The G20 summit: How not to rule the world

The London summit provided precious few signs that the major players in the global economy would act together to revive it, says Jayati Ghosh.

THE much-hyped G20 summit was supposed to save the world economy from imminent collapse, and provide much-needed relief to developing countries hit by an economic tsunami that was not of their own making. Even before the summit was held, it was already being hailed as the first sign of a changing global order, since at long last some large and economically significant developing countries like China, India, Brazil, South Africa and Argentina were admitted to the 'high table' of the self-appointed rulers of the world.

Though the G20 is somewhat larger than the G8, and now accounts for the majority of the world's population, it is still an illegitimate grouping, in that it completely bypasses the United Nations. Even so, there were those who believed that, given the urgency created by the global economy apparently in near collapse, it could be the harbinger of a new 'Bretton Woods' agreement that would reshape the international financial architecture, much in the way that the famous conference held at Bretton Woods in 1944 managed to do.

Of course, we should have all known that this was not likely, not only because of a lack of adequate preparation before the summit as well as lack of legitimacy and representation from all nations, but simply because there is still too much disagreement about most issues among the members of the G20. Even so, the resulting communiqu‚ released with so much fanfare is deeply disappointing, and particularly so for developing countries.

In fact, there were precious few signs that the major players in the global economy would act together to revive it. Instead, in the communique there was deafening silence on the fiscal front, with no clear commitment to coordinated fiscal stimulus, just some vague statements. This reflected the successful resistance of Germany and France to attempts by the US to ensure a collective plan for fiscal expansion.

Since there was no commitment to fiscal expansion, there was correspondingly no commitment to direct more resources towards new technologies and changing patterns of demand to ensure more sustainable and equitable use of the world's resources in the eventual recovery.

Nor was there any evidence of a binding commitment to specific measures to clean up the toxic assets of the world's banking systems. Instead, the communique simply stated that the leaders of these countries 'are committed to take all necessary actions to restore the normal flow of credit through the financial system and ensure the soundness of systemically important institutions' without making it clear what such measures would be.

Yet without such necessary measures, the chances of early global recovery are extremely bleak. So exports of developing countries will continue to fall, international capital markets will remain skittish and prone to punish emerging markets out of sheer nervousness and uncertainty, the credit crunch will continue to constrain investment and therefore limit recovery, and many countries will find themselves desperately short of resources for meeting essential needs and development projects.

'Successes'

Despite these evident failures, two great 'successes' of the summit were widely trumpeted in the international media: first, the declarations about tax havens, banking secrecy and financial regulation; and second, the announcement of a supposedly new $1.1 trillion 'programme of support to restore credit, growth and jobs in the world economy' including $850 billion which is supposed to be specifically directed towards developing countries.

But the promise of cracking down on tax havens is little more than a damp squib. To begin with, the approach chosen has been to agree to exchange information on companies and individuals suspected of evading taxes only 'on request' rather than automatically, thereby reducing the efficacy of such a measure. Second, the issue of misuse of tax concessions by companies - by far the biggest issue in tax avoidance - received no attention at all. In fact there was absolutely no attempt to ensure financial reporting or requiring exchange of information on beneficial ownership in all tax jurisdictions, which would have allowed for cracking down on corporate tax abuse.

The funniest of all was the loud announcement of the intention to 'name and shame' and then blacklist countries that do not cooperate. When the list was released the following day it was laughable, consisting only of four territories: Uruguay, the Philippines, the Malaysian Federal Territory of Labuan, and Costa Rica. Since none of them is well known as a tax haven, and the more established tax havens in Europe (such as Liechtenstein, Luxembourg, and so on) were excluded by virtue of belonging to the Organisation for Economic Cooperation and Development (OECD), little appears to have been achieved on this front. 

The only apparently concrete commitment was apparently to poor countries that have been thrown into crisis by the global turmoil, through pledges of $1.1 trillion in new funds. This sounds like a reasonable amount, but how much of it is for real? And how unconditional will such money flows be?

Not much, it turns out. For a start, the proposed new allocation of Special Drawing Rights (SDRs) ($250 billion) is to be a general allocation, based on existing quotas. So the bulk of it will go to ... the G20 countries! The rich world alone will get approximately 60% of the new SDR creation. Helping poor countries get more would require a special issue of new SDRs - something that was proposed in the IMF in 1997 but vetoed by the US, and held in abeyance ever since.

