The leaders of the Group of Twenty rich and developing nations—the G-20—are to meet in Washington, DC this weekend amid the most serious financial conflagration since the 1930s. Their task is twofold. First, they have to do more to prevent the fire from spreading. Second, they need to start designing new safety systems for the global economy.
Illustration: Jayachandran / Mint
Both are onerous tasks. We do not expect quick fixes. But the Washington meeting could be the first step in a long journey towards a new set of policies and regulations for the global economy. India must be an active participant in that journey. There will be no free rides, so we will have to make credible commitments to support the move into a new world. However, let us be prepared for China to steal the thunder in the initial stages, thanks to its larger economy, better public finances and $2 trillion of forex reserves.
The crisis that erupted on Wall Street is now moving into emerging markets as well as the real economy of production and jobs. Ensuring that the financial meltdown is not followed by an economic meltdown—deflation, recession and huge unemployment—is the most immediate and obvious task for the G-20.
The consensus view is that governments need to spend more at a time when consumers and companies cannot. China has already taken the lead by announcing a $586 billion spending plan for the next two years. A coordinated plan to increase fiscal spending will help, though there will be costs to be borne by future generations such as higher taxes to repay public debt or higher inflation.
There is also the long-term task of redesigning the global regulatory regime. It will take time. The 44 Allied nations that took part in the Bretton Woods conference in 1944 took close to three years to build a new architecture for the world economy. One meeting in Washington will not deliver a new version of Bretton Woods.
What can India do? Our inexcusably large fiscal does not allow us to offer a China-like spending package. But India can offer ideas; its sensible handling of the financial sector offers lessons to other countries which no longer want to blindly follow the Wall Street consensus. We should also commit to give money to IMF. And we have a special role in fighting the inevitable protectionist pressure that comes with every downturn. The Doha Round of trade talks can come to life if India is less obstructive. The other option is to go into a shell and allow China to take centre stage.
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