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It’s time for a group hug

Before it’s too late, the G20 must come up with a mechanism to avert the next crisis.

india Updated: Feb 20, 2011 21:16 IST

To stay relevant, the group of twenty (G20) economies that produce nearly nine-tenths of the world’s output needs to come up with an early warning system for the next crash. The meeting in Paris last week of finance ministers and central bankers had one set of measurable indicators on the table, but it is unlikely to find universal acceptance. Two of the four indicators measure imbalances within countries — the public deficit and debt, plus the level of private savings. There is little debate over them. G20 countries have committed nearly $2 trillion to discretionary spending after the 2008 financial meltdown, which, an International Monetary Fund (IMF) study reckons, could have added 1.2-4.7 percentage points to the bloc’s output in 2009 and 0.1-1 percentage point in 2010. But this process is not painless — the public debt in the G20 has climbed from 62% of its GDP in 2007 to 82% in 2010.

Since countries are at different points on the turnaround graph, fiscal rollbacks must occur at different times. When they do, they will have to be large: to regain its 2007 position, the world needs to bring down its fiscal deficit from 7% to under 1%, a process, the IMF paper says, that could drag on beyond 2016. An earlier G20 meeting in Toronto threw up two dates: 2013, by when the advanced economies will try to halve their deficits; and 2016 by when they should begin to stabilise their public debt ratios.

The other two indicators of economic health measure external imbalances — the current account balance or trade balance, or foreign currency reserves or real exchange rates. These are more contentious. According to the OECD, a club of the wealthiest nations in the world, emerging economies are holding $5.4 trillion in foreign currency reserves, nearly twice as much the amount held by rich countries. This amount represents the consumption the developing countries have forgone in their effort to flood the West with cheap goods. India favours adopting all four indicators, but China — sitting on the biggest stockpile of dollars in history — is resisting calls to float the yuan. It wants the dollar’s hegemony to end. Time is running out for the G20, a group cobbled together to take the world out of a crisis, unless it can come up with a mechanism to avert the next one.