment measures that are envisaged under this plan are spelt out in some detail in the Summit Document. Members with sustained, significant external deficit pledged to undertake policies to support private savings and where appropriate undertake fiscal consoli-dation while maintaining open markets and strengthening export sectors. Members with sustained significant external surplus, on the other hand, have pledged “to strengthen domestic sources of growth†. This means that they will rely less and less on exports for growth. Will China ever adhere to this pledge? So far as India is concerned, it is still far from emerging as a country with significant external surplus. At present, it is running a current account deficit to the tune of about 2.5 per cent of the GDP, which is projected to grow to 4.5- 5 per cent by the end of the current Five Year Plan.

•

AS regards the reform of the international financial institutions, the Summit endorsed the decision taken at the Finance Ministers’ meeting to increase the quota shares of the dynamic emerging members and other developing member countries by six per cent. The agreed redistribution of the quotas will have the effect of putting China in the third position and India in the eight position among the quota holding countries. Two developed countries will cease to be members of the 24-member Governing Board of the IMF and two others will slip below the tenth position. This redistribution has no doubt improved the voting power of the emerging economies, including India. But the improvement is still only marginal and the major developed countries together, particularly the United States, EU and Japan, will still hold enough quotas to block any project. There is a promise in the Summit Document of a new alignment of quotas designed to further improve the position of the emerging economies and other developing countries. It has been decided to start the next comprehensive quota review by January 2013 and complete it within a year. Thereafter, the Board’s composition will be reviewed every eight years. This is how the G-20 wants to move towards “a modernised IMF that better reflects the changes in the world economy†. As regards Multilateral Development Banks, the G-20 mainly reiterated their “commitment to an ambitious replenishment for the concessional lending facilities of the Multilateral Development Banks, particularly the International Development Agency (IDA)†.

On the financial regulatory framework, the main decision taken by the G-20 was to endorse the new Basel guidelines on bank capital and liquidity framework and undertake to translate them into national laws and regulations between 2013 and 2019. As regards the moral hazard risks posed by systemically important financial institutions, all that was agreed was to “address†this problem. Commitments were taken for more effective oversight and supervision at the national level. However, the idea of international surveillance of such oversight and supervision did not find favour at the Summit. This was in spite of the statement made a couple of days before the Summit by the Executive Director of the IMF that there should be an international supervision of the financial sector. There was, thus, no question of the Summit considering the more ambitious idea in the Stiglitz Commission Report for creating an international body, within the framework of the United Nations, for the surveillance of the financial sector.

The G-20 Summit did not consider some of the far-reaching measures of reforms of the international monetary system that have been on the negotiating table for decades and which have recently been advocated from other forums and reiterated in the Stiglitz Report. These include substantially increasing the resources at the disposal of the IMF by reaching an agreement on regular periodic issue of the SDR and moving towards an international currency reserve system, mainly based on the SDRs.

It was not clear what Korea had in mind in taking the initiative for including the item on the global financial safety net in the Summit agenda. It may, however, be recalled that at the time of the meltdown of the South-East Asian countries in 1996 and 1997 when the IMF failed to respond to the crisis, Japan had put forward a proposal for placing, at the disposal of the IMF, additional funds to bail out countries in distress and had announced its preparedness to contribute 100 billion dollars for this purpose. The United States and European countries had shown no enthusiasm for this proposal. Today, the IMF remains more or less where it was 15 years ago, direly in need of resources to provide a safety net for countries in financial distress. The agreement reached at the Seoul Summit does not represent much of an advance from the present position. It refers to the enhancement of the Flexible Credit Line to which member countries in need can have access and the creation of the Precautionary Credit Line as a new preventive tool. The fact is that the resources available under these credit lines are utterly inadequate and, in any case, their availability is subject to forbidding IMF conditionalities. Perhaps realising this, the Summit Leaders in their Document asked their Finance Ministers and Central Bank Governors to explore “a structured approach to cope with shocks of a systemic nature†.

Asian countries have accumulated enough reserves which, if pooled, can be used for rescuing countries in financial distress. There is already the Chiang Mai Initiative, among ASEAN+3 (that is, China, Korea and Japan) to make resources available for countries facing financial problems. This arrangement can be expanded with the addition of new members and extension of its mandate to provide much larger resources to a wider group of Asian countries. In the context of the IMF’s disability, regional financial arrange-ments of this type appear to be the only feasible option.

