G20 Summit: No accord on 'currency values' or imbalances

The Group of 20 concluded its summit in November in the South Korean capital with no real progress on the resolution of differences on key economic issues. Chakravarthi Raghavan analyses this failure.

THE Group of 20 (G20) major economies ended their 11-12 November Seoul Summit unable to resolve major differences on 'currency values' or how to reduce global imbalances, but managing to avoid a breakup - with agreement of sorts on a vague set of guidelines and a range of indicators to be developed (with progress to be discussed in the first half of 2011), and on monitoring progress in implementing national policy commitments through a Mutual Assessment Process.

The outcome is long on promises covering a range of subjects, outlining goals and objects, but sparse in concrete details of the processes to go from here to there. In effect, the G20 leaders managed to avoid a breakdown by kicking problems on their agenda down the road, but without even a clear roadmap to resolve them.

The Summit ended with a Declaration and the Seoul Action Plan of continued commitment to cooperation, with concrete national policy commitments outlined in a Supporting Document.

The Action Plan and the other documents commit the world's leading economies in the G20 to actions in five policy areas, with details of specific commitments by the members set out in the Supporting Document.

On monetary and exchange rate policies, the G20 reaffirmed the importance of commitment to price stability, recovery and sustainable growth, a move towards market-determined exchange rate systems and enhancing exchange rate flexibility to reflect economic fundamentals and refrain from competitive devaluations.

Advanced economies, including those with reserve currencies, will remain vigilant against excess volatility and disorderly exchange rate movements, thus mitigating the excessive volatility in capital flows facing some 'emerging market economies'. Nonetheless, in circumstances where countries face undue burden of adjustment, policy responses in emerging market economies with adequate reserves and increasingly overvalued flexible exchange rates may also include carefully designed macro-prudential measures, the Summit document said.

On trade and development, the G20 spoke of its commitment to 'free trade and investment. It pledged to  refrain from introducing and oppose protectionist policies, and recognised the importance of a prompt conclusion of the Doha Round of international trade negotiations. The Group also said it would focus efforts to resolve significant bottlenecks to inclusive and sustainable growth in developing countries, low-income ones in particular.

In the area of fiscal policies, the advanced economies are to formulate and implement clear, credible, ambitious, and medium-term fiscal consolidation plans.

On financial reform, the G20 promised among others to fully implement new bank capital and liquidity standards, and address too-big-to-fail problems, and agreed to further work on regulatory reforms.

In the area of structural reforms, the G20 promised to implement a range of structural reforms to boost global demand, foster job creation, contribute to global re-balancing, and increase growth potential. Where needed, it would undertake reforms in product markets, labour market and human resource development; tax reforms; green growth and innovation-oriented policy measures; reforms to reduce reliance on external demand and focus more on domestic sources of growth in surplus countries, and promote higher national savings and export competitiveness in deficit countries; reforms to strengthen social safety nets such as public health care and pension plans; corporate governance and financial market development to help reduce precautionary savings in emerging surplus countries; and investments in infrastructure to address bottlenecks.

For enhancing its Mutual Assessment Process (MAP) to promote external sustainability, the G20 promises to strengthen multilateral cooperation to promote external sustainability and pursue the full range of policies conducive to reducing excessive imbalances, and maintaining current account imbalances at sustainable levels.

Towards this end, the G20 Finance Ministers and Central Bank Governors are to agree on indicative guidelines to assess the nature and the root causes of impediments to adjustment as part of the MAP, while taking into account national or regional circumstances, including large commodity producers. The indicative guidelines are to be composed of a range of indicators to serve as a mechanism to facilitate timely identification of large imbalances that require preventive and corrective actions to be taken.

To support these efforts and commitments, the G20 Framework Working Group, with technical support from the International Monetary Fund (IMF) and other international organisations, is mandated to develop these indicative guidelines, with progress to be discussed by its Finance Ministers and Central Bank Governors in the first half of 2011.

The Summit has endorsed the G20 Finance Ministers' call at their October meeting in Gyeongju, South Korea for the IMF to provide an assessment, as part of the MAP, on the progress towards external sustainability and the consistency of fiscal, monetary, financial sector, structural, exchange rate and other policies. The first such assessment, to be based on the above-mentioned indicative guidelines, will be initiated and undertaken in due course under the French presidency. (France will assume the G20 presidency in 2011.)

