World leaders heralded the G20 summit as the day the
world "fought back against the recession" as they put on a show of
unity that lifted global markets and mapped out a new future for financial
regulation. A satisfied, if not elated Obama said, "Today, we have
finished a very productive Summit that will be, I believe, a turning point in
our pursuit of global economic recovery. By any measure, the London Summit was
historic. It was historic because of the size and the scope of the challenges
that we face, and because of the timeliness and magnitude of our response."
The Magnitude of the Challenge
According to Obama, "The challenge is clear. The
global economy is contracting, Trade is shrinking. Unemployment is rising. The
international finance system is nearly frozen. Even these facts can't fully
capture the crisis that we are confronting, because behind them is the pain and
uncertainty that so many people are facing." He further added, "Today,
we have learned the lessons of history. But after weeks of preparation and two
days of careful negotiations, we have agreed on a series of unprecedented steps
to restore growth and prevent a crisis like this from happening again. To
prevent future crises, we agreed to increased transparency and capital
protections for financial institutions. We are extending supervision to all
systemically important institutions, markets and products, including hedge
funds. Ultimately, the challenges of the 21st century cannot be met
without collective action."
The Agenda
Battered by the most severe crisis since the Great
Depression, there were high hopes that the meeting of the G-20 would provide a
significant impetus for reviving the world economy. The ambitious agenda for
the Summit included providing the stimulus for the revival of the world
economy; coordinated calibration of stimulus measures; avoidance of
protectionism by the countries; clamping down on tax havens and reforming the
global financial system by introducing stronger regulation and closer
supervision.
The Convergence of Views
Happily, there were some wide-ranging convergence of
views or shall we say declaration in the Summit including pumping an additional
$1.1 trillion into the International Monetary Fund, multi-lateral development
banks and international trade finance, agreement to crack down on tax havens,
and strengthening regulation and oversight over all financial institutions
including hedge funds and credit rating agencies. The meeting also reaffirmed
the commitment to the World Trade Organisation (WTO) to support free trade and
check protectionism by the members. Let us see how practical are the
declaration made at the G-20 Summit at London, including the impact that these
declarations could possibly have on the global economy.
How practical are the Declarations?
Soon after the outbreak of recession, several
Governments, particularly those in developed countries, announced hefty
stimulus packages to revive their national economies through financial help for
investments which could uplift the demand. All these stimulus packages
aggregated $5 trillion. Considering the magnitude of the problem, additional
stimulus to enable international development institutions to spend an
additional 1.1 trillion can make only a marginal difference. An overwhelming
proportion of this is for providing additional resources of $500 billion and
$250 billion by way of SDR to International Monetary Fund. The multi-lateral
developments will have an additional $100 billion and a further $250 billion
will be provided to support the trade finance.
Will Availability of Funds be Adequate?
While admitting that a substantial increase in
resources available to the IMF and other financial institutions is indeed a big
achievement, the fact remains that the immediate increase is $250 billion, far
less than the headline grabbing $1.1 trillion mentioned in most reports.
According to Summit communiqu, IMF's resources could increase up to $500
billion. To that extent, there will be an increased availability of funds in
the near-term, which could make a big difference to the countries hard hit by
drying up of international capital flows. The multi-lateral developments will
have an additional $100 billion and over the medium-term, this accretion in
funding would b e supplemented by additional resources of $250 bill for trade
finance. Not only, one cannot be too sure as to how much impact these
disbursement of funds will make on the economies of the countries which are
funded or on aggregate demand in advanced countries, the fact remains that the
actual disbursements of these funds will take quite, quite sometime. Much
indeed would depend upon the state of the economy, at each individual country.
It is not only in terms of adequacy of availability of funds, but also over
what period of time the disbursement is affected and gets percolated in the
world economy to push it up.
