The Summit of 20 nations, developed and emerging, representing 85 per cent of world output, was called to work out a global response to the global economic crisis - the freezing of credit markets in USA and Europe precipitating recession and disrupting and destabilising emerging economies and other developing countries.

This represents a major change in global economic governance which should get reinforced when leaders of the 20 nations hold a second summit proposed for April 2009. By then, hopefully, it would have the imprimatur of the change of guard in the White House with Barack Obama taking over as President on 20 January. Obama welcomed the outgoing President George Bush 'initiating' the Summit process and favoured 'coordinated global response' to a 'global crisis.' Presently he is more focused on domestic concerns, in particular 'the greatest economic challenge of our time,' as unemployment mounts and confidence among busin esses and consumers has been waning. A strong job-oriented fiscal stimulus to revive the US economy, which entered recession in the third quarter of 2008, will be his No.1 priority.

Muted response to recession

The Washington Summit, originally mooted by European leaders led by French President Sarkozy, was hastily prepared. Much of the home work for this was done by the Bush Administration keeping its 'free market capitalism' at the forefront in the draft of rules for financial markets of the future. Despite massive bail-outs for banks in distress in USA where banks were being recapitalised under a 700-billion dollar rescue package and similar actions in Europe, revival of credit markets was nowhere in sight and recession was officially declared in Europe and Japan on the eve of the Summit. Current indications are that stability in financial markets is unlikely to return till the middle of 2009.

IMF has forecast 'nil' growth in advanced economies in 2009. It has lowered growth projections for China and India to 8.5 and 6.3 per cent in 2009 respectively. The slowdown is already palpable in these countries and India's growth is now likely to be 7 per cent in the current year. China has launched a 586 billion dollar stimulus plan for the next two years though the spending would be phased over for the infrastructure projects. This has been commended by the developed nations and international institutions.

The World Bank has projected a 1 per cent growth for world economy next year, as developing countries entering a 'danger zone' slow down to less than 5 per cent, the lowest over a decade. What is worse, it indicates there would be no growth in world trade in 2009, for the first time in 27 years. This underlines the extent of the crisis which has hit hard emerging economies including China and India. The latter is already undergoing the negative impact of export downtrend and drying up of capital inflows, rising dollar demand and rupee depreciation and a substantial draw-down of reserves in the first eight months of 2008-09.

But the lengthy Washington Declaration avoiding any reference to a globally co-ordinated fiscal stimulus, merely called for a 'broad response' by nations working together to restore global growth and achieve needed reforms in the world's financial systems. While the Summit took note of the 'exceptional measures' taken including massive bail-outs of banks in USA and European Union and provision of guarantees to secure revival of credit flows, there were no visible signs of banks beginning to lend in a way that would trigger market confidence and new investment.

India's approach, forcefully outlined by Prime Minister Manmohan Singh in his address, was essentially based on 'inclusivity' - a new global architecture reflecting changes in the relative strengths of economies - a coordinated fiscal stimulus by countries to mitigate the severity and duration of the downturn and avoidance of protectionism. He said India should take all possible measures at the national level to complement any coordinated international plan of action.

There was some resonance of these points in the Declaration which, however, left it to countries to continue vigorous efforts to stabilise the financial system recognising the importance of monetary policy, 'as deemed appropriate to domestic conditions' and use fiscal measures "to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability." IMF has backed a global fiscal stimulus by most countries which, it says, would play a central role, unlike monetary policy, in stimulating domestic demand.

Reform and increased financing - role of IMF/World Bank

China's President Hu Jintao and Brazil's President Lula were two other powerful voices at the Summit calling for a new international economic order which is 'fair and inclusive' and which reckoned with emerging economies in today's globalised world. The Summit Declaration provides a new thrust for reform of the Bretton Woods Institutions to reflect adequately changing economic weights of countries and for greater voice and representation to emerging and developing economies, including the poorest countries. The Financial Stability Forum (FSF) would be expanded for a broader membership of emerging economies (which would include China, India and Brazil).

IMF, which has 200 billion dollars in its kitty, has been entrusted with a greater role in crisis response for developing countries through its instruments with flexibility and its new short-term liquidity for emerging economies in need ( unconditional loans for such countries with a sound track record of performance and stability). Given the rising demands on the Fund's resources, Japan has offered to lend 100 billion dollars while there are expectations of similar offers from China and Gulf countries, notably Saudi Arabia (which is among the G-20).The Summit also welcomed the World Bank's new facilities, especially for infrastructure support and trade finance and urged all multilateral development banks to use their full capacity in support of development agenda. (The Bank has announced it could make available 100 billion dollars over a three-year period of their development agenda, of which 35 billion could be committed in fiscal 2009, as against its annual 13.5 billion dollars, along with larger IDA disbursements and IFC support of upto three billion dollars for trade finance).

Trade and financial markets

The G-20 leaders pledged themselves against protectionism and to not raising any new market barriers for twelve months. The Summit also injected some new life in the moribund Doha Trade Round by urging countries to agree on new modalities by the end of the year to achieve an ambitious outcome for the 7-year old round of multilateral trade negotiations. Emerging market countries, Dr Manmohan Singh pointed out, had become the 'worst-affected victims' of slowing world trade and shrinkage of capital flows. WTO Director-General Pascal Lamy is calling a ministerial meeting in mid-December, hoping countries would abide by the Summit resolve.

An elaborate Action Plan has been incorporated in the Declaration to re-fix the world financial system. It embodies several principles for strengthened regulation and oversight of markets, products and players. The plan based on 'common principles' of reform, covers strict accounting standards, market transparency, including full disclosure of complex financial products and strengthened regulatory regimes, at both national and international levels. Some of the new regulations have to be in place before March 2009 and these would be reviewed by G-20 finance ministers prior to the next Summit.

Bush stresses on free market

USA under President Bush was keen on two things: one to escape any blame for the financial meltdown and safeguarding 'free market capitalism.' To Republicans, Bush was apologetic in having to intervene by investments in banks (after failures of firms) and extolled the virtues of free markets though they needed to be regulated better. With Europeans, Russians and others finger-pointing at USA before the Summit, the G-20 statement avoided embarrassment to the host by recording that "policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address risks building up in the markets."

On the other hand, President Bush got his market fundamentalism concurred by all including China and India with the formulation in the Declaration that on reforming financial markets would be guided by "shared belief on market principles: such as open trade and investment regimes," and that reforms would be successful only "if grounded in a commitment to free market principles including rule of law, respect for private property, competitive markets and efficient and effectively regulated financial markets." Over-regulation must be avoided as it would hamper economic growth and exacerbate contraction of capital flows, it contended.