In the result, the problem escalated with calls for a new global currency realignment accord, as world's finance ministers gathered in Washington (October 7-9). China has defied calls from both USA and EU for greater flexibility of its renminbi, to allow it to appreciate by a wider margin reflecting market fundamentals. Instead, it holds US deficit, debt and loose monetary policy as the cause for dollar depreciation which in turn has forced upward adjustment for other currencies.

IMF's policy-making committee deliberations produced a bland communiqué which merely underscored “our strong commitment to continue working collaboratively to secure strong, sustainable, and balanced growth and to refrain from policy actions that would detract from this shared goal.” Its listed priorities included work toward a more balanced pattern of global growth, “recognizing the responsibilities of surplus and deficit countries” (led by China and USA respectively).The Ministers have endorsed strengthened surveillance by IMF in “even-handed manner” (covering both surplus and deficit countries), which should be better focused on financial stability issues and their macroeconomic linkages, and more attentive to” cross-border spillovers”.

The G-20 Summit process, which through extraordinary efforts in 2009 of coordination among leading economies, developed and emerging, helped to prevent collapse of the financial system and lift the economy out of recession, would now appear to be weakening, even as the global recovery is sluggish and uneven among advanced economies. Some of these economies have set in motion fiscal consolidation while countries like China have sought to protect their export-led growth through controlled foreign exchange mechanism.

An array of challenges awaits the G-20 leaders when they meet in Seoul on November 10-11, at a time of weak recovery in Europe and a more uncertain environment in USA with its unrelenting unemployment rate of 9.6 per cent. US Treasury Secretary Mr Timothy Geithner has said that global rebalancing for sustained growth has not progressed as a whole with chronically surplus countries (China) not significantly moving toward market-oriented exchange rate management. At the Toronto Summit early this year, G-20 leaders had agreed on exit from stimulus beginning 2011 and also called for voice and governance reforms in IMF to be completed by January 2011.

The Seoul Summit outcome is critical for the world economy in several ways. There has to be a strong reaffirmation of the objective of strong, balanced and sustainable growth with some benchmarks of progress set and additional support for the faltering world economy while countries present credible programmes of fiscal consolidation for the medium-term leading to eventual reduction of the debt-GDP ratio to a sustainable level.

Given the earlier decision that advanced economies would begin to withdraw from fiscal support in 2011, G-20 may give a fresh look at the exit strategy though it has to be country-specific. USA stands apart in this and in giving a further boost to the economy, the Obama Administration is up against a recalcitrant Congress which would rather go for tax cuts for the rich than spend to create or save jobs which would increase the budget deficit. Fiscal 2010 ended in September with a deficit of 1.3 trillion dollars and there are misgivings about the Administration's ability to bring down deficits to sustainable level in the near term. The current expectation is that support for the revival of the economy would come from Federal Reserve making another round of purchases of a large amount of Treasury securities (“Quantitative Easing”- the economic jargon for printing money).

The Seoul agenda will include financial regulatory reform and stability of the banking system, restructuring of the international monetary system with effective voice and representation for fast-growing emerging economies and other developing countries in IMF (to give it legitimacy), and food and energy security. There are gaps in all these areas where some progress has been made both in USA and Europe. At the Fund-Bank meetings, India's Finance Minister Mr Pranab Mukherjee argued for a stronger quota increase and giving emerging markets and other developing countries (EMDC) greater weight commensurate with their nearly 50 per cent contribution to world output in PPP terms. They have now a share of 39.5 per cent in the total quotas.

IMF Managing Director Mr Dominique Strauss-Kahn hopes that agreement would be reached early before the Seoul Summit on the quota review (which would provide for a 5 per cent shift in weightage) to EMDCs. Mr Mukherjee and other Ministers insisted that the shift should be from over-represented countries and not by adjustments among under-represented countries. While supporting an increase in quotas, EU has reservations in regard to representation on the Executive Board where it has now six seats.

Strengthened surveillance by IMF of all economies inclusive of financial stability issues has already been agreed upon. In view of frictions arising out of exchange rate values and surge in capital flows, the IMF Chief Mr Dominique Strauss-Kahn says systemic stability would be at the core of the Fund's multilateral surveillance which developing countries urged should be even-handed. China sailed smooth at the Fund-Bank meetings despite being at the centre of the tensions over its exchange rate management for there was no reference in the communique to the issue. On the other hand, China's central bank governor demanded greater focus by IMF on developed countries whose “inappropriate” fiscal, monetary and financial sector policies, especially reserve currency issuers, were “more damaging to global economic growth, employment and trade”.

Mr Strauss-Kahn later said in a press briefing that there was general agreement that IMF is the place to deal with all issues relating to exchange rate and capital flows and other issues which have cross-border spillovers and the Fund would use its tools effectively through multilateral surveillance and make recommendations that are of a multilateral character. These would be part of Article IV and he would himself attend the conclusion of discussions with systemic countries like US, Eurozone, Japan and China.

China has taken the stand at the Fund-Bank meeting, as did its Premier Wen Jiabao in his meetings with President Obama and EU leaders recently, that it would reform its currency exchange rate mechanism in a “gradual” way to improve its flexibility and could not accept any steep revaluation which would lead to closure of hundreds of factories and trigger mass social unrest. China has to keep in view its own employment rate, domestic inflation, GDP growth and balance of payments and other factors, the Governor of central bank Mr Zhou Xiochuan said. (IPA Service)