G-20 is right to say cooperation and reforms are the way forward. But difficult choices lie ahead.
At its meeting in Sydney, the G-20 put in place targets and proposed policies for both advanced and emerging economies based on a paper prepared by the IMF. The paper argues that global activity has picked up, largely on account of the advanced economies. At the same time, in many emerging markets, despite a boost to output from stronger exports, domestic demand has been weaker than expected, reflecting in part tighter financial conditions. After the US Federal Reserve’s taper talk in May, there was a new bout of financial volatility. The paper argues that emerging economies with relatively high inflation and current account deficits saw the largest asset price declines initially. More recently, markets are showing signs of stabilising, on the back of actions by key emerging economies to shore up confidence and strengthen their policy commitments. India, for instance, has seen a focus on fiscal consolidation and forex reserve buildup.
While no one doubts the wisdom of better cooperation and reforms, there is little in the G-20 framework to, for instance, make the Fed take account of the impact of its actions on the emerging markets. The primary responsibility of the Fed is to meet its domestic targets. While it can give better forward guidance, cooperation is a different game. Similarly, the emerging markets can undertake fiscal consolidation and build infrastructure but there are political difficulties in this strategy and in a time of slow growth, which is likely to continue, these choices will not be easy, howsoever obvious they sound in the G-20 policy announcements.