The G20, described variously as 'the world's leading economies' and 'the premium forum for international economic cooperation', not only lacks the legitimacy that can come only out of a democratic process, but also lack the ability to find a way out of the economic ills facing the world. One thing seems clear: the Summit outcome (Declaration, Action Plan, and the Summit document outlining what each participant will do) will not take the world and the global economy any nearer to a solution for the three-year-old monetary and financial crisis that has morphed into a global economic crisis.

Some of their decisions endorsing the Basel and Financial Stability Board recommendations, and moves for an international insolvency process for the too-big-to-fail (TBTF) financial institutions, are also non-starters, given the current state of national sovereignty issues.

As Yves Smith has pointed out in a post on the 'Naked Capitalism' blog, the only real solution to the insolvency problems of a TBTF financial institution would be for each national jurisdiction to require foreign banks operating in their territories to be incorporated as subsidiaries, and for these subsidiaries to be directed by the central bank of the host country to set aside the necessary capital and keep them as assets in the country and/or as reserves in the central bank of the country (and not be allowed to avoid sequestering of such reserves by pointing to the capital available with home TBTF enterprises).

As for the G20 Summit's usual call for the conclusion of the Doha Round at the World Trade Organisation (WTO), such a conclusion, among other things on the basis of proposals on the table or in chairs' draft negotiating texts, will enable  the foreign financial firms of the US and Europe to use the cheap credits available in their home countries to undertake carry trades in local currencies and 'subsidise' their operations in developing countries, thus creating an even greater imbalance and unfair competition, as well as not allow local domestic regulatory powers to curb their activities.

The conclusion of the Doha Round negotiations without setting these deficiencies aright and resolving problems of the lack of data could easily precipitate another financial crisis which this time would envelop  countries like China, India, Brazil et al.

Institutional interests

In the immediate aftermath of the current crisis (marked by the Lehman Brothers bankruptcy), the leading nations of the world joined hands in a firefighting operation of sorts that enabled the world to avoid a repeat of the Great Depression. But instead of a recovery, the world is in the midst of what has been described as a Great Recession.

This is essentially because from the time of their coming into being at Pittsburgh in 2009 as a summit group to replace the discredited Group of 8, the political leaders of the G20 have forgotten the fundamental law of politics and political theory: governments agree on policies and create institutions to carry out these policies, but soon those staffing the institutions try to change the policies to suit their own institutional and career interests.

The various international institutions that have been providing inputs and backstopping for the G20 discussions - the IMF, the Organisation for Economic Cooperation and Development (OECD), the WTO, the United Nations, the UN Conference on Trade and Development (UNCTAD), the International Labour Organisation (ILO) et al - have been advancing their own agendas, to secure work for themselves.

By and large, these organisations have been engaged in what the English essayist William Hazlitt (1778-1830), in one of his essays, called 'Rifacimento' (yesterday's stale cake, cut into half, and sold under a new name and priced twice more). They have been dusting up their old proposals and recycling them, sometimes in new language.

There has been very little sign of any out-of-the-box thinking.

And among the international institutions so far, the IMF, which was on the verge of becoming irrelevant, managed to hijack the agenda and has found a new lease of life with expanded resources and surveillance role, whose effectiveness will depend on peer pressure. However, there is little change in its thinking or policy prescriptions.

And in its so-called governance reforms which have been touted as a 'major overhaul of voice and representation', the IMF management and staff have performed their own version of the pea-under-the-shell game, with the IMF chief, Dominique Strauss-Kahn, announcing at the Gyeongju meeting of the G20 Finance Ministers, an accord to achieve a 6% shift in quota and voting power to the 'dynamic emerging market and under-represented countries'.

A detailed scrutiny shows that the actual shift from the rich (Bretton Woods I power structure) to the developing countries has only been about 2%, with the other 4% 'achieved' by reducing the quota and voting power of many developing countries and shifting them to other developing countries.

Postwar system

In terms of the reform of the postwar international monetary and finance system and rescuing the world from its current crisis, the real issues are not even on the agenda of the G20.

As Kenneth Dam, in his book Rules of the Game, has noted, when the British and Americans were negotiating what became known as the Bretton Woods Agreement, they were not looking to reform the international monetary and finance system, but designing a finance and monetary system as part of the postwar family of international institutions and organisations for maintaining peace (and ridding the world of the scourge of war that had afflicted Europe twice in the early 20th century).

