Opinion The Economic Security Council

A second area needing attention is the requirement for a “safety net” for developing and emerging economies and the world’s poorest countries . The World Bank has pointed out that poorer countries are getting crowded out by developed countries in the demand for capital — and therefore,face higher borrowing costs,lower capital flows,weaker investment and slower growth.

 The Bank has only managed to assist two countries under its new crisis-assistance facilities. The IMF’s efforts have also proved to be slow and inadequate and worsened the impact — most starkly in Iceland. The IMF’s access limits for loans are way too low to permit drawings big enough to deal with the current economic problems of many nations. Disbursements are not front loaded enough,repayment periods are too short,and the IMF’s main lending window requires being subjected to onerous conditionalities,and procedures are slow.

The third issue is financial regulation. Unquestionably,financial regulations and supervision need to be tightened and their scope broadened,considering that the crisis originated in the sub-prime mortgage market. However,what is at issue is the extent and scope of these regulations,and the question of whether stronger global regulation is required as well.

 While the recent communiqué issued by G-20 finance ministers and central bank governors agreed on the need to strengthen the financial system through appropriate regulation and oversight over important institutions,markets and instruments,it did not name the institution responsible. Again,a new institutional mechanism is needed.

 A fourth contentious issue is that of global imbalances and the risks of competitive devaluation  — or what has been labelled as “manipulation” of  currencies,with a view to  encouraging exports. The US accused China of this; China then called for the creation of a new reserve currency,replacing the dollar.

Finally,global inequalities. At one level this issue is fundamental to the crisis. Recession,deflation and unemployment are a manifestation of the lack of effective demand for goods of the real economy. Demand is a function of income,and the propensity to consume. That propensity is high at low incomes,but decreases when income increases. Concentration of wealth with individuals or nations is bound to result in a problem of effective demand,especially in economies going through a deflationary phase. 

Measures aimed at reducing the asymmetries between developing and developed nations can therefore stimulate effective demand; developed nations must accept the fact that creating a playing field that is more level than hitherto helps make the world economy more sustainable. 

The prognosis for global economic recovery is actually fairly positive if a mechanism can be created which enables each of the these five critical  issues to be resolved urgently in an amicable manner. The commission of experts on reforms of the international monetary and financial system set up by the  UN General Assembly in its report submitted earlier this week suggested a globally representative  forum ( the Global Economic Co-ordination Council) to address these issues. Perhaps the Indian prime minister can pitch for such a mechanism as an immediate outcome of the London summit. Then the one-day Summit need agree only on this; it should be designed to ensure that all constituents and all major economies are represented,while keeping it small enough for effective discussion and decision-making.  That one step would automatically facilitate the resolution of the current and future obstacles to global economic recovery within a reasonable timeframe,and India would have contributed to writing this part of economic history.

The writer is a civil servant,views are personal.