Finance ministers and central bank governors from the Group of 20
economic powers are set to meet in Paris on Friday and Saturday, kicking
off the 2011 season of economic summitry. The theme for France’s G20 presidency is “New World, New Ideas.” Not bad, but this would have been better: “No more excuses.” It’s a make-or-break year. After five summits in less than three
years, the time has come for the G20 to live up to its own hype as the
“premier forum for international co-operation.” Failure to do so will
make prophets of all those who condemned the tens of millions spent on
the Toronto summit last year as a colossal waste of time and money. A
lot of time has passed since 2008, when former U.S. president George W.
Bush first assembled leaders from the G20, formerly a second-tier
grouping of finance officials from rich countries such as Germany and
Australia and emerging markets such as China and Brazil. Leaders
committed to spend hundreds of billions to reverse the recession. It
worked, sort of. The world economy is growing again, but not in a
way that makes anyone feel comfortable. Unemployment rates are still
above 9 per cent in the United States and Europe. Inflation is heating
up in Asia and Latin America, stoked by surging food and energy prices.
Both of these things – unemployment and inflation – are factors in the
popular revolts sweeping Arab countries, where high rates of joblessness
mixed with rising prices have stirred simmering anger at autocratic
regimes. China and other Asian countries are still exporting far more
than they import, exacerbating imbalances in global growth. “The
spirit of co-operation so strongly evident across G20 countries in the
autumn of 2008 has waned considerably,” said Paul Jenkins, the former
senior deputy governor of the Bank of Canada. While officials continue
to say the right things about reducing elevated unemployment rates and
smoothing lopsided growth patterns, “there are clear differences of view
regarding roles and responsibilities, and on the desired path of
adjustments and the policy actions needed to achieve adjustment,” said
Mr. Jenkins, who is now a distinguished fellow at the Waterloo,
Ont.-based Centre for International Governance Innovation. French
President Nicolas Sarkozy wants to tackle three big subjects:
overhauling the international monetary system, improving global economic
governance and reducing volatility in commodity markets. These are
worthwhile topics; precisely the kinds of questions that the world’s
premier economic forum should tackle. There’s an emerging opinion
that the global economy might be better served by a monetary system that
revolves around several reserve currencies, rather than simply the U.S.
dollar. Finance Minister Jim Flaherty last year said it was too
difficult to bring a couple of dozen officials together quickly when
trouble flares, as it did last spring when Greece was on the brink; that
appears to be one of the reasons France wants to debate the need for a
tighter group to discuss currency issues. Most research shows Mr.
Sarkozy’s anxiety over the role speculators play in pushing food prices
higher is misplaced. Still a debate at the G20 on the subject is worth
having if it would settle the matter once and for all. But there’s
one problem with this agenda: The G20 hasn’t proven it is capable of
doing anything besides putting out a fire. The French program amounts to
a rebuild of the global financial architecture and the members of the
G20, so far, have shown little interest in building. “A host of measures
are needed in different countries to reduce vulnerabilities and
rebalance growth in order to strengthen and sustain global growth in the
years to come,” the International Monetary Fund said last month. The
G20 has been promising to rebalance the global economy for two years.
Its failure to bring about change risks destroying the credibility it
gained in the fight against the financial crisis. “The problem we
have is pure political will,” Tim Adams, a former under secretary for
international affairs at the U.S. Treasury Department, said last week
during a panel discussion on the financial system hosted by the
International Monetary Fund in Washington. For the audience’s
benefit, Mr. Adams ran through the list of the macro risks to the global
economy: the U.S. has done nothing significant to shrink its budget
deficit; Europe projects annual economic growth over the next decade of a
mere 1.5 per cent; and Asian countries refuse to loosen controls on
their exchange rates, hampering domestic demand and stoking inflation
pressures. One of the big ideas that the French intend to discuss
is making the IMF’s administrative unit of exchange – the Special
Drawing Right, or SDR – a legitimate global currency. The idea is to
reduce the global economy’s reliance on the greenback, which might take
some of the volatility out of foreign-exchange markets. On paper, this
could work; in the real world, the SDR will fly only if private
investors and companies have confidence in the authorities behind it. It’s
right to start the debate: Now that economic power is diffused, why
should one country’s currency be at the centre of global trade? But the
G20’s leaders should approach these subjects with humility, recognizing
they haven’t yet earned the right to be taken seriously. Before getting
carried away with reworking the international monetary system, the G20
should first make good on its original pledge – to stabilize the global
economy. That means following through on the pledge made in Seoul in
November to create guidelines for when a member country’s economic
policies risk throwing the global economy off track. Then, show the G20
is capable of exerting enough pressure to force that country to change
its policies. “We know what needs to be done,” said Mr. Adams, who
is now a managing director at the Lindsey Group, a consultancy based in
Fairfax, Va. “None of this is novel. It’s all in the G20 communiqués.
