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G-20 leaders pledge $1 trillion to kick start global economy

business Updated: Apr 03, 2009 08:38 IST
Gautam Chikermane

Globalisation is not dead – yet. Leaders of the Group of 20 countries on Thursday agreed to a $1.1 trillion (Rs 55 lakh crore) deal to combat the worst economic downturn since the Great Depression.

The G-20 leaders agreed that this sum will be made available to the world economy through the International Monetary Fund (IMF) and other institutions. This will include $250 billion of the special IMF “currency” called Special Drawing Rights.

“This money will be available for lending to all IMF members,” British Prime Minister and summit host Gordon Brown said at a press conference after the summit.

In addition, the IMF will see its own resources tripled, with up to $500 billion in new funds. The G-20 also agreed to a trade finance package worth $250 billion over two years to support global trade flows.

<b1>Taken together, this means countries facing a liquidity crisis will get money to finance their return to sound economic health and global trade, which has ground to a crawl, will no longer suffer for want of funds.

G-20 leaders also signed off on plans to blacklist tax havens — like Jersey, Monaco, Cayman Islands, etc., which allow people to hold numbered accounts that protect their identities — and tighten financial rules to bring hedge funds and credit rating agencies under closer supervision.

The underlying message from the summit was as much political as economic. “A new world order is emerging. We are undertaking an unprecedented and concerted fiscal expansion, which will save or create millions of jobs that would otherwise have been destroyed,” Brown said.

This means one of India’s main expectations – of increased funding for IMF – has been addressed.

Speaking at a dinner hosted by British Prime Minister Gordon Brown for G-20 leaders on Wednesday, Prime Minister Manmohan Singh had said: “We must declare our resolve to increase the resources available with the IMF by around $500 billion over the next two years. This will provide developing countries with about $80 billion of usable resources at a time when liquidity is exceptionally tight.”

With the politics in place, the G-20 statement went beyond the immediate. For one, there was a sharp sense of “working together” that ran through Brown’s 45-minute press conference after the end of the summit.

French President Nicolas Sarkozy, who had earlier threatened to walk out of the summit over the issue of regulating hedge funds and other financial institutions, said the results were beyond what could have been imagined. Another of India’s concerns, protectionism – which Singh had flagged at the G-20 meeting in Washington in November 2008 – was also addressed, but only partially.

The G-20 statement, released after the summit said: “Members will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions or implementing measures inconsistent with WTO norms.”

Most importantly, the leaders agreed to “take action against non-cooperative jurisdictions, including tax havens.” This includes the name-and-shame proposal that Sarkozy and Merkel had proposed.

Following this, people can still stash away unaccounted money in numbered bank accounts in tax havens, but countries that do not share this information with governments that request it will be blacklisted by the international financial community.

The markets cheered the deal. Stocks were up 3.4 per cent in the US, 4.5 per cent in UK, 6.4 per cent in Germany, 5.4 per cent in France, 7.4 per cent in Hong Kong and 5.9 per cent in Singapore. The Bombay Stock Exchange, which closed much before the deal was announced late on Thursday night, rose 4.5 per cent, as the Sensex crossed 10,000.

Now, the world will watch with bated breath how the leaders fulfill their promises in the months to come. The good thing is that the leaders themselves are watching, too – the next global meeting has already been planned for later this year.

Meanwhile, globalisation and the free market can be expected to get a much-needed booster dose of oxygen.