A significant meeting of the developed and the poor nations in Morelia, a sleepy colonial city west of the Mexican capital, in October has been overlooked in this part of the world. Nevertheless, the Morelia summit of the group of 20 countries focussed on some interesting issues.
The G-20 summit is significant because it offers a forum for emerging market economies to interact with wealthier participants and give voice to their own trade and financial needs. The said meeting brought together finance chiefs from the world’s leading industrial nations — the United States of America, Britain, France, Germany, Japan, Canada, Italy — as well as from Argentina, Australia, Brazil, China, the European Union, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey.
Last year’s G-20 meeting (the fourth) was hosted by New Delhi where a nine-point charter was decided upon. Key among these were agreements on early removal of trade barriers and a phaseout of trade-distorting subsidies. It essentially sent out a signal to the US and the EU to dismantle barriers that stymie the developing world’s progress. It was recognized that economic globalization that does not solve the problems of the weak and the poor is unsustainable. Not only that, this may also exacerbate political and social tensions that would inevitably spill over into the West. However, the conference paved the way for a worldwide consensus on globalization.
The G-20 meeting last year had discussed steps to block finance for global terrorism. It had, naturally, been egged on by the US which was eager to choke off funds to outfits like al Qaida. Though this featured on the US agenda this year too in Mexico, little progress has been made. The G-20 members merely agreed to continue strengthening the regulation of financial transfers.
The US was also eager to persuade reluctant donors to help reconstruct Iraq. At a donors’ conference in Madrid just before the Morelia summit, France, Germany and Russia had refused to cough up additional cash for Iraq, but this time the meeting managed to raise $33 billion in pledges.
More of interest to India was the statement of the US treasury secretary, John Snow, that global growth prospects were picking up but macroeconomic imbalances threatened the medium-term trajectory. Since the G-20 members together account for three-quarters of the world’s economic output and its population, the Morelia communiqué assumes importance.
Snow identified three elements that can jeopardize growth prospects: the US current account deficit, the China currency peg and high debt levels in Latin America. It is crucial for the US that China gives more flexibility to the yuan, which has been linked to the US dollar for nearly a decade. US manufacturers claim that the Chinese pegged currency gives its exports an unfair price advantage.
With record budget and trade deficits (the budget deficit in the just-ended 2003 fiscal year, was $374.22 billion), the US naturally wants China and other emerging-market economies to bear the brunt of the adjustments required to even out its own economic imbalance. The International Monetary Fund chief, Horst Kohler, insisted that “solving these (global current account) imbalances in an orderly manner must be the primary objective of international economic policy”.
But the IMF itself revised its stand later, declaring there is no real evidence that the yuan (or remninbi) is substantially undervalued. This effectively exposed the speciosity of the claims of US exporters that the currency has been artificially depressed so that the trade distortion with the US favoured China.
Morelia’s role in this controversy cannot be discounted. Indeed, its storm warnings show that the pitfalls of globalization can no longer be ignored.