G20 makes bold move to balance global growth

28th September 2009, Comments 0 comments

Leaders of the Group of 20 developing and developed economies agreed that they must tackle front-on the imbalances in global economic growth that many say fuelled the worst financial crisis since the Great Depression.

Pittsburgh -- If the G20 is to implement a promise to redress global imbalances, China's export machine must slow, Americans must learn to save more and borrow less, and Japan and Germany must puncture their ever-fat surpluses, experts say.

Leaders of the Group of 20 developing and developed economies agreed Friday that they must tackle front-on the imbalances in global economic growth that many say fuelled the worst financial crisis since the Great Depression.

They launched "a framework that lays out the policies and the way we act together to generate strong, sustainable and balanced global growth," according to a joint statement after a two-day summit in the US city of Pittsburgh.

Washington strongly campaigned for the move, saying it would help prevent another global crisis exacerbated by the wide gap between reserve surplus-rich Asian nations led by China and the mostly deficit-hit Western nations.

But the proposal triggered a war of words, even among the rich nations.

US President Barack Obama blamed Germany and China, the world's two biggest exporters, for exporting much more than they import.

But German Chancellor Angela Merkel said that "if you want to do something about imbalances, then you should allow free global trade." In an apparent dig at Washington, she cited "protectionist tendencies."

Chinese leader Hu Jintao, his nation still the top global growth driver, argued that the "root cause" of the imbalances was the "yawning development gap" between the industrialized world and emerging economies.

But leaders in Pittsburgh eventually set aside their differences and adopted the "Framework for Strong, Sustainable and Balanced Growth" that will attempt to harmonize the fiscal, monetary, trade and structural policies of countries.

The International Monetary Fund will be asked to help analyze how the different national or regional policy frameworks fit together while the World Bank will look into development and poverty reduction strategies as part of the rebalancing of global growth, officials said.

"Going forward, we cannot tolerate the same old boom and bust economy of the past," Obama said after the meeting.

Indian Prime Minister Manmohan Singh praised the new framework, which he said would allow leaders "to analyze the weaknesses and strengths of the economies of various countries, improving the strength of the financial system and banking system as a whole.

Experts believe the G20 decision is workable although similar efforts by the Group of Eight (G8) summit virtually failed.

"Although this is not a new concept -- previous G8 summits set up similar and, as it turned out, ineffectual frameworks -- the Pittsburgh agreement appears to have greater buy-in by China," said Uri Dadush, director of the international economics program of Washington-based Carnegie Endowment for International Peace.

"It is also more in line with what both US and Chinese authorities have determined they need to do anyway," he said.

The United States has to save more while tackling its ballooning budget deficit and China needs to beef up domestic consumption and channel its huge surplus to boost social safety nets and financial and services sectors, experts said.

In fact, the Obama administration has signalled that it must become an export-oriented rather than a consumption-based economy in rebalancing growth so that it could shed its role as the world's consumer and importer of last resort by running vast deficits and depending heavily on overseas finance.

The move will obviously have repercussions on US trading partners.

"To the extent it is credible, it is a warning shot to the rest of the world," said Fred Bergsten, the head of the Washington-based Peterson Institute for International Economics.

If the United States will not run huge deficits, countries such as China, and probably Germany and Japan, will not be able to run large surpluses, he said.

"They will not be able to rely on export-led growth. They will have to find ways to expand domestic demand on a lasting and substantial basis."

APF/Expatica

 

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