•

COUNTRIES like India, Brazil and Korea attached great importance to the inclusion of trade and development in the Summit agenda. Inclusion of this item was and remains important for two fundamental reasons. Firstly, as stated in an article written by the former Secretary-General of the United Nations, Kofi Annan, a few days before the Seoul Summit, it is not possible to address the issue of trade imbalances without addressing development imbalances. Secondly, if the developing member countries of the G-20 are to remain credible in the eyes of other developing countries, they have to demonstrate that they are making some progress in harnessing inter-national cooperation for development. The developing member countries of the G-20 have to carry the other developing countries along with them because they still depend on the latter’s support for advancing their interests in inter-national forums on a whole range of issues, particularly reduction in domestic agriculture protection in the developed countries, revision of the TRIPS Agreement and bolstering their position in the climate change negotiations. More-over, by putting the development item on the agenda, the developing member countries of the G-20 also wanted to demonstrate that they have also a role in setting the agenda of the G-20, and that they are not there only to put their stamp of approval on the agreements reached among the G-7.

Development, therefore, occupies a very prominent position in the Seoul Summit Document. The Summit has adopted a Social Development Consensus for Shared Growth, with a 10-page Multi-year Action Plan on Development. This Action Plan deals with a large number of issues relating to development, such as infrastructure, human resources development, trade, private investment and job creation, food security, growth with resilience, financial inclusion, domestic resource mobilisation and knowledge sharing. Among the development issues, India had put maximum emphasis on the development of infrastructure. One of the ideas that the Indian delegation was reported to have toyed with was entrusting to international financial institutions the role of intermediating the channelling of the resources of the surplus countries like China, Japan etc., for investment in infrastructure in developing countries like India. This idea was, however, not reflected in the Summit Document. This is presumably because of the preference of the surplus countries to retain full flexibility in deploying their surplus resources and their opposition to the idea of establishing any formal link between accumu-lation of reserves and their use for development financing. In this connection it may be recalled that when the SDRs were first issued, the developed countries had resolutely and consistently opposed the demand of the developing countries for making a part of the SDRs available for development financing. Nevertheless, infrastructure development and financing finds a prominent place in the Action Plan for Development. It is the very first item of the Action Plan. In the operative part, the regional development Banks and the World Bank group have been requested to “work jointly to prepare action plans for increased public, semi-public and private finance and improve implementation of national and regional infrastructure projects...†. The Summit Leaders also decided to create a High Level Panel for Infrastructure Development to mobilise support for scaling up infrastructure financing. This Panel will remain in existence for a year and will submit its final report to the Finance Ministers’ meeting and to the Leaders of the Summit in 2011. It is difficult to predict whether the steps to be taken in pursuance of these provisions would result in any substantial augmentation of resources for infrastructure development in developing countries.

The agreement reached on other aspects of development are very much in the nature of technical assistance to be mobilised by relevant financial and other international agencies. The role of the private sector comes in good measure, though without involving any commitment on their part. As in the case of infrastructure, new mechanisms, of an ad hoc nature and limited duration, have been created to take follow-up action on the agreements reached on some other components of the Action Plan. Apart from the vague commitment in the section on the reform of the international financial institutions to an ambitious replacement of the IDA, there is no commitment of resources, let alone of additional resources, for implementing the agreement reached on any of the components of the Action Plan. The Action Plan, thus, is essentially an empty box.

In trade, developed countries are increasingly emerging as the sinners and the developing countries the sinned against. Apart from maintaining their domestic support for agriculture, which in value is today more than what it was when the WTO Agreement on Agriculture came into force, there has been a proliferation of non-tariff barriers imposed by these countries. During the time of the global economic crisis, in spite of their pledge, given in successive G-20 Summits, not to adopt trade protectionist measures, a number of such measures affecting the trade of developing countries were adopted. For example, the United States has increased fees for visas for business visits and States in the USA have adopted laws restricting outsourcing of business services. These measures have adversely affected the trade interests of countries like India. The Indian delegation was reported to have taken a very strong position against protectionism. Moreover, in a statement made before the Summit, the Prime Minister of India stated that trade was an important part of the development agenda. The agreement on trade, reached at the Summit, has some very eloquent formulations in favour of free trade. In the Summit Document, the Leaders have committed themselves to “keeping markets open†and to “resisting all forms of protectionist measures†. They “reaffirmed the extension of their stand-still commitments on protectionism until the end of 2013 as agreed in Toronto and committed themselves to roll back any new protectionist measures that may have arisen...†. However, in the backdrop of the protectionist measures already adopted and in operation, it is not sure whether these commitments are really serious.

On the WTO’s Doha Development Round, the G-20 Leaders have reiterated the declaration made by them in the past. They have directed their negotiators to engage in across-the-board negotiation to “promptly bring the Doha Development Round to a successful, ambitious, comprehensive and balanced conclusion...†. As a measure of emphasis, they have declared: “We now need to complete the end-game.â€

The author is a former Foreign Secretary who played a prominent role as the Indian representative in international economic conferences and negotiations.