And the process has begun…!

In our last post, we spoke about the G20 and what it entails. Whilst there were no earth-shattering world-altering overnight solutions to the global meltdown, to come out of the London summit, but yes the process to unweave ourselves out of this very tangled web that we have woven has begun. So now let’s take a macro look at what went down at Bretton Woods II (with reference ofcourse, to the Bretton Woods Conference of 1944 which was held to lay down the base rules for managing the worlds monetary system). Déjà vu…did I hear you say?

To begin with, we’d like to say that the summit itself could prove to be an historic moment in a critical year for the twin crises of climate change and economic meltdown. It could very well mark a global shift of power towards the large developing countries such as China, India and Brazil, and the partial eclipse of the old G8 club. However, the decisions and declarations were, as with any such event, a mixed bag.

THE MACRO PICTURE

Struggling to bridge deep divides over how to revive a paralyzed global economy, the leaders of the world’s largest economies agreed Thursday to bail out developing countries, stimulate world trade and regulate financial firms more stringently.

Towards this effect, (as we all know too well), the summit announced a whopping $1.1 trillion boost for the world economy, a sizeable fiscal stimulus in its own right.

FYI this is made up of:

• trebling the resources of the IMF to $750 billion, through a combination of immediate financing from member governments. Some of this was already pledged beforehand – by Japan ($100 billion) and Europe ($100 billion), but China also promised $40 billion, totaling $250 billion and subsequently to be expanded through the New Arrangements to Borrow method to $500 billion. There will also be a general SDR (Special Drawing Rights) allocation, which will inject a further $250 billion into the world economy.
Note: This is truly the only real big thing that happened at the summit; the support shown by the G20 for the IMF. The most concrete step (see above) was a $ 500 billion reinforcement of the resources of the monetary fund, which has emerged from years of waning relevance to become the first responder in this crisis, lending billions of dollars in emergency roles to dozens of countries
• Atleast an additional $100 billion in lending by the Multilateral Development Banks was agreed, with a commitment over the next three years for this to rise to $300 billion. This will go to all developing countries (low and middle income).
• $250 billion for trade finance was announced, which is to be provided over two years for all countries, of which Germany has committed $60 billion. As part of the $250 billion, there will be a World Bank Global Trade Liquidity Pool that should provide $50 billion over the next three years. However, reports indicate that at present there is only $5 billion in this fund, made up of IFC $1 billion put in by the IFC itself and a further $3-4 billion in voluntary bilateral contributions made at the G20. This is a worrying sign of creative accounting, with $5 billion apparently being magically transformed into $50 billion.


Very importantly, the G20 has recognised and responded to the rising evidence that this crisis is hurting poor people and countries:
Quoting from the communiqué issued, ‘We recognise that the current crisis has a disproportionate impact on the vulnerable in the poorest countries and recognise our collective responsibility to mitigate the social impact of the crisis to minimise long-lasting damage to global potential.’
Adding up the numbers, the communiqué could potentially provide a total of $240 billion for developing countries (low and middle income countries). This is a tremendous amount and, whilst most of it will come in the form of loans, it will be much needed as other forms of finance for developing countries have effectively dried up. However, it is vital this funding is new money, is disbursed quickly, is highly concessional and comes with no harmful conditions attached.
To conclude, while those present may have breathed a sigh of relief that the summit achieved more than the low initial expectations, the truth is that real results are likely to fall far short of the hopes of transformational change that were widespread at the end of 2008. The test of the London Summit lies in what happens next, particularly in the crucial rounds of global diplomacy during the rest of 2009.

Sources: Text of the communiqué of the G20 Summit, Oxfam report on G20, nytimes.com