Eluding consensus

The G20 summit which recently concluded in Seoul has not produced any concrete and immediate solutions to the contentious issues that mark a delicate and difficult stage in the world’s economic relations. The main reason is that the recovery from recession is uneven and different countries have different perspectives on their present situation and on ways to move forward.

There was a consensus that the currency wars between countries which has  become a possibility should be avoided. But the finance ministers who had met before the summit had already agreed on this. Currency wars could result from trade imbalances and the focus of the deliberations was about how to avoid them.

The US, which has a high trade deficit, and China, which has a huge surplus, have the highest say on the matter and there was no meeting point between the two on the matter.

There was concern that both China and Germany have not done enough to slow down their exports and to stimulate domestic demand so that global recovery becomes more balanced. The US wants China to revalue its currency for this, but China has not given any assurance except that it will move towards market-determined rates in due course.

The US too has faced criticism for its quantitative easing policy which results in devaluation of the dollar. The resulting flow of funds to emerging countries can harm their currencies and affect their exports adversely. India may not be seriously affected because its growth is not dependent on exports and there is good domestic demand growth. But prime minister Manmohan Singh did well to warn against competitive devaluation and recourse to protectionist measures which can distort the global recovery.

The international  consensus to avoid protectionism, as seen in the earlier summits, seems to be fraying now. The prime minister’s call to the developed countries to reduce debt also made sense at a time of trade imbalances.

Some of these prime concerns have been postponed for corrective action till the summit to be held next year. Some guidelines have been envisaged but actual action will necessarily have to wait. The US proposal to set a binding cap on trade deficits and surpluses has not been accepted and was not seriously discussed either. without a clear consensus, fault lines in the world economy are likely to continue.

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