Much of the rest of the money will be conditional lending from the IMF, which has recently distinguished itself only by its utter failure to prevent or deal with financial crises in emerging markets because of its aggressively procyclical conditionalities. It is amazing that the multiple failures of the IMF are being thus rewarded. This is after all the organisation that failed to predict the collapse of the US subprime market, announced that the medium-term financial outlook for Iceland was exceptionally healthy just months before the country was declared effectively bankrupt, and has succeeded in making things much worse in most of the countries where it has forced its austerity measures in return for paltry loans.

Unconditional gift to the IMF

So the single greatest beneficiary of this G20 meeting must be the IMF, which would otherwise have been on life-support as a global player. Indeed, the most disappointing - even most alarming - aspect of the G20 communiqu‚ is the declared intent to prop up and strengthen the IMF without doing anything about its completely undemocratic structure of decision-making or its unacceptable loan conditions.

What makes this especially troubling is that the IMF continues to impose these disastrous procyclical conditions on countries that are forced to borrow from it at present: Ukraine, Pakistan and Latvia, for example, have all been told to cut government spending and raise interest rates and user charges for government services in the middle of the downswing, in return for IMF loans. Unfortunately, since the IMF has been given this unconditional gift from the G20 leaders (including those from developing countries who should really know better), there is nothing to stop it from continuing to behave in this ridiculous and unjust way, which is also based on extreme double standards for rich and poor countries.

Much of this IMF money is likely to go to 'emerging' markets in Central and Eastern Europe, to countries that are effectively bankrupt because of a borrowing spree aided and abetted by Western multinational banks. So it is also hard to avoid the cynical conclusion that this gift to the IMF is just another way of saving Western banks, who would be otherwise very badly hit by the counterparty risk of financial collapse in these countries. What is the point of having representation from so many developing countries in the G20, if they deliver the same results that were earlier the product of self-serving policies of the G8?

Commission's recommendations ignored

What is particularly unfortunate is the way the G20 completely ignored the recommendations of the Stiglitz Commission on international financial reform set up by the more democratic international body, the UN General Assembly. That Commission came up with its preliminary report just before the G20 summit and made a number of useful short-term and medium-term recommendations. For example, it recommended an immediate new special allocation of SDRs, along with a new credit facility for development funds, strengthening regional initiatives and providing 1% of all stimulus packages as official development assistance (ODA). These would actually have made a much more positive difference to developing countries than the self-aggrandising posturing of the G20. On financial regulation as well, the Commission had several important suggestions that have been more or less ignored by the G20.

Even the G20's commitment to avoid protectionism sounds ominous for developing countries, and not only because it is likely to be honoured only in the breach. It was stated with the goal of 'reaching an ambitious and balanced conclusion' to the World Trade Organisation (WTO) negotiations - which can only mean forcing more trade liberalisation that has already led to an agrarian crisis and deindustrialisation in much of the South. Indeed, what is required in the current global conjuncture is an asymmetric approach to trade management: the North must be prevented from turning protectionist because that will drag down the whole world economy, and the South must be allowed to protect the livelihood of its farmers and small producers and to promote industrialisation through appropriate trade policies, which in turn will help the growth of the world economy as well.

The G20 also ignored another crisis that was much talked about just a few months ago: the food crisis, which has not disappeared in many developing countries even though world food prices have come down in the past year. The fact that retail prices of food have not come down, and even continue to increase in much of the developing world, is an indication of the difficulties that developing-country governments are having in ensuring domestic food security at least partly because of the financial crisis. They are finding it harder to borrow in external lending markets, are facing sharp depreciations of the currency as finance moves back to the US, and have to deal with loss of livelihood and return of migrant workers among the population at large, which affects the ability to buy food. The G20 ought to have stressed emergency and non-conditional measures of providing compensatory finance to developing countries affected by the food crisis, but this crucial issue seems not to have even been talked about at the summit.

The basic problem, though, is that the G20 has not produced anything like the response needed to pull the world economy out of this unprecedented mess. Clearly, the idea is to put back the broken pieces somehow, to produce more of the same pattern of growth as before. That is neither desirable nor sustainable, and will rapidly run into crisis once more, at tremendous human cost. What a pity that the would-be leaders of the world have shown so little generosity or imagination.                                       

Jayati Ghosh is professor of economics at the Jawaharlal Nehru University in India. The above is a revised version of an article for Frontline magazine.

*Third World Resurgence No. 224, April 2009, pp 7-9