When the US' Harry Dexter White and Britain's John Maynard Keynes (both eminent economic thinkers, with Keynes the more erudite, but representing a country that had lost its 19th century political and economic hegemony and eminence) discussed and negotiated a framework for the postwar economic system, they had no doubt prepared themselves with inputs from their governmental bureaucracies, principally their treasuries. But they also brought to bear their own thinking and policy ideas (in political economy, and within it money and finance) developed over the interwar years and the experiences of those years and the Great Depression. They did not depend on or have any international bureaucracies (which have all the weaknesses and faults of national bureaucracies plus one, that of the international).

[The political and security aspects of the postwar system evolved in outline from the discussions of the leaders of the US, Britain and the Soviet Union (the three allies fighting Nazi Germany). But the economic system was negotiated by the US and Britain, though much later it became known that White, a communist, was keeping the Soviet Union informed.]

In the negotiations, Keynes and White - with White's views (because of the US power, both military and economic) prevailing over those of Keynes - had a clear perspective; but even that perspective and framework that emerged in the Bretton Woods accords got partially discarded in the IMF that came into existence and began functioning.

As US academic Jane d'Arista has pointed out, at Bretton Woods, both Keynes and White laid great emphasis on ensuring liquidity for a country facing a payments problem and agreed that 'policy conditions should only apply ex post - after a borrower's needs were met - and only if that borrower were unable to take appropriate action or were unable to repay. Their position on conditionality was, in fact, reflected in the initial framework for the IMF. It was only in the 1950s that the Executive Board of the IMF "introduced the conditional lending that gradually became standard practice" [Boughton, 2006, IMF Working Paper 06/6, p. 11]. Also missing from the final agreement was the automaticity and apolitical structure that Keynes envisioned. It is likely that either his overdraft plan or White's swaps would have provided liquidity in a more timely fashion than the IMF's quota-based lending. But another serious loss was White's proposal for subscriptions of transferable securities to provide the framework for counter-cyclical open market operations. This would have made the International Stabilisation Fund a true lender of last resort - unlike the IMF that depends on contributions of taxpayer funds and, like Keynes's ICU [International Clearing Union], plays an essentially passive role in international transactions.' (Cambridge Journal of Economics, 2009, Vol. 33, pp 633-652)

When the Bretton Woods system, and its dollar-gold convertibility and fixed exchange rates, collapsed (with US President Richard Nixon's unilateral devaluation of the dollar against gold in 1971, with just a half-hour notice to the then IMF Managing Director), a patchwork emerged as a result of the Smithsonian and Jamaica amendments to the IMF charter. But even that non-system has now collapsed. And the World Bank President, Robert Zoellick, peddling his idea of a modified gold standard system (while denying he is advocating a return to the gold standard), is promoting solutions that if adopted will probably accentuate a global deflationary crisis.

If at Bretton Woods, and again in the 1970s, the US opposed symmetrical adjustment, and pushed for open capital accounts and for trading of money as a commodity, now in 2010, while calling for symmetrical adjustment (and pushing for revaluation of the renminbi by the Chinese), it is engaged in its own currency manipulation and dollar devaluation through the Federal Reserve's 'QE2' (quantitative easing operations, a euphemism for printing dollars and buying Treasury and other bonds).

In a Washington Post op-ed explaining the QE2 operations, and in a subsequent speech at a meeting at Jekyll Island to celebrate the 100th anniversary of the founding of the Fed (New York Times, 10 November), the Chairman of the Federal Reserve, Ben Bernanke, has not cared to address the concerns of other countries over the impact of the Fed policy on these countries, given the position of the US dollar as a universal reference and transaction currency.

In a comment to this writer on Bernanke not addressing the concerns of other countries on the effects of the Fed's actions, Andrew Cornford of the Observatoire de la Finance says: 'It is extraordinary but perhaps predictable from a prominent member of the establishment of a country to which other countries' concerns often seem at best secondary. If a Gibbon eventually chronicles the decline of the American empire, he will probably devote significant space to this failing of the US elite.'

