G20 PLEDGES FUNDS FOR THE FUND
SHAMIM AHMED RIZVI
Apr 20 - 26, 2009
The G-20 summit in its two day conference in London last week took historic decisions of far reaching consequences to control the world economic meltdown and restore it to its normal level. The G-20 which is a group made of the Finance Ministers and Central bank governors of 19 largest economies in the world plus the European Union, pledged a huge raft of new spending which, according to them, will take their outlay in the world economic crisis to five trillion US dollars by the end of next year out of which $1trillion would go to International Monetary Fund (IMF) to augment its funding capacity to help the developing countries.
The word economic leaders also decided to order a crackdown on tax havens to help poor countries. "A new world order is emerging and with it we are entering a new era of international cooperation," British Prime Minister and host of the conference, Gordon Brown told newsmen after the summit. We are going to act decisively to kick start international trade. ýWe will ensure at least $250billion over the next year for this purpose," he said adding that IMF and the World Bank would undergo major reforms to reflect changes on the power structure of the world economy.
In a communiqu╚ recapitulating a dramatic two-day gathering, the leaders of the Group of 20 nations announced the creation of a supervisory body to wipe out problems in the global financial system. They did not, however, satisfy the US and British calls for new stimulus measures. They did bridge the gap between the United States and some European nations over how far to regulate the market and curb the excesses that sparked the global economic crisis.
"Today the largest countries of the world have agreed on a global plan for economic recovery and reform," said the host, Gordon Brown. His announcement was quickly followed by similar ones by the French and German leaders, who supported the results of the G-20 summit. French President Nicolas Sarkozy, who earlier had threatened to walk out if unsatisfied with the outcome, also praised President Barack Obama for helping to create consensus and persuade China to agree to publish lists of tax havens.
"There were moments of tension," Sarkozy said. "Never would we have thought to get as big an agreement." German Chancellor Angela Merkel called the measures "a very, very good, almost historic compromise" that will give the world clear financial markets architecture. While the leaders did not announce any new stimulus measures-as some in the United States had hoped-Brown said the $1 trillion deal to boost funds for the International Monetary Fund and other global institutions was unprecedented. The money included $300 million over three years for multi-country development banks to lend to poor countries that have seen credit from crisis-hit banks dry up.
"For the first time we have a common approach to cleaning up banks around the world to restructuring of the world financial system. We have maintained our commitment to help the World's poorest", Brown said. "This is a collective action of people around the world working at their best." The G-20 leaders said they would renounce protectionism and pledged $250 billion in trade finance over the next two years a key measure to help struggling developing countries.
The world is passing through a worst period of economic and financial crisis, which is deepening despite attempts by individual countries. The United States and other Western countries have announced aggregate packages worth several thousand billion dollars to support their falling banking, insurance, transport and industrial sector but still there are no indications that the crisis has started mitigating. On the contrary, scores of corporations and companies are rendering thousands jobless every month and many of the businesses are closing down. However, the affluent States have the capacity to withstand the pressure and they have necessary resources to help their economy come out of trouble. But the plight of the poor countries is really miserable, as they don't have the resources to face the challenge.
In this rumpus, it is appreciable that the G-20 countries have decided to allocate resources for assistance of the poor States. However, strangely enough they will be doing so through the dreaded IMF, which is known for its exploitative approach. The aid disbursed through IMF is invariably associated with tough terms and conditions, which create more problems for the common man. This has been experienced by many countries including Pakistan where every tranche of the IMF leads to more inflation and more taxation for the already hard-pressed people. There are also complaints that IMF is used by big powers to influence even domestic political policies of the aid receiving countries.
The G20 leaders' decision to commit $1.1trillion to "restore credit, growth and jobs in the world economy" is a decent compromise amidst the present circumstances. The US, UK, and Japan went into the summit demanding that the rich countries increase the size of the fiscal stimulus they had already committed to. But countries such as France and Germany were of the opinion that the $5trillion stimulus money already committed by major countries until the end of 2010 was enough, and made it clear they would dig in their heels ˇ which could have derailed the summit itself. But committing money is one thing, using it effectively another. Most of the $1.1trillion will be disbursed through the IMF. But not through the one, which sends shivers down the spines of finance ministers in the developing world for decades. Instead a new IMF that is quicker off the mark, with more resources and more flexible plans, is to help stave off financial crises in the months ahead. At least that's the hope.
Here in Pakistan, the immediate question is whether a beefed up IMF with a renewed sense of urgency could be of further aid to the economy. The answer: it's too early to say anything. First, much of the IMF's new resources may be eaten up by Eastern European countries that are in crisis and which Western Europe has so far refused to bail out. Second, it remains to be seen if our economic woes will qualify for an IMF booster. In any case, while more money on easier terms may be desirable, Pakistan's economic problems would not be solved were the spigot to be opened some more.
The real benefits of the IMF programme then may be felt elsewhere. As noted by The Economist: "By some estimates poor countries have $1.4trillion of debts to roll over this year alone and western creditors are hoarding their cash. These countries have far less fiscal room for maneuvering than rich economies." More fiscal space for such countries, the magazine goes on to note, would have a bigger bang for the buck because growth could rebound quicker as households typically have lower levels of debt than in the developed world. Moreover, the G20 has given the IMF instructions to go beyond traditional aims such as debt rollover, balance of payments support and bank recapitalization, and include areas such as stimulus spending, social support, and trade finance and infrastructure investment.