G20 Draft Communique

Every time the G20 meet it ends in an agonising photo opportunity and the release of a communique in which the leaders announce, in the vaguest possible terms, what they have agreed. The London summit is no exception and yesterday (29/3/09) a draft document was leaked hinting what will be in the final communique. The full 24 points of this draft document can be read here; http://www.ft.com/cms/s/0/f6f30eaa-1c88-11de-977c-00144feabdc0.html

Alongside the now traditonal commitments to free trade principles, greenwashing and commitments to millenium development goals in this draft document there are several paragraphs which, if the G20 leaders are doing their jobs properly, will cause serious friction and will have to be excluded from the final communique. These are;

Paragraph 3: "We are taking unprecedented and concerted fiscal actions to support growth and jobs. Acting together we strengthen the impact of this fiscal expansion, which amounts to a stimulus of more than [$x trillion] this year and next and is expected to increase output by more than [2] percentage points and employment by over [20] million jobs1. We are committed to deliver the scale of sustained effort necessary to restore growth while ensuring long-run fiscal sustainability."

and Paragraph 10: "These actions together constitute the largest fiscal and monetary stimulus, the most comprehensive support programme for the financial sector, and the greatest mobilisation of resources to support global financial flows in modern times. Our objective is that they will enable the global economy to expand by [x] by the end of 2010. We have taken and will continue to take the measures necessary to deliver this outcome. We call on the IMF to assess regularly the actions taken and the actions required."

Together these can be summarised as Gordon Brown's vanity paragraphs and call on the G20 nations to increase fiscal and monetary stimuli in order to get the world economy back into growth by 2010. The problem with this is the world economy is in recession and in recession for good reason. Between 2004 and 2008 the world economy was growing too fast fueled by unsustainable credit. In short people were thinking they were getting rich by manufacturing and selling products for which there is no market. The rules of capitalism are quite clear that because these enterprises had no market and no basis in reality then they must come to an end in order to make way for new, more sustainable enterprises. The recession is nothing more then the process by which this happens. The problem of stimulus packages are further compounded by the fact the main proponents of them simply don't have the money to pay for them.

The far more dangerous paragraph in the draft document is 6: "Emerging and developing countries, which have been the engine of recent world growth, are now facing shocks which threaten stability and jeopardise the global economy. It is imperative that capital continues to flow to them. We have therefore agreed to make [$x] of resources available through the international financial institutions. This will finance counter-cyclical spending, bank recapitalisation, infrastructure, trade finance, debt rollover, and social support. To this end:"

6.1;"we have agreed to increase the resources available to the IMF to $[x] through bilateral borrowing from members of $[x] subsequently replaced by an expanded New Arrangements to Borrow of $[x] and borrowing in the market of up to $[x] if necessary"

Which once you get through the jargon and rudimentary algebra actually sounds quite warm and cuddly. The richest 20 nations will increase the amount of money they will lend to the IMF to allow the IMF to nurture and protect the poorer nations. The problem arises with what that amount will be and where it will be raised from. The rumoured figure is said to be US$500bn with the US contributing $200bn, the EU contributing $100bn and China contributing $200bn. In return China will want greater political influence within the IMF and greater say over how the IMF operates.

The problem with giving China this extra influence is that the IMF is a free market capitalist organisation and China is a controlled market, communist country. In the Chinese economy savers don't really have the option of depositing their money in private banks. Instead they've got to put their hard-earned yuan in a central peoples bank. This bank then uses those yuan to buy US dollars on the international currency markets helping the dollar hold its value. The Chinese then place the dollars they've brought into a delightfully named Sovereign Wealth Fund which goes out and buys things like US Treasury bonds and US corporate debt. This interlinking of the worlds two largest economies creates a fine balance of power with China holding a slight advantage because it has the power to distort the value the yuan. To allow the Chinese greater influence over the IMF without first forcing them to revalue their currency would fatally tip this balance of power in China's favour destroying the mechanism that has driven China's economic and social reform in recent years.

The G20 communique has tried to address this concern with the inclusions of paragraph 11.4:
"we commit to conduct our economic policies responsibly with regard to the impact on other countries and to refrain from competitive devaluation of our currencies."
However I feel that even by G20 standards this is neither strongly worded or specific enough to resolve the problem. Therefore I think it would be better for the IMF to go underfunded and have paragraph 6.1 excluded from the final communique.