Bridges Weekly Trade News Digest • Volume 12 • Number 39 • 19th November 2008
G-20 Recognises Central Role of Emerging Economies
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A weekend was never going to suffice for leaders from major industrialised and developing countries to redraw the rules governing global finance, as they met to grapple with the financial crisis and the prospect of a prolonged global recession.
Instead, heads of state from the Group of Twenty, whose countries account for the lion’s share of world output, trade, and population, used their first-ever summit to promise continued monetary and fiscal measures to stimulate their domestic economies, to resist protectionism in trade and investment, and to cooperate on financial market stabilisation and regulatory reform. (N.B. This G-20 should not be confused with the developing country alliance in the WTO agriculture negotiations.)
The leaders also pledged to “strive to reach agreement this year” on a framework for concluding the struggling Doha Round of WTO negotiations, and to expand the voice of developing countries in the World Bank and International Monetary Fund.
But more than the show of unity, the Doha exhortation, the pledge to maintain development aid, or the specific instructions on regulatory reform and financial oversight, the 14-15 November meeting in Washington was noteworthy for the central role given to developing countries in shaping future financial reforms.
The gathering marked “the coming out party of the emerging countries in the governance of the global economy,” said Andrew Cooper, associate director of the Centre for International Governance Innovation in Waterloo, Canada.
The G-20 leaders agreed to meet again by the end of April, by which time US President-elect Barack Obama, whose administration will be a key determinant of how the reform process unfolds, will have taken over from George W. Bush. The plan to meet again implies that the G-20 will be playing a larger role in the informal coordination of the world economy, a place heretofore occupied by the Group of Seven leading industrialised nations (with or without Russia).
It is too soon to say whether the G-20 is replacing the G-7/8, said Cooper, an expert on the industrialised bloc’s relationship with emerging economies. But the larger group, which includes China, Brazil, India, Indonesia, Mexico, South Africa, South Korea, and Turkey, is “certainly on the ascendancy,” and taking over as a “hub” of governance.
Support for economic stimulus, open economy
The G-20 leaders pledged to “take whatever further actions are necessary to stabilise the financial system.” Central banks around the world have cut interest rates in recent weeks, in an attempt to stimulate slowing economies. They also pledged to “use fiscal measures to stimulate demand to rapid effect.” Earlier this month, China announced a US$ 586 billion infrastructure and social spending plan to bolster domestic demand. The incoming US administration also supports a new stimulus package.
As for the problems faced by developing countries that are finding it hard to access finance amidst the worldwide credit crunch, their five-page declaration called for ensuring that the IMF, the World Bank, and other multilateral development banks “have sufficient resources” to maintain lending during the crisis.
The leaders underlined a “shared belief that market principles, open trade and investment regimes, and effectively regulated financial markets” are essential to economic growth and employment, as well as poverty reduction.
Specifically, they agreed to “refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing WTO-inconsistent measures to stimulate exports” over the next 12 months.
Harvard professor Dani Rodrik described these pledges as “so-so.” Writing on his blog (http://rodrik.typepad.com/dani_rodriks_weblog/2008/11/and-now-the-real-g-20-communiqu.html), he noted that there was “no coordination” planned for different countries’ fiscal stimulus packages, and that “the promises made to emerging markets are vague.” Furthermore, though the statement on protection and export support was “clear,” there was no monitoring or enforcement mechanism to hold countries’ to their word.
Indeed the Financial Times reported Monday that Russia would go forward with sharp increases to import tariffs on cars, on the grounds that the changes had been planned before the G-20 meeting. Russia, which is not a WTO member, has previously said that it would consider reversing import duty cuts made as part of its accession negotiations.
The G-20’s promise on the WTO – to “strive” to conclude a ‘modalities’ agreement by next month – echoed dozens of unheeded exhortations made by various governments and groups in recent years. Whether this one will actually lead to shifts in governments’ negotiating positions – a prerequisite for any Doha Round deal – remains to be seen.
The chair of the Doha Round agriculture negotiations said on 17 November that governments would have to show movement by the end of next week for there to be time to draft an updated draft agreement text in early December (see related story, this issue). Australia, Brazil, the UK, and other governments have been pushing for bringing trade ministers from key WTO Members back to Geneva in mid-December for another try at closing out a modalities deal, after a failed attempt last July.
Geneva-based trade officials say that it is not clear how the economic turmoil will affect the trade negotiations. One view on the vicissitudes of the Doha Round held that the rude health of international trade and the world economy in recent years meant that governments saw little motivation to make the concessions necessary to reach a deal. Now, simply locking in currently applied tariff levels could seem a more attractive prospect than it did some months ago. On the other hand, economic fears can heighten protectionist pressures, as politicians seek to avoid further job losses.
Finance ministers to work on reforms
Finance ministers from the G-20 countries have been tasked with implementing an ‘action plan’ on financial reform, which was appended to the leaders’ five-page declaration. Their objectives will be to ensure that regulations do not serve to exacerbate cyclical booms and busts, to improve global accounting standards, to improve cooperation between national regulatory authorities, and to improve risk management and financial oversight.
The G-20 called for the Financial Stability Forum, set up in 1999 to improve financial information sharing and surveillance in the wake of the Asian financial crisis, to be expanded between now and March 2009 to include “a broader membership of emerging economies,” beyond the current Singapore and Hong Kong.
G-20 members also agreed to undergo “vigorous and even-handed surveillance reviews” by the IMF, implying a strengthened role for the Bretton Woods institution in providing “macro-financial policy advice.”
They also called for the IMF and the World Bank to be “comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges.” Giving greater voice and representation to developing countries would imply diluting the voting power of European countries in particular, which has proved contentious in the past.
ICTSD reporting; “Russia to raise import duties,” FINANCIAL TIMES, 17 November 2008.
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