President Barack Obama made his international debut at the second G-20 Summit in London (2 April ) with a call for “bold, comprehensive and coordinated” actions to jump-start recovery and launch “a new era of economic engagement.” But in its declaration, the Summit failed to come up with the kind of response Obama had in view, after signing a 787-billion dollar economic recovery and reinvestment act back home. In EU, resistance by Germany and France, to make further fiscal commitments to stimulate their economies beyond what they had done, thwarted a decisive, well-coordinated stimulus the worsening global outlook demanded.

Nor did the Summit come up with a broad action plan to stabilise the dysfunctional banking system in USA and Europe, some of which are globally interconnected. Faced with solvency problems, these banks have precipitated recession in advanced counries and downturn for economies around the world. Unless these banks are repaired, relieving them of toxic, mortgage-related and other assets, even partially, credit markets would not revive. Risk-averse investors had been pulling back capital from emerging and other developing countries.

A longer recession...

IMF has warned that global recovery is critically dependent on normalisation of credit markets to lend for businesses and households so as to restore confidence and growth. Emerging economies like India have experienced capital outflows and difficulties in accessing external credit and financing of trade transactions.

The contraction in the world economic output and trade on an unprecedented scale in the last 60 years is unlikely to wind down in the near future. According to IMF, a synchronised recession in advanced economies associated with a financial crisis would be ‘severe and last longer,’ and historical trends suggest that recovery from such downturn would be ‘sluggish.’
The financial crisis having negatively impacted on emerging economies rapidly, a prolonged decline in capital flows is not ruled out..

Looked at from all these perspectives, the London Summit may have proved unequal to taking head-on the challenge of reversing the global slowdown and restoring allround confidence. All that it did was to embody in its declaration a series of general commitments by participating nations to do everything, fiscal and monetary, to restore growth and stabilise the financial system. There was a significant reaffirmation of countries to refrain from competitive currency devaluations or raising new trade barriers not consistent with WTO rules.

Banking reform...

The Summit declared that there could no longer be banking secrecy and also set the broad guidelines on functioning of international banks so that their executive compensations reflected the profitability and sound health of the respective institutions. G-20 also set the pace for reform of IMF and other institutions to give greater voice and representation to developing countries.

The G-20 comprising developed and emerging market nations, together accounted for some 80 per cent of output and a major chunk of world trade. The Financial Stability Forum has been expanded to include all G-29 countries, including BRIC (Brazil, Russia, India and China) economies, with a stronger mandate on promoting financial stability.

Beefing up IMF

The Summit decided on a set of measures, including the trebling of IMF’s resources to 750 billion dollars. This is mainly intended to assist the countries hit hard by the global crisis for which IMF has created a Flexible Credit Line (FCL).
G-20 authorised IMF to create 250 billion dollars through special drawing rights (SDRs) which would be distributed among member-countries and add to global liquidity. Another 100 billion dollars would be made available by multilateral institutions for trade finance. British Prime Minister George Brown who chaired the Summit, said that the global economy would now get a massive stimulus of 1.1 trillion dollars (through IMF and other institutions).

IMF Managing Director Dominique Strauss-Kahn was ecstatic that IMF would take the ‘centre stage’ and regain its badly-needed relevance. –SS