The meaning of the G20 deal for Pakistan
Since capital-short Pakistan has to repeatedly go to the IMF to be rescued, it has been subjected to the Washington Consensus conditions. Some of these conditions were right. Some others did damage. Foremost among those that hurt the economy were the emphasis on adjustment over growth, opening the capital markets and not putting emphasis on reg- ulating the private sector. After the London agreement to take ideology out of economic advice, countries such as Pakistan should be able to craft their own policy framework.
By Shahid Javed Burki
Monday, April 13, 2009
WAS the ability of the G20 countries to reach an agreement at their second summit devoted to addressing the problem created by the current economic downturn highly significant? Or was it just a papering over of the differences among the leaders representing the world’s largest economies?
The G20 had met in Washington in November soon after the election of Barak Obama as the president of the United States. The President-elect did not attend the meeting. For that reason alone, the summit was a holding operation, waiting for Obama to settle down in his office. Only then could the world leaders seek to address the problems associated with the global economic downturn.
There was considerable apprehension before the leaders sat down for deliberations in London on April 2 that the summit may not produce significant results. There were great differences in the approaches adopted in particular by the United States and continental Europe about the way crisis was best handled. These could produce, if not a deadlock, an agreement that was not worth very much.
Had that happened it would have been devastating for the markets in the large countries and that, in turn, would have deepened the recession. The world was spared such an outcome. The communiqué signed by the summiteers produced a euphoric market response. Almost all major stock indices around the globe registered major advances.
However, the agreement came short on one important issue: the need for concerted action by the large countries to stimulate their economies. The United States, under Obama, had taken a major step in that di rection by getting Congress to agree to a large stimulus package. The amount of money that was to be pumped into the economy was close to $800 billion following on $750 billion Washington had already earmarked for helping the ailing banking and automobile industries.
Even before the Americans moved, the Chinese had announced a large stimulus package of their own amounting to nearly $600 billion. The Europeans, how ever, declined to take this route, concerned that spending of such amounts would result in inflation. The European resistance was led by Germany which had deep memories of hyper-inflation that had contributed to the break out of the Second World War.
The Europeans wanted the world’s large powers to take a long view.They wanted them to regulate their financial sectors more meaningfully. They not only wanted the strengthening of domestic regulatory mechanisms, they also wanted an international institutional arrangement to keep watch over all major financial systems and ring the alarm bells if there was apprehension that in some part of the global system there were developments that could threaten world financial stability.
The focus on the regulatory systems clearly pointed a finger at the United States that had followed the strategy of allowing the private sector enormous free dom to operate. This was done in the belief that “selfregulation” was much better than regulation by state agencies, in particular in the non-banking sector. If some institutions in this part of the system went off track they will be pulled back by the forces of the market place. This turned out to be a naïve belief and the entire US financial system got caught up in greed and unsound practices.
The Europeans were keen that such behaviour should be caught early before it infected other parts of the globe as had happened this time around.There was an underlying philosophical difference in the two approaches. The continental Europeans wanted to bury for good what they called “Anglo-Saxon capitalism”. The United States did not think that the time had come to write an obituary of the system that had bought it immense prosperity.
In the end a compromise was reached. The United States agreed to strengthen its own system by bringing in non-banking institutions into the regulatory framework. It also agreed to be exceptionally vigilant about the workings of very large institutions that could not be allowed to fail. Citigroup and AIG were two examples of such institutions that had already received hundreds of billions of dollars of government money but were still struggling. Their failure would reverberate all over the world.
What does the G20 agreement mean for a country in Pakistan’s situation? Although Pakistan was not present at the London meeting – it is unfortunately one of the few large emerging economies that have not made it to the list of G20 and thus has no influence over its deliberations– it should closely watch how this group evolves its thinking over time and how it begins to reshape the global economic and financial structures.
Three developments at London hold significance for Pakistan.The first is the large increase in the resources available to the IMF. The Fund was given most of the liquidity that is to be pumped into the global economy. It will receive $750 billion of the $1.1 trillion the group promised to provide for ending the global financial crisis. It will come in two forms.
Large countries will inject new money into the Fund so that it continues to mount the kind of rescue operations from which Pakistan is already benefiting. The European Union, Japan, and the United States will provide $100 billion each while China will give another $40 billion. The Fund will also sell some of its large gold holdings to raise additional amount. In addition the Fund will increase its share capital which will be available to all countries according to the quota they hold at the institution.
The second important development from the perspective of the emerging world is the conclusion reached by the London conference that The Washington Consensus will be buried. This Consensus, developed by the institutions located in the American capital, has guided the World Bank and the IMF in their endeavors in the developing world.
Since capital short Pakistan has to repeatedly go to the Fund to be rescued, it has been subjected to the Consensus conditions. Some of these conditions such as the need to promote exports by keeping an appropriate exchange rate and to reduce fiscal deficits to the level where they did not cause inflation were right.
Some others did damage. Foremost among those that hurt the economy were the emphasis on adjustment over growth, opening the capital markets and not putting emphasis on regulating the private sector. After the London agreement to take ideology out of economic advice, countries such as Pakistan should be able to craft their own policy frameworks.
The third London decision of significance for Pakistan is to provide trade finance where the inability to access credit has affected trade. Pakistan is one of those countries. The G20 decided to provide $250 billion for this purpose. It is yet not clear what will be the conduit for this infusion of capital.
In sum, it can be said that the London summit produced useful results for Pakistan. However, for the country to benefit from London’s outcome, it will have to look carefully at the decisions taken by the G20 and draw up a plan of action to gain access to the additional flows of capital that will soon become available to Pakistan and other emerging markets that are under considerable economic stress.