In her article (pp 644-645), d'Arista has cited the writings of Nicholas Kaldor, in 1971, on the dollar crisis: '... The persistent large deficits in the United States balance of payments - given the universal role of the dollar as the medium for settling inter-country debts - acted in the same way as a corresponding annual addition to gold output ... So long as countries preferred the benefits of fast growth and increasing competitiveness to the cost of part-financing the United States deficit (or what comes to the same thing, preferred selling more goods even if they received nothing more than bits of paper in return), and so long as a reasonable level of prosperity in the United States (in terms of employment levels and increases in real income) could be made consistent with the increasing un-competitiveness of United States goods in relation to European or Japanese goods, there was no reason why any major participant should wish to disturb these arrangements ... [But] as the products of American industry are increasingly displaced by others, both in American and foreign markets, maintaining prosperity requires ever-rising budgetary and balance of payments deficits, which makes it steadily less attractive as a method of economic management. If continued long enough it would involve transforming a nation of creative producers into a community of rentiers increasingly living on others, seeking gratification in ever more useless consumption, with all the debilitating effects of the bread and circuses of Imperial Rome ...'

D'Arista, in her paper, has pointed to the spillover effects of the investment of emerging economies' current account surpluses in the US and other major national and international financial markets. This results in the poorer countries not only financing the rich, but having some portion of their own funds recycled back (by the foreign banks and firms having access to low-interest easy money) in the form of foreign acquisition and ownership of their financial assets and productive facilities, and not always in accord with investment strategies concerned with development.

Hence, in d'Arista's view, one of the more pressing issues in dealing with global imbalances is to find ways to recycle the developing countries' savings (as a result of exports of goods and services to the rich countries) back into their own economies in support of development strategies that increase demand and income more equitably and reduce dependence on export-led growth. Towards this end, she suggests a public international investment fund for emerging economies. She also suggests a revival of Keynes' idea of an international clearing agency to serve as the institutional platform for a new global payments system that would foster egalitarian interactions and more balanced outcomes. She also suggests a new structure for issuance of Special Drawing Rights (SDRs) by reviving the idea of a substitution account which would provide some limited protection as the United States reduces its imports.

Shortcomings

A South Centre paper (November 2010), authored by its chief economist, Yilmaz Akyuz, draws attention to the main shortcomings in international monetary and financial arrangements, but notes that the agendas of the G20 and the IMF still miss some of the most important issues that need urgent attention. The paper says that the current turmoil in the world economy has demonstrated once again that the international arrangements lack mechanisms to prevent financial crises with global repercussions. Not only are effective rules and regulations absent to bring inherently unstable international financial market and capital flows under control, but there is no multilateral discipline over misguided monetary, financial and exchange rate policies in systemically important countries despite their disproportionately large adverse international spillovers.

Both national and international policymakers, Akyuz complains, are preoccupied with resolving crises by opening the faucets and spigots to support those who are at the origin of the problems, rather than introducing institutional arrangements to reduce the likelihood of their recurrence.

Through such interventions, he says, they are creating more problems than they are solving, and indeed sowing the seeds for future difficulties. For the first time in the postwar era, widespread economic difficulties are seriously threatening to disrupt whatever order the international economic system may have, by giving rise to beggar-my-neighbour policies in major economies, largely because of the absence of multilateral disciplines over exchange rate policies and orderly and equitable adjustment to global trade imbalances without scarifying growth.

The international monetary and financial arrangements need a major overhaul. The primary objective should be to deliver 'the global public good of financial stability'.

The missing components in the current arrangements, according to the South Centre paper, are:

* The need to establish credible and effective surveillance over national monetary and financial policies with global repercussions. This depends on introducing enforceable commitments and obligations regarding exchange rates of major currencies and adjustment to imbalances by both deficit and surplus countries.

* The world economy should move away from the current reserves system centred on the US dollar. This is essential not only for reducing global trade imbalances and securing greater international monetary stability, but also for the scarce resources of poorer countries to be used for investment and growth, rather than being transferred to the reserve issuer enjoying the exorbitant privilege of being able to live beyond its means without encountering serious costs.

* There should be a serious rethinking of the approach to international capital flows. The international community should firmly establish that controls over capital flows are legitimate tools of policy and they should be used not only by developing emerging economies but also by advanced economies to secure macroeconomic and financial stability.

* Crisis intervention and lending should not undermine market discipline and distort the balance between debtors and creditors. Private creditors and investors should be involved in the resolution of payments crises through both voluntary and mandatory mechanisms. With mounting sovereign debt with international dimensions in several emerging and mature economies, it is no longer possible to deny or ignore the need for impartial sovereign insolvency procedures.

