:: Editorial

A reality check for rich nations

Oct 05 : Money is not everything, and the weekend meeting in Istanbul of the Group of Seven richest nations in the world must have realised this. Almost all, with just one exception, are reeling under massive financial problems and clinging to stimulus packages — as the proverbial last straw — possibly in the realisation that if these were withdrawn their economies could go into a tailspin. The problem is that they are yet to resolve issues relating to the real economy. The communiqué at the end of the one-day deliberation on Saturday admits that "the prospects of growth remain fragile and labour market conditions are not yet improving." But the solutions they talk about don’t appear relevant to real problems, they only deal with the symptoms. The G-7 talks of strengthening the financial system by building on high-quality capital; implementing strong international compensation standards; improving over-the-counter derivative markets; develop a new framework for sustainable and balanced growth; reform and review the resources, mandate and governance of international financial institutions, etc. It is all so much déjà vu, and does not take issues forward.

The G-7 communiqué notes that "excess volatility and disorderly movements" in exchange rates have adverse implications for economic and financial stability — which is an euphemism for asking China to release controls on its currency — the renminbi — to ensure more balanced growth, in China and elsewhere. But China, always fiercely nationalist, has made it clear time and again it will work at its own pace and to suit its own requirements, and it is powerful enough to ensure that its writ prevails. Beijing has been signing yuan-based agreements with other nations, skirting the dollar, in line with its view that the dollar should not remain the world’s only reserve currency. The real problem with the Anglo-Saxon and European economies is that they have priced themselves out of the markets, and are forced to provide huge subsidies to maintain exports. Their markets are flooded today with goods from developing economies which the poorer countries produce at the cost of exploiting their own citizens. Wages are low and workers labour in sweatshops across China, India and much of Southeast Asia because the West, over the years, leveraged its strength to beat down Asian markets and prices. Now the fortunes are reversed because the West has outpriced itself, and no longer enjoys leverage. That is why the World Trade Organisation is so vital for them: with a world trade deal they hope to be able to flood the markets of the developing world with their products. That scary proposition is the main hurdle that is tripping the Doha Round of world trade talks.

The only real success of the G-7 has been to maintain the illusion of its relevance. It succeeded in pushing under the carpet any talk of restructuring the G-7 into a G-4 as suggested by the United States (to comprise the US, EU, Japan and China). From indications given by the Japanese and German finance ministers, the G-4 wasn’t discussed at all, allowing the G-7 to survive to fight another day. The International Monetary Fund, at its parallel meeting in Istanbul, perhaps wrote the G-7’s epitaph: it said "the G-20 nations would become the world’s main economic decision-making forum, effectively taking over the role of the G-7 group of rich countries", as it (G-20) represented both the rich and the large emerging countries.