The rich among the G-20 nations finally saw the light at the end of their tunnelled vision and relented to the demands of emerging countries, agreeing to give India, China and Brazil slightly greater representation on the board of the International Monetary Fund at the just-concluded G-20 finance ministers’ meeting. The other major development signalled at that meeting, held at Gyeongju in South Korea, was putting the international “currency war” on freeze for the moment. It will probably be thrashed out at the G-20 summit in Seoul on November 11-12. As India’s finance minister Pranab Mukherjee noted with some satisfaction, for now at least the IMF has gained real legitimacy, and so has the G-20 grouping. The IMF had of late suffered a lack of credibility with the developing world, which forms the bulk of its 187-nation membership. Its representation on the IMF board has increased by six per cent — though a seven per cent increase appears justified. Developing countries contribute 47.5 per cent of global GDP, which over the years will go up further, while the share of the developed countries is set to decline with these economies struggling with growth rates ranging between one and two per cent. Till now, however, the developing countries had a 39.5 per cent share of the IMF board, which will now go up slightly to 45.5 per cent.
Some other reforms are badly needed in the IMF’s functioning and governance, which the resolution at the end of the G-20 finance ministers’ meeting duly noted. For instance, a former governor of the Reserve Bank of India has proposed a global exchange rate management system, such as the one that existed in the 1940s when the IMF was given the task of surveillance of exchange rates. He suggested that the G-20 should think in terms of a Bretton Woods-II — with all the leading economies of the world working out a new mechanism on exchange rates. Such a system has worked whenever there has been a currency crisis — whether it was Bretton Woods-I or the Plaza Accord of the 1980s. The current crisis is unprecedented — with the United States and China ranged against each other. Germany, interestingly, openly spoke out against the US at the G-20 finance ministers’ meeting — fuming over Washington’s “super-loose” monetary policy, with its lavish stimulus packages which has only flooded the banking system and pumped up assets and exchange rates. US government policies are in fact pricing its manufacturers out of world export markets, given that the exploitative era of the past — in which developing countries were forced to buy high-cost American goods and sell their exports cheap — no longer exists. This era, when the developing nations did not have much of a voice internationally, also saw great transfer of wealth from the developing to developed nations. And now, with their increased IMF representation, the developing countries should be able to restore some justice and balance in the global redistribution of wealth.
The dispute over currency rates is a nagging global problem. The Southeast Asian countries in particular, which are largely export-dependent, are quite vulnerable, while the emerging economies face another major problem-in-the-making with huge inflows of dollars from the developed world, primarily the United States. With the emerging economies providing attractive rates of return at a time when US interest rates are near zero, billions of dollars are flowing into these emerging markets. This leads to the fear that these billions will stoke the fires of inflation as well as pump up the currencies of these countries as they sanitise the excess dollars.