G-20 Summit OKs Compromise List
Of Indicators, Puts Guidelines Off for April
By Rick Mitchell
PARIS--Group of 20 finance ministers and central bank chiefs Feb. 19 announced that they had agreed on a compromise set of indicators for identifying countries' “persistently large imbalances” that require policy action.
However, they put off, until April, work to agree on “indicative guidelines,” or benchmarks, against which to assess those indicators.
The officials from the worlds' leading industrialized and emerging economies had gathered in Paris Feb. 17-19 for the first financial summit of France's one-year 2011 presidency of the G-20, to discuss pressing global economic, financial and trade issues. In keeping with France's stated goals for its presidency, the Paris meeting made decisions and resolutions aimed at reestablishing macro-economic and monetary balance, tackling volatility of exchange rates and commodity prices, and trying to reform world governance.
But the agreement France had put most its efforts into for this first meeting was the one for indicators, which, in the weeks leading up the meeting, seemed doomed to failure because of resistance, primarily by China.
The compromise list appears to have been designed to meet China's approval. In particular, it does not refer to “current account balance,” or include an indicator for currency reserves, and it only states that exchange rates will be “taken into due consideration. China had objected to all of these on grounds they could be used to single out China for its undervalued currency, enormous currency reserves and trade surplus.
Geithner Says China Currency Undervalued
The French minister of economy, finance and industry declared herself “very satisfied” with the compromise. “It is an important stage in the reduction of imbalances that threaten world growth,” she said.
Treasury Secretary Timothy Geithner said the agreement was “very encouraging,” but he said more reforms are needed to ensure future global economic growth.
Geithner said global economic growth appears to be at its strongest level since the crisis, with most forecasters projecting emerging economies growing about 5-6 percent, the United States at 3 to 4 percent and Europe and Japan average 1-2 percent.
He said the main challenge G-20 countries face today is how to sustain the recovery. In addition to action on trade and current account imbalances, he said the world needs stronger norms for exchange rate policies to accommodate swings in the global economy.
A Geithner statement distributed after his remarks noted that, since June 2010, China's authorities have allowed the yuan to appreciate about 6 percent a year in nominal terms, and more than 10 percent a year in real terms, given faster inflation in China than in the United States.
“Nonetheless, China's currency remains substantially undervalued and its real effective exchange rate—the best measure to judge its currency against all of its trading partners—has not moved much in this latest period of exchange rate reform,” Geithner's statement said.
China's foreign reserves jumped 7.5 percent in the fourth quarter of 2010 to a total of $2.85 trillion, the world's largest, according to official data. China trade surplus with the United States widened to $25.6 billion in November from $25.5 billion in October, according to U.S. Commerce Department figures issued Jan. 13.
Indicators Grew Out of Korea Meetings
France had set a key goal for the weekend meeting of agreeing on a set of indicator guidelines that the G-20 Mutual Assessment Process could use to identify countries running large current account imbalances, or other problems, and then to analyze them and determine corrective action.
But sources said that in the negotiations leading up to the financial summit, certain emerging countries, led by China, objected to two of the indicators proposed, current account balance and exchange rates, fearing they would be used to single them out.
Lagarde said the Paris meeting, among other things, discussed progress made at the Seoul summit in November, where leaders agreed to strengthen cooperation to promote external sustainability and pursue policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels.
During the Seoul G-20 finance summit in October, several emerging country finance ministers rejected a proposal by Geithner to use a single indicator, current account surplus, to identify imbalances.
Current account comprises balance of trade, which equals exports minus imports of goods and services, plus net factor income, such as interest and dividends, and, finally, net transfer payments, like foreign aid.
MAP Process
Nevertheless, in Seoul the leaders did instruct their finance ministers and central bank governors to produce indicative guidelines composed of a range of indicators that would serve as a mechanism to facilitate timely identification of large imbalances that require preventive and corrective actions to be taken.
The guidelines are to be used to examine individual G-20 members within the context of the Mutual Assessment Process that was set up at the G-20's 2009 Pittsburgh summit to assess whether an individual country's policies are consistent with the group's definition of strong, stable and balanced growth.
The first of the assessments is supposed to take place during France's G-20 presidency.
Two-Step Process
Lagarde said the agreed-on set of indicators will allow focusing, through an integrated two-step process, on persistently large balances that require policy actions.
However, “to complete the work required for the first step, our aim is to agree, by our next meeting in April, on indicative guidelines against which each of these indicators will be assessed, recognizing the need to take into account national or regional circumstances, including large commodity producers,” she said.
The language on large commodity producers was originally added in Seoul in response to concerns from G-20 countries such as Saudi Arabia, which runs a huge trade surplus based almost entirely on its oil exports.
Lagarde stressed that the guidelines, are benchmarks, not targets. When they are developed, they will be used to assess indicators including one that comprises public debt and fiscal deficits plus private savings rate and private debt.
