The G20 Leaders’ Summit in Los Cabos, Mexico is meeting at a time of extreme complexity in the world economy. This premium forum for international economic affairs is encountering re-emerging signs of financial crisis and economic recession in euro zone economies. But adding to the complexity is that the US government and Congress still cannot forge a clear long-term fiscal consolidation plan. And the growth of emerging economies is starting to slow down. All these elements have thrust the G20 into another challenging and crucial period.
The Los Cabos Summit, on June 18-19, is expected to consider three major issues at the top of the agenda. First is the euro zone economic situation. The biggest worry is the rising policy uncertainty surrounding Greece’s future role in the euro zone. This is coupled with endless and fruitless policy debates among governments, at both a national and EU level, which may invoke the double jeopardy of a sovereign debt crisis and a bank liquidity crisis. The second issue is the disorderly international capital flow as a result of the spillover effect of continuous bailout monetary policies maintained by the central banks of advanced economies. The third is the fluctuation of commodity prices which may damage both consumer and supplier countries.
As the second largest economy in the world, China attaches great importance to the G20’s role. It views the G20 as a more balanced forum which includes on an equal footing both developed and emerging economies. Also, China has been striving to advance the G20’s role from not just a crisis management committee but to being the steering committee for global economic governance. Chinese leaders have been looking forward to the G20 Los Cabos Summit to reconvene the consensus of major economies and showcase again the spirit of we’re all “in the same boat”. Only through this collaborative approach can countries find solutions to the world’s current turbulent economic situation.
The following five issues are causes for great concern to China.
1.Euro zone economic situation
With the systemic importance of the euro zone economy to the world economy, China is watching closely the changing situation in Europe. Just like other countries outside Europe, China wants to see a stable and orderly crisis management process in euro zone countries. But some major points may need to be addressed. First, to reassure market investors, the euro zone countries must maintain a clear and stable macroeconomic policy. They should continue to intensively coordinate their policies and actions to prevent possible major market fluctuations as a response to policy uncertainty. Second, based on the economic scale of the potential countries in need of bailout such as Spain and Italy, the current euro zone firewall plan seems still not enough to address future crises and consolidate market confidence. Euro zone countries may need to raise the cap on available resources and accelerate the pace of funds contributed to the European Stability Mechanism. Third, euro zone countries should weigh carefully the balance between economic growth and fiscal austerity. Any measure they take must not erode the effectiveness of fiscal consolidation policies. Fourth, considering the limited space of maneuverability in monetary and fiscal policy, euro zone countries may need to dig deeper into other policy areas, such as wage reform, increased labor market flexibility and trans-border labors flows, and certain measures to attract and facilitate foreign and domestic investment.
2.Reform of international financial institutions’ governance structures
The 2010 IMF Quota and Voice Reform Package is scheduled to come into effect before the IMF’s annual meeting in November this year. However based on the slow rate of progress in approvals by IMF member countries, the required amendments to the IMF Articles of Agreement are far from completion. And the United States, with the biggest quota and voice in the IMF, still lags behind in presenting the reform package for approval to its Senate. Therefore, China and other major emerging countries need to take a united and stronger stance to push for the reform to come into effect according to the agreed schedule. What must be borne in mind is that IMF governance reform is a necessary precondition for an increase of no less than US$430 billion in resources to the fund. If the IMF really needs the deeper involvement of emerging market economies, it must adapt itself to the changed pattern of global economic power.
3.Impact of disorderly capital flow
The spillover of the bailout monetary policy adopted by advanced economies works mainly through capital flow channels. So we should beware of the potential balance of payment crisis that could result from a sudden stop of capital inflow in emerging and developing economies. China therefore needs to urge the IMF to strengthen its monitoring and assessment of the spillover effect of monetary policies on advanced economies, with provision for timely warning messages to their governments. In responding to such exogenous impacts, emerging and developing economies have the right to take measures such as capital account controls to offset the effect of a global surplus of liquidity. On the other hand, in terms of balance of payment crises suffered by the emerging and developing economies, the IMF needs to increase its resources to address such issues with relatively loose conditions required.
4.Stabilization of commodity prices
Volatile commodity prices have not only put great pressure on the world economy’s recovery, but also led to security-related problems. Generally speaking, the goals of addressing such issues are twofold: to ensure sustainable supply, and to achieve relatively stable prices. Chinese Premier Wen Jiabao presented at the start of 2012 the idea of addressing global energy governance through one organisation, incorporating the supplier, consumer, and intermediate countries into an integrated mechanism to coordinate the interests of different parties. This concept could also be expanded to cover all the different commodities. The major role of such an organization would be to implement a compensation mechanism for environmental damage, a protocol for the sharing and transfer of technology, and a method to stabilize market prices.
5.Multilateral trade talks
As an important member of both the G20 and the WTO, China has a large stake in the conclusion of the Doha Round of trade talks. Its position on the talks is guided by two basic principles. First, is to stick to the nature of them as a development round, giving special and preferential treatment to the poorest developing countries, such as “quota free, duty free” provisions. Second, the Doha Round should adhere to the WTO’s major principle, which is the vivid manifestation of multilateral reciprocity. Therefore, some members should not use certain industries to forge a separate deal.
Xue Lei is research fellow at Shanghai institutes for International Studies.