By S. Sethuraman
Finance Ministers from over 180 nations re-committed themselves “to act collectively to restore confidence, rekindle growth and create jobs”, at the bi-annual Fund-Bank meetings in Washington (April 20-21) against the backdrop of fragile global recovery, financial stresses in euro-zone posing risks of cross-border spill-overs, high oil prices and volatile capital flows. But such declarations are wearing thin looking to developments on either side of the Atlantic.
The only tangible outcome at the meetings of IMF and G-20 Ministers was the approval of a ‘global firewall” with pledges totalling 430 billion dollars from IMF membership for crisis prevention and resolution. USA is not contributing to the global safety net while BRICs supportive of the “firewall” are yet to indicate their individual shares in the total.
IMF Managing Director M. Christine Lagarde, who attached highest priority to beef up the Fund’s resources, assured the membership that it was not merely intended to under-pin the eurozone efforts at dealing with the sovereign debt crisis and carried no “EU label”. Assistance would be available to any member-country in difficulty on terms IMF usually attached to its loans.
It was agreed commitments made for enhancement of IMF resources for crisis prevention and resolution would be in addition to the quota increases under the 2010 voice and governance reforms which should, subject to ratification by USA and other members, should be completed by the end of 2012. IMF is already at work on the formula for the next (fifteenth) review of quotas to be taken up in January 2013 and completed by January 2014.
Reflecting the fragile recovery of the world economy, world trade of goods and services took a hit in 2011, with growth shrinking to 5 per cent in volume after the post-recession rebound of 13.8 per cent in 2010. In its annual survey on trade flows, WTO projects a further slowdown in volume growth to 3.7 per cent in 2012 linked to the current tepid output recovery, which could keep down global growth at only 2.1 per cent in 2012.
This contrasts with the IMF estimates for 2012 of world output at 3.5 per cent (or 2.7 per cent at market-based exchange rates) and improving to 4.1 (3.3 per cent) at the PPP and market exchange rates respectively in 2013. IMF’s estimates for world trade in goods and services for 2012 also anticipate a sharp slowdown to 4.0 per cent (as compared to WTO projection of 3.7 per cent).
The Fund-Bank meetings did not offer a road map for stabilising the world growth in the absence of credible action programmes in the two largest economies – in relation to debt and deficit problems in USA and the ongoing financial stresses in eurozone, which are keeping markets volatile and pose risks of cross-border spillovers. Global uncertainties have impacted on growth of emerging economies like China and India, which have been drivers of global growth in the post-crisis period.
In the United States, President Obama campaigning for his second term is thwarted by the Congressional Republicans in working out a balanced package of deficit reduction with tax reform for credible debt reduction while EU leaders wedded to a Fiscal Compact insist on imposing a “destructive austerity”, as the New York Times puts it, on the recession-hit, indebted peripheral countries of the euro-zone. .
Near term prospects of pick up in world merchandise trade is rated bleak by the WTO. Its latest survey says a faster than average growth of 5.5 per cent recorded over the last twenty years (including the period of trade collapse as in 2009) could happen only after governments, businesses and households in developed countries reduce their debt burdens to more manageable levels.
But this process of deleveraging (reducing reliance on debt) and fiscal consolidation (lowering budget deficits) is likely to take years, WTO acknowledges. Therefore, the world may have to resign itself to a long period of slower-than-average growth in international trade. This would have serious implications for emerging economies and other developing countries dependent to varying extent on exports for their growth.
In 2011, India emerged the fastest growing exporter with shipments rising by 16.1 per cent followed by China with 9.2 per cent and USA7.2 per cent. China led in import growth with 9.7 per cent and India 6.6 per cent. Excluding intra-EU trade, India ranked 13th among exporters and eighth among importers.China is the largest exporter in the world followed by USA and the second largest importer after USA. Germany and Japan are third and fourth in both exports and imports.
At the Fund-bank meetings, the US position outlined by Treasury Secretary Geithner was that while his country supported a constructive role of IMF in reinforcing economic reforms in Europe, increased IMF involvement (funding) could not substitute tough reforms of the eurozone economies themselves. He wanted. EU policymakers who had taken important steps to make more efforts in addressing debt crisis.
India’s Finance Minister Mr Pranab Mukherjee told the Fund-Bank meetings a great amount of economic and political turmoil had been witnessed over the past year. Volatility in commodity prices and high oil prices had added to global uncertainty and impacted businesses across the globe, slowing the recovery in both advanced and emerging economies. The Finance Minister, however, was “reasonably confident” that despite adverse external conditions, India’s growth fundamentals would remain firm.
M. Lagarde, greatly pleased with her additional resource mobilisation effort, saw the outcome of the two-day deliberations as expression of “collective resolve” to tackle the combination of necessary growth and fiscal consolidation while also working on structural reforms.
Emerging markets won assurances from their G20 partners that their growing economic clout would be given recognition with greater voting power in the next quota review over and above the 2010 reform which enhanced their quotas and representation on the Executive Board. But for the latter, ratification process remains incomplete and M. Lagarde has appealed to member-countries to complete the process before the annual meetings in October in Tokyo.
Mr Mukherjee has emphasised that the next quota formula should provide greater weightage for GDP in PPP terms which better captures the dynamism of emerging markets and developing countries and that the distribution should better reflect the relative weights of IMF members in the world economy.
The Development Committee of Fund-Bank welcomed progress on the World Bank’s modernisation agenda designed to improve its effectiveness and efficiency in delivering more and better results. The Committee also recorded its profound appreciation and gratitude to Robert B. Zoellick for his leadership of the WBG over the last five years and positioning the Bank at the forefront for effective and timely responses to food and financial crises and natural disasters.
His stewardship saw the first large recapitalization of the IBRD in 20 years and two record-breaking IDA replenishments totaling more than $90 billion. The Committee also committed to working in close partnership with his successor, Mr.Jim Yong Kim, Dartmouth College’s president (USA) who was chosen after an open process for selection. It also thanked Dr. Ngozi Okonjo-Iweala, Nigeria’s Finance Minister and Dr. José Antonio Ocampo (Colombia) for their candidacies and for sharing their valuable ideas for the World Bank Group. (IPA Service)