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Home > Blogs > Anthony Harrington > India’s take on the G20: an emerging market view

India’s take on the G20: an emerging market view

Global economy | India’s take on the G20: an emerging market view Anthony Harrington

With the press in the developed markets now more or less resigned to hearing little of substance from G20 meetings it might be useful to take in an emerging market perspective, as given by the Director General of the Reserve Bank of India in a recent speech.

Dr. Subir Gokarn begins his extremely penetrating and insightful evaluation of the recent round of G20 meetings, culminating with the meeting in Seoul in November, from a historical standpoint – namely the East Asian crisis of 1997-98 when the G8, as it then was, first came together.

Actually, the precursor to the present G20 was the Liberty Group of five, consisting of the finance ministers of the UK, France, Germany and Japan, who were invited by US Treasury Secretary George Shultz in 1973 to meet to discuss the devaluation of the dollar. (See the Wall Street Journal’s history of the G20 for a refresher on this). The G8 was indeed created in 1998 with the Asian crisis very much in mind. The G20 met for the first time in Berlin a year later, again with the fallout from the Asian crisis very much in mind, but with the Russian economic crisis also at the forefront of discussions.

However, throughout the crash of the Asian tiger economies, Dr. Gokarn points out that developed markets felt little need for any grand collective action, despite the fact that it was partially caused by destabilising inflows of Western capital. “Since the crash had no significant macro economic impact on the advanced economies, they had no particular interest in pursuing any collective strategy for structural change,” he points out.

For their part, as they recovered, the Asian economies took their own prudent steps to introduce various buffers to protect themselves, so they too saw no need for global action. However, when the need arose at the Washington meeting of the G20 in 2008 the group finally proved able to act (more or less) as one and achieved its finest moment to date. Dr. Gokarn argues that whether or not the sum of all the measures taken would have been the same if each country had simply done its own thing without reference to the G20, is irrelevant. Markets undoubtedly took heart from the display of unity by so many of the world’s top economies. So as a global confidence builder, the G20 turned up trumps.

However, his speech is nothing if not level headed and he knows full well that much of that famous unity has since given way to fractious self interest. His take on why this is so is concise and pragmatic. The 20 countries in the group have a number of dividing lines based on one or more of the following descriptive criteria: large or small, more or less affluent, net importers or exporters, commodities producers or manufacturers and, of course, population demographics. Equally critical is whether their economies are stalling, in sluggish growth mode, or growing well. Different positions on these dimensions generate very different policy priorities, so acting in unison for the G20 is now extremely difficult. “Whichever way one looks at it, the composition of the group (does) not inspire much confidence that it can agree on common approaches to the structural issues that confront the global economy,” Dr. Gokarn says.

However, he goes on to argue that what does give the group the chance of a common voice, and keeps it coherent and meaningful, is that all members agree that “a strong and inexorable process of global financial integration… with all the risks it entails, does have large potential benefits for all countries concerned”.

If you buy in to this, then you also have to buy in to the necessity for a common set of regulatory principles, standards and practices across countries, so that capital flows are driven by real perceived opportunity and not by regulatory arbitrage, he says. The message for emerging economies is that although they might be in a very different place, with respect to their domestic policies, than many developed economies, they need to keep their eye on the bigger picture, i.e. the necessity to promote global financial integration and a unified financial regulatory system.

Even quantitative easing by developed markets in general and by the US in particular, which emerging markets hate for very good reasons, can be seen to be aligned to emerging market interests in the medium term, Dr. Gokarn argues. His logic here is simple. If it is the only tool to stop the US economy from spiralling into depression, then QE is ultimately on the side of global growth, since depressed developed markets and a depressed US market in particular will ultimately hurt emerging markets severely. It seems that one of the G20’s fundamental principles, not to do harm to each other, needs to be viewed over the medium to long term, with those on the receiving end of present pain being asked to take the long view. If the G20 can pull that trick off, it will be heroic indeed.

Further reading on the Indian economy, the global economy and regulation:




Tags: Asian economies , G20 , G8 , global economy , India , Reserve Bank of India , Seoul
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