Growth projections by IMF for the world economy at over 4 per cent, after contraction in 2009, are largely based on the strength of performance of fast-growing emerging market and other developing countries (EMDC), which now account for 47 per cent of world output. Asia, Japan included, contribute roughly one-third to the global economy. Dynamic emerging economies including China, India and Brazil, will now have a greater voice and representation in IMF. China and India will have the third and eighth places among the top ten quota-holders (USA, Japan, 4 BRIC countries and 4 European nations)

The combined GDP growth of EMDC is estimated at 7 per cent in 2010 and 6.4 per cent in 2011 as against 2.7 and 2.2 per cent of advanced nations. China is embarking on major changes in its economic structure in the 12th plan beginning 2011 and it is committed to the G-20 goal of a strong, sustainable and rebalanced growth of world economy. This would involve reliance on greater domestic consumption for growth in surplus countries (like China) and savings, and net exports in deficit countries (such as USA) so as to bring about a reduction of the current global imbalances.

Trade and currency tensions topped the deliberations of Finance Ministers in Seoul (Oct.22-23), ahead of the G-20 Summit on November 11-12. USA, running huge bilateral trade deficits with China, has long complained that China keeps its currency, renminbi, greatly under-valued for competitive advantage and its unceasing trade surpluses aggravate global imbalances, a view shared by EU. China contends that its policy is to keep exchange rate “stable” and would let its currency appreciate” gradually” under its foreign exchange mechanism.

Since June 19, when the People's Bank of China reintroduced the mechanism, the currency has risen by about 3 per cent whereas, according to US market analysts, the renminbi is still under-valued by 10 to 15 per cent. At the same time, the surge of capital flows into emerging economies as investors from faltering advanced nations seek attractive markets, coupled with the steady decline in the value of dollar, had led to a race among some countries ( Japan, Korea and Thailand) trying to prevent appreciation of their currencies. Brazil, with its 'real' appreciating, increased its levy on foreign investments in bonds to 6 per cent. Its Finance Minister coined the term “currency war”.

Against this background, the United States proposed at the Seoul meeting of Finance Ministers (October 22-23), ahead of the G-20 Summit on November 11-12, that countries should commit to a specified ratio of GDP for current balances and also refrain from exchange policies to achieve competitive advantage either by weakening their currency or preventing appreciation of an under-valued currency. More than China, the proposal was resisted by other exporting nations like Germany and Japan and the Ministers finally settled for a consensus, thus averting a threat of erosion of G-20 solidarity as the world's premier economic-decision making institutions.

The Ministers' Communique said that they would move towards more “market-determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies”. Reserve currency countries (chiefly USA) would be vigilant against excess volatility and disorderly movements in exchange rates, according to the communiqué. This is tough obligation for USA itself, as the holder of reserve currency with a benign neglect of its value. “These actions” the Ministers hoped, would help mitigate “the risk of excessive volatility in capital flows facing some emerging countries”.

The Ministers also committed themselves to promote “a stable and well-functioning international monetary system” and to resist all forms of protectionist measures. US Treasury Secretary Timothy Geithner's letter to his colleagues on G-20 suggesting a target for current balance was one way of circumventing the resistance of China, but with differences among Ministers, the Ministers had to settle for a compromise which was an acceptable improvement after failure at the IMF annual meeting to address exchange rate concerns.

China would have liked G-20 to keep off going into exchange rates but wisely decided not to throw a spanner into the G-20 framework. The US idea was to limit current account balance to 4 per cent of GDP, but it did not command wide support. However, Mr Geithner won a point the way IMF has been called upon to focus on external sustainability with its “spill-over reports” on how “excessive imbalances” in any country would impact on other countries.

G-20 Ministers also finalized IMF governance reforms designed to enhance its legitimacy. There would be a shift of over 6 per cent of quota shares from over-represented to under-represented countries, while protecting the voting share of the poorest. There would be a doubling of total quotas and these reforms would be completed by the end of 2012 for the new quotas to become effective from 2013. There would be greater representation for EMDCs in the 24-member Executive Board which would be fully elected for the first time.

IMF has cautioned countries of Asia-Pacific region, undergoing self-sustaining recovery, against the risks from volatile capital flows as well as inflation in some countries like India, where further monetary policy tightening may be needed. Development of Asia's financial markets would become even more important to contain potential risks to stability from the expected large capital inflows and to make the best use of region's savings in support of domestic demand, IMF Regional Outlook for Asia-Pacific said.

China's GDP moderated to 9.6 per cent in the third quarter and growth in the first nine months (Jan-Sep) was 10.6 per cent, officials said in Beijing. The Central bank raised interest rate on October 19 by 25 basis points to 5.56 per cent aimed at curbing excessive rise in property prices and countering inflationary pressures. CPI had risen above the target to 3.6 per cent in September. IMF has projected China's growth in 2010 at 10.5 per cent which would moderate to 9.6 per cent next year while for India, the estimates are 9.7 per cent this year and 8.4 per cent in 2011. (IPA Service)