World leaders on Friday admitted they were in the midst of a currency war and there was precious little they could do to about it. The group of twenty (G20) nations that produces 85% of the world's output ended their fifth summit since the 2008 financial meltdown with a pious declaration that they needed a set of indicative guidelines to spot large trade imbalances, which threaten to destabilise the global economy. They couldn't even agree whether these guidelines should be qualitative or quantitative. The fissures among economies that have clambered out of the recession and those that are still struggling run deep. "Uneven growth and widening imbalances are fueling the temptation to diverge from global solutions into uncoordinated actions. However, uncoordinated policy actions will only lead to worse outcomes for all," the Seoul communiqué says in a feeble attempt to recapture a rapidly receding consensus.
The principal belligerents and the world's biggest two economies, the US and China, have ratcheted up their rhetoric in recent weeks. Washington sees China's refusal to allow its currency, the yuan, to appreciate as obstructionist. Beijing, on the other hand, is concerned that the Federal Reserve may be deliberately debasing the dollar by printing more money. The Seoul summit took place under this cloud. The rest of the world aligns itself to one camp or the other depending on how fast their economic engines are running. However, the meeting was not a complete washout. Advanced economies promised to guard against disorderly currency movements to reduce the risk of excessive volatility in capital flows to emerging economies, which got an okay to erect firewalls if they felt these were necessary. India's suggestion — building infrastructure in emerging economies to help rebalance global demand — has much going for it. For one, it generates consumption in countries that have piled up huge trade surpluses, a persistent call of the advanced economies. It also tempers the tendency towards competitive devaluation and currency manipulation. And by working through multilateral institutions like the World Bank, it reinforces the glue that is fast evaporating for concerted global reaction to the "most severe world recession our generation has ever confronted".
The Seoul summit had at least one area where unanimity was not elusive: in strengthening the financial market's architecture to avoid future meltdowns. The new set of safeguards, including "bank capital and liquidity standards, as well as measures to better regulate and effectively resolve systemically important financial institutions", is still work in progress. It lies at the heart of why the G20 should keep talking to each other. Inclusion of the concerns of the developing world in this framework is a step forward for countries like India.