A second, complicated indicator gets around China's objection to “current account balance” by referring to “the external imbalance composed of the trade balance and net investment income flows and transfers. It also ”[takes] due consideration of the exchange rate, fiscal, monetary and other policies,“ seeking to assuage China's aversion to an exchange rate indicator while satisfying advanced countries' insistence that it be considered in the MAP process.
“Currency reserves was dropped” as an indicator, Lagarde said flatly, declining to elaborate, while Geithner said that one could wait for later.
Timetable for Growth Framework Action
Lagarde said the meeting had adopted a timetable for developing a 2011 action plan to implement the framework for strong, sustainable, and balanced growth agreed at the G-20's Seoul finance meeting in October 2010 and monitor commitments already made.
It called on the International Monetary Fund to assess the external sustainability and consistency of country policies through the Mutual Assessment Process, and report to the ministers' October meeting. In October, the IMF is also to provide a report on the MAP, including an action plan and an analysis of root causes of persistently large imbalances, based on the agreed guidelines.
Lagarde said the ministers had agreed on a work program aimed at strengthening the functioning of the international monetary system, “including through coherent approaches and measures to deal with potentially destabilizing capital flows,” such as macro-prudential measures; management of global liquidity to strengthen capacity to prevent and deal with shocks, such as financial safety nets and also to consider the role of special drawing rights.
The ministers said the IMF will deliver a report on these issues in April for the next G-20 finance meeting, while the World Bank and regional development banks will deliver reports on efforts to strengthen local capital markets and domestic currency in emerging and developing economies. The OECD is also working on capital flows, they said.
Following the G-20 meeting, the IMF's managing director, Dominique Strauss-Kahn, said, “the world needs the right kind of recovery” that addresses unemployment and inequality. He warned that some emerging markets risk overheating.
Commodity Price Volatility
In a speech opening the first formal G-20 meeting in the evening Feb. 18, French President Nicolas Sarkozy said global prosperity faces two main threats: volatile currency values and capital flows, and runaway commodity prices.
Lagarde said the G-20 finance ministers had asked their “deputies” to work with international organizations and to report back to the ministers on underlying drivers and challenges that volatile commodity prices pose for consumers and producers, and to consider possible actions.
The ministers said long-term investment is needed in developing countries' agricultural sectors to fight the impact of this volatility on food security. They also called for the International Energy Forum, International Energy Agency and the Organization of Petroleum Exporting Countries (OPEC) to continue work aimed at improving reliability of oil market data, and asked the IMF, IEF, IEA, OPEC and Gas Exporting Countries Forum to provide, by October 2011, concrete recommendations to extend previous G-20 work on oil price volatility to gas and coal markets.
The ministers said they had committed to reform of the financial sector and said significant work remains. Among other things, they said they will implement the Financial Stability Board's recommendations on over-the-counter derivatives and on reducing reliance on credit rating agencies. The FSB released a report on these issues [see related article in this issue].
Shifting Center
G-20 members are Argentina, Australia, Brazil, Canada, China, the European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States.
Collectively, they account for 85 percent of world gross domestic product, 81 percent of world exports and two-thirds of the global population.
Lagarde noted earlier in February that the world's economic center of gravity has shifted toward emerging countries in recent years, with China the obvious prime example. Thirty years ago, emerging countries accounted for one-third of the world economy. In less than five years, they will account for 50 percent, she said.
In 1985, exports accounted for 18 percent of emerging countries' gross domestic product. Today, the figure tops 30 percent, according to French data.
Overemphasis on Analytics
Gabriela Ramos, the Paris-based Organization for Economic Cooperation and Development's representative in G-20 negotiations, told BNA public attention is over-focused on the analytics of the G-20 process.
“The fact is that the G-20 is building a process by which countries are talking to each other on the most important issues that they need to address, on how their polices are affecting the global economy. This has never been done before,” she said.
She said the negotiations are complicated and tense.
“You have a very fragile recovery and the policy requirements of certain groups go against the circumstances of other groups. There are huge deficits, high unemployment and inflationary pressures,” she said.
“Zero rate [interest] policies in advanced countries are creating massive capital flows into emerging economies, so emerging countries are creating capital controls to protect themselves. Each country has a different perspective,” she said.
10 Years Needed for Reforms
During a panel of G-20 central bank chiefs, a G-20 side event Feb. 18—sponsored by the French Central Bank and Eurofi—Bank of England Governor Mervyn King said G-20 countries have so far shown limited willingness to coordinate over policies outside a global crisis.
“The major surplus and deficit countries are currently pursuing economic strategies that are in conflict,” he said.
Ramos said she is convinced the G-20 is moving in the right direction, but solutions will take time.
During the panel, Xiaochuan Zhou, head of the People's Bank of China, gave an idea of how long he thought that might be. After listening to European and U.S. central bank chiefs talk about the need for immediate reforms, he said it might take 10 years for the Chinese to make the changes the West is asking for.
The Korean Minister of Finance Yoon Jeung-hyun said the G-20 is too obsessed by advanced country problems. “It's time for the G-20 to pay more attention to emerging country issues,” he said.
(Appeared Feb. 23, 2011)
