The outcome of the meeting of 20 of the world’s richest countries was almost predictable. The G-20 met at Seoul under the shadow of the currency wars and this shadow lurked over the 19-paragraph communiqué issued at the end of the summit. It was interesting that Prime Minister Manmohan Singh was able to get the G-20 members to
agree to country-level assessment policies, called Mutual Assessment Process, by the IMF. It recognises the interconnectivity of the world and that what one country does can affect the growth of another. Today, the imbalances in the world are given importance and are more pronounced only because it is the once-all-powerful West that is in the throes of a financial crisis and may not see real growth for another three to four years, if not longer. They have huge unemployment problems and are looking to the developing world to give them access to their markets to create jobs back home. Imbalances have always been there and are illustrated in the fact that we had nomenclatures that labelled countries as developed, underdeveloped, developing, and least developed. And now some of these are called emerging markets. Each country will, naturally, do what is best for its economy, but now that the world is globalised to a large extent the problems of the developed world will impinge on the growth of the developing world, which depends on exports to the developed world, primarily to the US, the world’s largest consumer.
Because of this the currency wars assume tremendous significance. There is a race to depress currencies to make exports more competitive and China, and even Germany, depend a lot on exports. The US, which has always accused China of suppressing the rise of its currency, has itself seen the dollar depreciate around 12 per cent since June 2010. This happened because of the huge stimulus packages it announced, which is an euphemism for printing greenbacks, flooding markets and keeping interest rates at zero. This has also caused new fears that these dollars will flow to the emerging markets, which provide good returns but in turn create inflation and threaten those economies. Dr Singh has warned against competitive devaluation and protectionism in different guises, like non-tariff barriers. He urged Britain and the US to move towards fiscal consolidation to tackle their problems and also made a plea for the implementation of structural reforms of the global financial system. Dr Singh can talk with authority because India has been able to stay relatively less singed than the other economies only because of the prudent monetary policies of the RBI. India and China, the two fastest growing economies, have been trying to develop their domestic markets but this will take time. A beginning has been made to put purchasing power in the hands of the have-nots. The West could learn from the experiences of the developing countries as they moved up the global ladder. But there is a feeling that each country will still do what is best for it until the economic crisis eases. The only way to get everyone to observe some kind of world view is to give more powers to the IMF. In this context, the suggestion for Bretton Woods II is very relevant. It was mooted by former RBI governor Bimal Jalan and the World Bank chief echoed the sentiment a week ago. Bretton Woods I, and in the Eighties the Plaza Agreement, helped iron out currency issues from deteriorating into a currency war.