Dr. Manmohan Singh will be well advised to get his mind off the minutiae of electoral politics this week. Bigger things are at stake in London next Thursday. The G20 meeting which Gordon Brown has convened is reminiscent of a similar London Conference in 1933. That one failed because Franklin Roosevelt refused to come. USA was then the greatest economic power but lacked the political clout in international financial matters that Britain had. The failure of developed countries to cooperate in tackling the Depression added to national grievances hanging over since the Treaty of Versailles sparked the Second World War.
Since then international cooperation and dialogue have been institutionalised. The Bretton Woods conference established the IMF and the World Bank. These became possible because Britain,with Keynes at the head of its delegation,recognised that while it had lost economic power it still had the best brains. Keynes did not get his way but still the Bretton Woods kept the Western economies prosperous for 25 years.
Since the breakdown of fixed exchange rates in 1971,we have had a dysfunctional IMF and no oversight of global financial problems. The developing countries got nothing but bad advice and a lot of bullying from the IMF. Now we have had globalisation. The flow of private capital to developing nations rose from $200 billion in 1992 to $950 billion in 2007,many times the official foreign aid. After 15 years of boom,from 1992 to 2007,we have a deep depression. The flow of private capital to developing nations is again down to $200 billion. The system needs fixing,perhaps with a reformed and restructured IMF.
But this time,thanks to globalisation,economic power has shifted from the West to the East. The debtors are the rich countries and the creditors are in Asia. The central issue of the G20 conference will be to give a concrete shape to the shifting balance of economic power. Just as the US was the economic powerhouse but had to take junior position to the UK in 1933,now it is China which is the economic powerhouse but it lacks the clout commensurate with its financial balances. China has to state its conditions for the reform of IMF. The main need is for extra resources for the IMF and the rich countries are bankrupt. China will have to foot the bill.
China has been very cautious in revealing its plans. This is where India can play a crucial role. India has the expertise in Team Manmohan. India can put forward the schemes which would command agreement. In principle,the world needs a mechanism whereby surplus financial reserves of nations need not all be put in US Treasury Bills but can form the basis of a global reserve asset. Thus the billions of Chinese,Japanese and other Asian economies surpluses can be banked with the IMF,which can loan it out to deficit countries. Of course,it needs to get a better economics tool kit than the one it has been using,which has harassed developing countries for decades.
IMF can recycle the surpluses not only by holding the debts of several countries but also by buying and selling commodity futures to mitigate the excessive volatility in their prices. Commodity prices can cause much misery whether they are too high or too low.
Keynes wanted IMF to be more like a world central bank. In 1945,the world was not ready for it. Even now the world is not a single global economy. Yet the time has now come to take one more step towards it. IMF can begin to perform the task of oversight of global financial flows and of helping the deficit countries in a way which does not kill the growth process and hurt the poorest people.
India can give intellectual shape to these ideas and play,along with China,the crucial role of architect of the new international order. The realities of economic power,thanks to globalisation over the last 15 years,are that Asia can be a full partner in any new order. But it must be an order which never again neglects the needs of the poor.