We just need to do it.”
" China ranked 2nd largest economy .."..
" the fact that China's economy is booming is welcome news for Japan as a neighbouring country ".....
Japan’s economy shrank slightly in the final quarter of 2010 but
analysts expect a recovery this year as stronger exports to China and
other parts of fast-growing Asia offset persistently weak domestic
demand.The data confirmed Japan lost its place to China last year
as the world’s second-largest economy and highlighted Tokyo’s
increasing reliance on its giant neighbour, which buys nearly a fifth of
Japan’s exports. Gross domestic product (GDP) shrank 0.3% in the
October-December period from the previous quarter, slightly less than a
0.5% fall expected by markets but still the first contraction in five
quarters. That translated into an annualised contraction of 1.1%,
with analysts largely blaming the weakness on a temporary hit to
consumption after the September expiry of government incentives to buy
low-emission cars. The data showed Japan’s economy was the weakest
among major rich nations, compared with annualised growth of 3.2% in
the United States in the same quarter. European data due out on Tuesday
is expected to show slight growth in the 17-nation euro zone. "The
data confirms that the economy entered a lull on a downturn in private
consumption, but recent monthly economic indicators such as output and
exports show it is unlikely that the lull will be prolonged," said
Yoshiki Shinke, senior economist at Dai-ichi Life Research Institute. "The
economy will continue to depend on external demand for growth, as
domestic demand is likely to be capped by subdued income growth and the
anticipated negative impact from the expiry of subsidies for
energy-efficient electrical appliances." The latest GDP
figures confirmed analysts’ estimates that China pulled ahead of Japan
in 2010 as the world’s second-biggest economy behind the United States
on a seasonally unadjusted, nominal dollar basis, at US$5.8786 trillion
against US$5.4742 trillion. Economics Minister Kaoru Yosano said
Japan needed to make the most of China’s growth to boost its own
fortunes, as it increasingly relies on demand from its Asian neighbour. "The
fact that China’s economy is booming is welcome news for Japan as a
neighbouring country," Yosano told reporters after the release of the
data. "We want to deepen the amicable economic relationship between
Japan and China." Japan’s shipments to mainland China accounted
for 19.4% of its overall exports last year, making it the No.1
destination for Japanese goods, followed by the United States at about
15.4%. The signs of an export-led recovery prompted the government
to upgrade its economic assessment last month and dampened expectations
of any imminent monetary easing by the Bank of Japan. BOJ
policymakers meeting this Monday and Tuesday may see no immediate need
to ease policy further through an increase of asset purchases and may
instead focus on assessing the strength of the recovery. While
recent data showed exports and industrial output rose more than expected
in December, a pick-up in the corporate sector is seen unlikely to
spill over to personal consumption, which makes up about 60% of GDP. Capital expenditure rose 0.9% from the previous quarter, slower than the 1.5% pace of gains in July-September. Analysts
said the increase in capital spending may not lead to stronger consumer
spending as companies remain reluctant to boost wages due to fierce
global competition, and as workers put a higher priority on job security
than wage hikes. The roll-back of government incentives for
purchases of energy-efficient household electronics in December will
also weigh on private consumption, which fell 0.7% from the previous
quarter after a 0.9% increase in July-September. External demand,
or net exports, shaved 0.1%age point off GDP, with the yen’s spike to a
15-year high against the dollar during the period hurting exports. As
the economy remains mired in stubborn deflation, the BOJ is in no
position to roll back its comprehensive easing anytime soon. That is in
stark contrast with policymakers in other parts of Asia, Europe and
elsewhere where the focus is shifting from supporting sustainable
recoveries to controlling inflation. China raised interest rates
last week for the second time in just over six weeks and further policy
tightening is expected from Beijing in the coming months, raising the
prospect of a slowdown in Chinese demand for everything from imported
electronics to construction equipment and cars. Nissan Motor Co
7201.T, Japan’s No.2 automaker, raised its annual profit and sales
forecasts last week as its big drive into emerging markets such as China
pays off. But with Japan’s domestic demand expected to remain weak, a
heavy reliance on exports to fuel recovery is expected to pose a risk if
external demand stumbles. "Risks from overseas economies and
currency moves need to be closely watched," Economics Minister Yosano
said, noting that financial markets were also monitoring the
government’s ability to enact legislation in a divided parliament. Highlighting
concerns about prolonged political paralysis, a Kyodo news agency
survey showed support for Prime Minister Naoto Kan’s government had
fallen below 20%, a level where some premiers have been nudged out of
power in the past.
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