Seoul commitments

Among the areas covered in the promises and commitments of the G20 Seoul documents are:

* actions on promises made to support international financial institutions (IFIs) with resources to support the global economy, and G20 commitments on further reforms needed at IFIs;

* 'modernised' IMF governance (with the G20 endorsing and commending the 'comprehensive IMF quota and governance reform package' approved by the IMF Executive Board and remitted for vote to the Board of Governors);

* strengthened IMF surveillance;

* completion of ambitious replenishment for concessional lending by multilateral development banks;

* strengthened global financial safety nets - the already achieved enhancement of the IMF's Flexible Credit Line, creation of a Precautionary Credit Line, and the recent IMF decision to continue work to improve the global capacity to cope with shocks of a systemic nature, and the dialogue to enhance collaboration between regional financial arrangements (RFAs) and the IMF;

* mandate to G20 Finance Ministers and Central Bank Governors for a structured approach to cope with shocks of a systemic nature, and ways to improve collaboration between RFAs and the IMF;

* endorsing financial sector reforms and transformed financial system to address the root causes of the crisis (including the new Basel III capital and liquidity framework) and the work of the Financial Stability Board (FSB) on systemically important financial institutions (SIFIs) and the TBTF problems, higher loss absorbency capacity for SIFIs, and initially more intense supervisory oversight for globally systemically important financial institutions (G-SIFIs);

* encouraging the FSB, Basel Committee on Banking Supervision (BCBS) and other relevant bodies to complete their remaining work, in accordance with their work processes and time-lines in 2011 and 2012;

* G-SIFIs should be subject to a sustained process of mandatory international recovery and resolution planning;

* implementation and international assessment, including peer review, of the ongoing processes of the reform efforts (including in an internationally consistent and non-discriminatory manner, work on strengthened regulation and supervision of hedge funds, over-the-counter derivatives and credit rating agencies);

* importance of achieving a single set of improved high-quality global accounting standards;

* commitment to preventing non-cooperative jurisdictions from posing risks to the global financial system, and welcoming the ongoing efforts by the FSB, Global Forum on Tax Transparency and Exchange of Information and the Financial Action Task Force.

In the area of future work warranting more attention, the Summit identified:

* further work on macro-prudential policy frameworks;

* addressing regulatory reform issues pertaining specifically to emerging market and developing economies;

* strengthening regulation and supervision of shadow banking;

* further work on regulation and supervision of commodity derivative markets;

* improving market integrity and efficiency; and

* enhancing consumer protection.

In the area of trade and investment, the Seoul documents:

* reiterated the importance of free trade and investment, and the commitments to keep markets open and liberalise trade and investment;

* welcomed the broader and more substantive engagement of the past four months on the WTO Doha Round, and called for intensified and expanded engagement with a view to completing the end game. The Summit asked negotiators to engage in 'across-the-board' negotiations to bring the round to a 'successful, ambitious, comprehensive and balanced conclusion consistent with the mandate of the Doha Development Round and built on progress achieved'.

'Once such an outcome is reached, we commit to seek ratification where necessary in our respective systems,' the Summit document declared.

[But this last seemed problematic, insofar as the US is concerned, given the recent US Congressional electoral outcome and the ongoing US political processes, with the two parties focused on the 2012 elections.]

The Seoul Development Consensus for shared growth and a Multi-year Action Plan on Development (outlined in two annexes) are seen as replacing the failed and discredited Washington Consensus.

[But these will be judged on how they play out in actions - and there is ground for considerable scepticism given that the same technocrats and bureaucrats of the international system and those running the institutions are the same ones from the neo-liberal Chicago school.]

In practical terms, the Seoul Summit failed to deliver on the 'duty-free quota-free' promises in trade for the least developed countries.

The Summit Action Plan and document also cover the areas of financial inclusion, support to small- and medium-sized enterprises (SMEs) and SME financing and credits, fossil fuel subsidies and fossil fuel price volatility, the Global Marine Environment Protection initiative, climate change and green growth, anti-corruption, and enhancing G20 processes for consultations with the wider international community.                  

Chakravarthi Raghavan is Editor Emeritus of the South-North Development Monitor (SUNS). The above is based on his articles published in SUNS No. 7039 (12 November 2010) and 7040 (15 November 2010).

*Third World Resurgence No. 244, December 2010, pp 4-8