The Group of Twenty (G-20) summit that concluded in London last week pledged to ensure economic recovery not by words, but through a substantive plan of action. Yet, a closer look at the $1.1 trillion worth of resources the leaders at the summit promised shows a large gap between words and action.
The big beneficiary of this summit was supposed to be the International Monetary Fund (IMF), which saw its lending power triple by $500 billion by the nod of 20-odd leaders. But as of now, no country has officially committed cash. Japan’s $100 billion and the European Union’s $101 billion came before the summit.
Then there’s $250 billion promised in trade finance. But an additional G-20 communiqué indicates an immediate disbursal of only $3-4 billion on this front. As for the time when countries will agree on the remaining $246 billion, your guess is as good as ours.
The next component is a $250 billion allocation of special drawing rights (SDRs), the new monetary rage following China’s suggestion last month to move away from the US dollar. But any allocation of SDRs—IMF’s reserve assets— requires the approval of three-fifths of IMF membership, where the US itself holds 16.75% of the votes. The US Congress has still not ratified the amendment concerning SDRs. And staring at a $1.8 trillion budget deficit at home, it’s not going to be easily persuaded to start spending on global monetary instruments.
UK Prime Minister Gordon Brown called the summit’s stimulus the largest the world “has ever seen”; yet the much-touted headline figure conceals specifics. The only component of the $1.1 trillion package G-20 concretely provides now is $100 billion for multilateral development banks. Outside of the $1.1 trillion, IMF gets $6 billion for poor countries from gold sales and $250 billion in immediate financing from members. That’s certainly not the largest stimulus the world has ever seen.
It was encouraging to see G-20 take a consolidated stance last week. But replacing measured actions with grand rhetoric only inflates market expectations that can suffer later. If greater spending isn’t possible at a time when national treasuries are strained, G-20 should just stop pretending.
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