The G-20 (a club of rich and economically emerging states) Summit is taking place in Seoul, the Republic of Korea, on November 11 and 12, 2010. This is the first G-20 Summit to take place in a non-G-8 country and the first one to take place in Asia-Pacific, in recognition of the emergence of the region as the growth pole of the world’s economy. Implementation of the framework for strong, sustainable and balanced growth based on a more resilient global financial system will be the agenda for this G-20 Summit.
After decades of stable economic growth the world’s economy was hit hard by a global financial crisis in August-September 2008 that led to a synchronised decline in world economic growth of a magnitude not witnessed before in the preceding six decades. The full-blown economic crisis caused human suffering and misery all around the world. Some 30 million jobs were lost globally, with millions more having slipped into underemployment and poverty. It also damaged the development gains of the last decade, especially with respect to progress towards achieving the Millennium Development Goals.
As a result of extraordinary coordinated policy actions at the international level, the world’s economy was not only prevented from slipping into another Great Depression, it witnessed a faster-than-anticipated economic recovery. Although the recovery is underway, the upturn is fragile and uneven; indeed it is fragile because it is uneven. The main drivers behind the recovery have been inventory accumulation and fiscal stimulus. The first one is coming to a natural end and the second one will have to be phased out slowly.
How can a more balanced recovery be achieved will be the agenda of the G-20 Summit in Seoul. In particular, four items will constitute centre stage of the Summit, that include (i) rebalancing of global growth, (ii) exchange-rate flexibility, (iii) financial sector reform and (iv) the spirit of cooperation.
Global economic recovery is underway but it is fragile and uneven. It is sluggish in advanced countries but much stronger in emerging and developing countries. Domestic demand (consumption and investment) is fuelling growth in emerging and developing countries in the wake of a weaker export demand. Domestic demand is still weak and likely to remain so in advanced countries and as such growth would not recover soon there unless rebalancing takes firm root in the short-to-medium term.
The sluggish growth in advanced countries causing reduction in revenue on the one hand and massive expenditure linked with fiscal stimulus on the other has increased budget deficit. Budget deficit at $1.3 trillion or 10 per cent of GDP in the United States has emerged as the major restraining factor in recovery. Growth in the United States cannot be recovered by relying on domestic demand which is already weak. The sources of growth for US should therefore be net exports.
Many developing countries including China have relied excessively on net exports before the crisis. They need to turn more to domestic demand for sustaining growth. Thus, readjustment in sources of growth is essential for achieving a strong and balanced growth for the world economy. Rebalancing of global growth would dominate G-20 Summit in Seoul. The Asia-Pacific region would be asked by the Summit to rely heavily on domestic demand, particularly on consumption.
The rebalancing of global growth, according to G-20, can only be materialised by readjusting the exchange rate. The onus of rebalancing global growth would be on developing and emerging economies. These countries are enjoying large current account surpluses and accumulated huge foreign exchange reserves. They need to allow their exchange rate to reflect economic fundamentals. Large current account surplus and accumulation of foreign exchange reserves will lead to exchange rate appreciation; imports in these will become cheaper and exports dearer, thus reducing current account surplus. Thus, adjustment in exchange rate along with relying more on domestic demand would go a long way in rebalancing global growth. Global problems would require global solutions.
Financial sector reform will be another item of discussion in the G-20 Summit. Global economic recovery is linked with reforms in the financial system. The world needs a financial system that reduces moral hazard, limits the build-up of systemic risk, and supports a strong and stable economic growth. Considerable progress has been made in strengthening the global financial system by fortifying prudential oversight, improving risk management, promoting transparency and continuously reinforcing international cooperation. More work would be needed in improving transparency and regulating oversight of hedge funds and credit-rating agencies; discouraging excessive leverage and risk taking and protecting the flow of credit in good and bad times.
A thorough debate on the new financial system should be launched at the global and regional levels to bring all the stakeholders on board. From the late 1970s through 2008, the world in general and the US in particular witnessed a regulatory system swung towards less regulation and free markets. The recent crisis has reversed the trend and the pendulum is swinging towards more regulations. Given the fact that most advanced economies are still in recovery, the new financial regulations may put a damper on recovery. Thus, an in-depth debate on new rules will be essential to take all the stakeholders on board.
The vanishing spirit of cooperation at the international level would form the fourth agenda item of the G-20 Summit. It was the unprecedented cooperation that produced a correct response to the 2008 crisis that helped avoid a crisis as epic in proportion as the Great Depression. In the absence of cooperation, the recovery will remain in peril and there is a likelihood that everybody will be worse off. The G-20 Summit in Seoul is likely to set the post-crisis agenda for sustaining balanced growth and a more resilient financial system through the spirit of cooperation.
