Bridges Weekly Trade News Digest • Volume 13 • Number 12 • 1st April 2009
G20 Confronts Global Financial Crisis
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As leaders from the world’s 20 largest economies prepare to meet in London on Thursday, divisions are emerging over how the world should respond to the global economic crisis. But tentative consensus appears to be emerging around calls to secure funding for trade finance, and to both prop up and reform international financial institutions.
British Prime Minister Gordon Brown, whose country holds the rotating G20 presidency, has signalled that he hopes the one-day meeting will help craft a blueprint for rescuing the global economy and reforming the international financial system.
British Foreign Secretary David Miliband said on Sunday that the summit will produce specific commitments from the world leaders.
“No, this is not just warm words,” Miliband told the BBC’s Andrew Marr.
But with controversies already brewing over how much countries should spend versus how much they should regulate, and over how extensively the group should restructure decades-old international financial institutions, some doubt the extent to which the leaders will be able to find common ground.
Earlier this week, The Financial Times leaked what it claimed to be a draft version of a joint declaration for the summit. (The document is published online here (http://www.ft.com/cms/s/0/f6f30eaa-1c88-11de-977c-00144feabdc0.html?nclick_check=1.)
The draft confirms that there are three principal items on the summit’s agenda: to co-ordinate spending, interest rate cuts, and other government actions to stimulate the global economy; to increase oversight of financial institutions to lower the risk of future crises; and to solidify a framework for reforms to the world financial system, including the International Monetary Fund, while also increasing the organisation’s funding.
World trade is also expected to figure prominently in the discussions. A trickle of dismal forecasts for world trade have been released in advance of the summit, and WTO Director-General Pascal Lamy will be in attendance.
The leaders will likely emerge from the meeting Thursday evening with some sort of joint promise to resist trade-restricting measures, just as they did at their last meeting in Washington in November (see Bridges Weekly, 19 November 2008, http://ictsd.net/i/news/bridgesweekly/34105/).
But if recent history is any indication, such a promise may not translate into concrete action. Seventeen of the G20 nations have enacted measures the World Bank deemed ‘protectionist’ since they vowed not to do so five months ago (see Bridges Weekly, 18 March 2009, http://ictsd.net/i/news/bridgesweekly/43455/).
China and other major emerging economies like Brazil, India and Russia are expected to make their presence felt at the London summit, as they seek to solidify the influence on the international financial system.
With the world’s emerging economies playing an increasingly vocal role Thursday’s meeting could go down in history as “the last hurrah for the US and Europe rescuing the world economy,” Simon Johnson, a professor and former chief IMF economist, said in an interview with The New York Times.
Stimulus spending, IMF Reforms
Some of the meeting’s biggest battles are expected to centre on how much money countries should pour into stimulus packages, and what reforms should be brought to the IMF.
Leading the charge for increased stimulus funding, the US wants the world’s biggest economies to up their spending both this year and in 2010. Stimulus spending “should be robust and sustained until demand is restored,” US President Barack Obama wrote last week in an op-ed that was published in 31 newspapers around the globe.
The IMF says that stimulus spending equivalent to 2 percent of global GDP – roughly US$ 2 trillion – will be needed to pull the world out of the slowdown. China and the US have met that target, according to the IMF, but France and Japan, among others, have not.
Indeed, continental Europe is expected to make a hard push for prioritising financial oversight over increased spending.
“We want the principles of a new financial regulation. It’s non-negotiable,” French President Nicholas Sarkozy told journalists on Wednesday while standing beside his German counterpart, Angela Merkel. “This needs to be laid down in the communiqué,” Merkel added.
With so many countries struggling or falling into crisis, there appears to be broad consensus among world leaders that the IMF, the world’s lender of last resort, needs a financial boost. The US and the UK say they want the IMF to get US$ 500 billion in additional funding. The EU and Japan have already pledged US$ 100 billion each; funding promises are also expected from the US and Norway, The Wall Street Journal reported.
But the extent to which emerging economies are willing to chip in may hinge on whether they can secure a stronger voice in the direction and management of the 65-year-old institution. Wang Qishan, a senior Chinese trade official, wrote in the Times of London on Friday (http://www.timesonline.co.uk/tol/comment/columnists/guest_contributors/article5982824.ece) that Beijing was ready to contribute to the IMF, but added that a major restructuring of the fund was needed. Wang specifically called for a review of the IMF’s quota system, which allocates voting powers and determines the size of each country’s financial contribution to the fund. China now controls 3.72 percent of the fund’s total votes; the US has 17.09 percent, while Japan accounts for 6.13 percent.
Structural reforms to the IMF have also been touted by a UN commission chaired by Nobel-prize winning economist Joseph Stiglitz. Writing in the UK’s Guardian newspaper, Stiglitz made a case for both increasing funding, and allowing recipient countries more leeway in how they make use of their loans.
“It is important that any assistance be provided without the usual strings. Conditions such as those which force developing countries to contract spending and raise interest rates are counterproductive: the intent of the assistance is to help them expand their economies, thereby assisting the global recovery.
“Deficiencies in current institutional arrangements for disbursing funds – for example, through the IMF – have long been noted, but the reforms so far are insufficient,” he wrote.
Thursday’s meeting is also expected to produce a concrete result on trade finance, which many consider to be the lifeblood of international commerce. Many developing countries rely on trade finance - loans tied directly to cross-border trade transactions - to help fund their participation in the global market. But with many banks short on cash or just unwilling to lend, such loans have become harder to come by.
UK Prime Minister Brown and Brazilian President Luiz Inácio Lula da Silva have proposed creating a US$ 100 billion global fund to finance world trade. Brown said that he was confident that other G20 leaders would accept the proposal.
EU Trade Commissioner Catherine Ashton and EU Economic and Monetary Affairs Commissioner Joaquin Almunia called on G20 heads of state to emerge from Thursday’s meeting with a “concrete initiative on trade finance.”
Protests break out as summit approaches
Roughly 35,000 people took part in a demonstration in London over the weekend, and more protests were planned in the run-up to Thursday’s meeting. Banding together under the slogan ‘Put People First’, the protestors marched to Hyde Park in London bearing signs reading ‘Hang a banker’ and ‘Storm the banks,’ media sources reported. The organisers of the event said they wanted G20 leaders to be more open and transparent, and to take strong action on poverty, climate change and unemployment.
But protests took a violent turn on Wednesday, when demonstrators broke through police lines, vandalised the Bank of England and smashed windows at a branch of the Royal Bank of Scotland. More than 30 people were arrested.
Protests of several thousand people were also held in Berlin and Vienna over the weekend; smaller marches took place in Paris and Geneva.
ICTSD reporting; “European protesters march in G20 rallies,” AP, 29 March 2009; “Obama will face a defiant world on foreign visit,” THE NEW YORK TIMES, 29 March 2009; “Focus: G20 countries damp expectations for April 2 summit,” THE WALL STREET JOURNAL, 29 March 2009; “G20:France Sarkozy:New Fincl Rules ‘Non-Negotiable’,” DOW JONES, 1 April 2009.
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