Global Trends by Martin Khor

Monday 30 March 2009

Week of decision for world economy

The exclusive Group of 20 meets in a summit meeting in London this week to discuss the global economic crisis.  But hopes are fading it will take decisions on the global reforms needed, or that will really benefit the developing countries.

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This will be a crucial week for the fate of the global economy, as political leaders meet in London this Thursday to discuss the financial and economic crisis.

It will be the second meeting of the so-called “Group of 20”.  The first was hosted by former United States President George W. Bush last November, and it launched what was to be a series of Summits to reform the world financial system.

While the inaugural meeting was a political launching of principles, the London meeting  is supposed to take major decisions.  Meanwhile, the global economy has rapidly deteriorated to a full-blown crisis, thus putting more pressure on the meeting to succeed.

The G20 has however been attacked for being an exclusive club of rich and big countries that lack legitimacy because it is unelected and most countries are not represented.  Thousands of protestors have already taken to the streets in London and elsewhere.

But still, expectations run high. The London summit is the last chance to avoid a world depression, said George Soros last week.  If the leaders only talk but fail to take key decisions, “then the global financial and trading system falls apart,” he told The Times of London. “That could push the world into depression.  It is really a make-or-break occasion.”   

It is ironic that Soros, who more than a decade ago had become the most famous or infamous investor and hedge-fund operator that manipulated markets to make billions of dollars of profits, is now one of the world’s fiercest critic of “market fundamentalism” and advocate of change. 

Soros has called for an overhaul of the global system, even as he continues to profit from it.  The Times reported that he earned another billion of dollars last year by betting on the shape of the recession.

Prospects for the meeting’s success have been lowered in recent days because of disagreements between the United States and Europe on what should be done.

Most European leaders want to push for stronger global financial regulations to prevent future crises.  However this is being resisted by the United States, which prefers to get agreement on the need for each country to contribute to economic recovery through boosting government spending and pumping more money into the system.

A pact on “fiscal stimulus” is being resisted by German and French leaders who fear it may lead to inflation, a new “bubble” and another crisis in future.  The Prime Minister of the Czech Republic, which currently holds the presidency of the European Union, even described the United States’ reflationary policies as “the road to hell.”

There is the suspicion that the US and Britain are not eager to agree to global oversight and reform of the financial system, because they are the major centres of finance, and want to retain their dominance.

That the US and Europe are not prepared for basic changes is shown by the fact that both want to use the London summit to strengthen the resources and role of the International Monetary Fund, even before it is reformed.

The IMF had lost credibility and business because of the wrong policies tied to its crisis loans, especially during the Asian crisis.  It governance and voting system is undemocratic as it marginalizes the developing countries. 

But more than ten countries have had to take new loans from the IMF in recent months as their economies plunged into crisis.

The Western countries want to double or treble the funds available to the IMF so that it can lend to more countries in trouble, and this revitalization of the IMF is likely to be the main outcome of the London summit.

A recent study by the Third World Network has however shown that in the new loans given to Eastern European countries and developing countries like Pakistan, the IMF is still tying its loans to tight monetary and fiscal policies, opposite to the reflationary policies that the US and Western Europe are undertaking.

Boosting the power of the IMF before reforming it is a step backwards and not forwards. 

The developing countries, which are becoming the main victims of a crisis they did not create, face a gap in external financing of US$270-700 billion this year, according to a World Bank estimate. 

The United Nations Secretary General Ban Ki-Moon last week called for new funding of one trillion dollars (to be used in two years) to assist developing countries to counter the crisis.

These massive funds need to be made available, and they should not be tied to the recession-inducing IMF-type conditions, otherwise many developing countries will fall into a new debt trap, with decades of economic stagnation and social strife.

However, the G20 meeting is unlikely to make the right decisions that the developing world requires. Thus, the double standards are likely to continue – on one hand, the developed countries will challenge one another to use Keynesian policies to boost their sagging economies, and on the other hand the IMF will be the recipient of hundreds of billions of new funds, which it will use to get crisis-laden developing countries to take on tight monetary and fiscal policies.

The G20 has also come under severe criticism for being mainly a club of the rich, which is self-selecting and which has no legitimacy as it leaves out most countries.

At the United Nations in New York last week, a special General Assembly dialogue session was held in which the Nobel-winning economist Joseph Stiglitz launched the summary of a report of the Commission of Experts on the economic crisis set up by the President of the General Assembly.

The report proposes wide ranging reforms to the world financial system and measures to counter the recession in ways that aim to benefit developing countries and the poor.

The UN is also planning to hold its own Summit on the economic crisis in the first week of June, to focus on the plight of the developing countries and on reforms to the global economic system.

If the G20 fails to come up with results this week, the action (at least where developing countries are concerned) may well shift to the more inclusive UN process.