The writer is director general and dean at NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk
After decades of stable economic growth the world’s economy was hit hard by a global financial crisis in August-September 2008 that led to a synchronised decline in world economic growth of a magnitude not witnessed before in the preceding six decades. The full-blown economic crisis caused human suffering and misery all around the world. Some 30 million jobs were lost globally, with millions more having slipped into underemployment and poverty. It also damaged the development gains of the last decade, especially with respect to progress towards achieving the Millennium Development Goals.
As a result of extraordinary coordinated policy actions at the international level, the world’s economy was not only prevented from slipping into another Great Depression, it witnessed a faster-than-anticipated economic recovery. Although the recovery is underway, the upturn is fragile and uneven; indeed it is fragile because it is uneven. The main drivers behind the recovery have been inventory accumulation and fiscal stimulus. The first one is coming to a natural end and the second one will have to be phased out slowly.
How can a more balanced recovery be achieved will be the agenda of the G-20 Summit in Seoul. In particular, four items will constitute centre stage of the Summit, that include (i) rebalancing of global growth, (ii) exchange-rate flexibility, (iii) financial sector reform and (iv) the spirit of cooperation.
Global economic recovery is underway but it is fragile and uneven. It is sluggish in advanced countries but much stronger in emerging and developing countries. Domestic demand (consumption and investment) is fuelling growth in emerging and developing countries in the wake of a weaker export demand. Domestic demand is still weak and likely to remain so in advanced countries and as such growth would not recover soon there unless rebalancing takes firm root in the short-to-medium term.
The sluggish growth in advanced countries causing reduction in revenue on the one hand and massive expenditure linked with fiscal stimulus on the other has increased budget deficit. Budget deficit at $1.3 trillion or 10 per cent of GDP in the United States has emerged as the major restraining factor in recovery. Growth in the United States cannot be recovered by relying on domestic demand which is already weak. The sources of growth for US should therefore be net exports.
Many developing countries including China have relied excessively on net exports before the crisis. They need to turn more to domestic demand for sustaining growth. Thus, readjustment in sources of growth is essential for achieving a strong and balanced growth for the world economy. Rebalancing of global growth would dominate G-20 Summit in Seoul. The Asia-Pacific region would be asked by the Summit to rely heavily on domestic demand, particularly on consumption.
The rebalancing of global growth, according to G-20, can only be materialised by readjusting the exchange rate. The onus of rebalancing global growth would be on developing and emerging economies. These countries are enjoying large current account surpluses and accumulated huge foreign exchange reserves. They need to allow their exchange rate to reflect economic fundamentals. Large current account surplus and accumulation of foreign exchange reserves will lead to exchange rate appreciation; imports in these will become cheaper and exports dearer, thus reducing current account surplus. Thus, adjustment in exchange rate along with relying more on domestic demand would go a long way in rebalancing global growth. Global problems would require global solutions.
Financial sector reform will be another item of discussion in the G-20 Summit. Global economic recovery is linked with reforms in the financial system. The world needs a financial system that reduces moral hazard, limits the build-up of systemic risk, and supports a strong and stable economic growth. Considerable progress has been made in strengthening the global financial system by fortifying prudential oversight, improving risk management, promoting transparency and continuously reinforcing international cooperation. More work would be needed in improving transparency and regulating oversight of hedge funds and credit-rating agencies; discouraging excessive leverage and risk taking and protecting the flow of credit in good and bad times.
A thorough debate on the new financial system should be launched at the global and regional levels to bring all the stakeholders on board. From the late 1970s through 2008, the world in general and the US in particular witnessed a regulatory system swung towards less regulation and free markets. The recent crisis has reversed the trend and the pendulum is swinging towards more regulations. Given the fact that most advanced economies are still in recovery, the new financial regulations may put a damper on recovery. Thus, an in-depth debate on new rules will be essential to take all the stakeholders on board.
The vanishing spirit of cooperation at the international level would form the fourth agenda item of the G-20 Summit. It was the unprecedented cooperation that produced a correct response to the 2008 crisis that helped avoid a crisis as epic in proportion as the Great Depression. In the absence of cooperation, the recovery will remain in peril and there is a likelihood that everybody will be worse off. The G-20 Summit in Seoul is likely to set the post-crisis agenda for sustaining balanced growth and a more resilient financial system through the spirit of cooperation.
The writer is director general and dean at NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk
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