Gyeongju (South Korea): Group of 20 finance leaders struck a landmark deal on Saturday to boost developing countries’ power in the International Monetary Fund even as they failed to set targets for a wide-ranging global economic rebalancing.
The IMF deal was hailed by fund managing director Dominique Strauss-Kahn as a “historical” moment that will see Europeans give up two seats on its 24-strong board to powerful developing countries and transfer 6% of votes to them.
“This makes for the biggest reform ever in the governance of the institution,” Strauss-Kahn, who heads the 187 country body, told reporters.
The G-20 agreed a year ago to shift at least 5% of voting rights to developing countries such as India and Brazil whose clout within the Fund has not kept pace with their emergence as major engines of global growth.
Despite the surprise deal on the IMF, which had not been expected until G-20 leaders meet in South Korea next month, efforts to firm commitments to enshrine numerical targets for current account deficits met with tough resistance.
Attempts to firm up rhetoric in the final communique to push emerging market countries to accept meaningful near-term appreciation of their currencies failed and all countries will commit to is to refrain from “competitive devaluation”.
“We’re all committed to moving toward market determined exchange rates that reflect underlying fundamentals and refrain from competitive devaluation,” said an official, who spoke on condition of anonymity.
The lack of a stronger pledge from the likes of China and the South Korean will likely hit the dollar, economists said.
A US official separately told Reuters the United States had no expectation its proposal of setting numerical targets on external balances would make it into the G-20 statement.
The US official said Washington knew that including specific targets for imbalances at this stage would be rejected by a number of countries with structurally high trade surpluses, including Germany and major commodity exporters. But it helped focus the discussions which initially were in disarray, he said.
A source with knowledge of the night-long discussions confirmed that the final statement would water down proposals on tackling external imbalances. “Persistently large imbalances would warrant an assessment,” the communique would state, he said.
Such an outcome is what other G-20 officials had predicted, given the disparate views of the diverse group.
China was against any limits on imbalances, another G-20 source said on Friday. He also said there was a “rift down the middle” on currencies and International Monetary Fund reforms, and the final statement would be “bland”.
There was, however, broad agreement that “unilateral and uncoordinated responses” to shore up fragile economies could prove damaging for everyone, a source said.
In a letter read to fellow finance ministers of the G-20 on Friday, US treasury secretary Timothy Geithner said countries should act to reduce their current account imbalances below a specified share of national output.
Japanese finance minister Yoshihiko Noda said Geithner, backed by host South Korea, proposed capping surpluses and deficits on the current account -- the broadest measure of trade in goods and services -- to 4% of national output.
Noda also voiced scepticism: “We doubt whether rigid numerical targets should be set,” he said.
The criticism underscored the difficulties facing the G-20 as it strives to put the world economy on a more stable footing and defuse currency tensions that economists fear could trigger trade wars.
While the G-20 won praise for coordination of stimulus packages during the global financial crisis, its unity has been tested by low growth in rich countries and attempts by some emerging market economies to help exporters by holding down their exchange rates.
Saudi Arabia, Germany and Russia are the G-20 members with the biggest current account surpluses, but China is the chief culprit in Washington’s eyes -- and the unspoken target of Geithner’s proposals -- because of massive currency market intervention to keep a lid on the yuan.
Beijing has amassed $2.65 trillion in official currency reserves as a consequence, and prompted the US House of Representatives to pass a bill threatening retaliation unless China lets its currency off the leash to reduce its huge trade surplus with the United States.
Chinese officials made no public comment, but a G-20 source said Beijing was opposed to any statement that explicitly bound countries to limits on current account balances or any other form of rules on currency policy.