G20 - Balance of power is shifting from developed to emerging economies

The Leaders of the G20 recently had their fifth meeting since the start of the world recession in 2008. Many commentators view the outcome as neither surprising nor particularly disappointing. The Leaders build on their original commitments to support and stabilise the global economy and to lay the foundation for reform. They adopted an Action Plan which focuses on five policy areas namely: monetary and exchange rate polices, trade and development policies, fiscal policies, financial reforms, and structural reforms. However, given the complex world that we live in, these countries will have to rely on a number of international organisations such as the WTO, World Bank and IMF to pursue these reforms.

In the area of monetary and exchange rate policies, they agreed to follow “more market-determined exchange rate systems” to reflect underlying economic fundamentals. This came in response to China’s unwillingness to allow the Yuan to appreciate and America’s push for more liquidity into its banking system. However, in reference to concerns of emerging markets with overvalued flexible exchange rates such as South Africa, countries may respond with “carefully designed macro-prudential measures”. This could be interpreted as giving these countries the go-ahead to take the necessary steps to deal with the vast capital inflows into their economies, which have driven the currency gains.

On the issue of trade and development they reaffirmed their previous commitment to refrain from protectionist trade actions and to conclude the Doha Round of multilateral trade negotiations. They also agreed to formulate medium-term fiscal consolidation plans for advanced economies in line with the Toronto commitment. This commitment must ultimately bring about the stabilisation or reduction of government debt to GDP ratios by 2016 and to at least halve deficits by 2013.

The Leaders agreed to raise international financial regulation standards and to ensure that national authorities fully implement current global standards. They endorsed the policy framework by the Financial Stability Board to address problems related to systemically important financial institutions and banks that are purported to be too-big-to-fail. This latest undertaking comes in response to the financial crisis that was caused by reckless and irresponsible risk taking by banks and other financial institutions, combined with major regulatory and supervisory failures.

These decisions came amid a related debate on the reform of international financial institutions. These organisations, originally responsible for the regulation of the international economy after the Second World War, were created for a different time and purpose. Urgent reforms were necessitated by the realities of a multi-polar global economy where developing countries are now key global players. In response to better reflect these realities, the voting powers of developing and transition countries at the World Bank were increased earlier this year. The 3.13 percentage point increase in the voting power of these countries brought their share to 47.19 percent.

Similarly, the IMF’s Executive Board also announced governance reforms earlier this month. This will bring about a 6 percent shift in the voting power of developing countries. Accordingly, the top ten shareholders of the Fund; the United States, Japan, the four largest European economies (France, Germany, Italy and the United Kingdom), and the BRICs (Brazil, China, India and the Russian Federation) will better reflect their ranking in the global economy.

One thing is clear; the balance of power is shifting from developed to emerging economies.

By: JB Cronje - Tralac South Africa
http://www.tralac.org/cgi-bin/giga.cgi?cmd=cause_dir_news_item&cause_id=1694&news_id=95688&cat_id=1059

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