G20 to map out road to recovery for the world's economy

Tuesday, March 31, 2009

Much pressure has been placed on the Group of 20 countries meeting this week, to map a way forward to respond to the global economic crisis while ensuring they can keep their promises to developing countries, writes Bathandwa Mbola.

The Group of 20 most powerful countries, making up about 85 percent of the world economy, are expected to meet in London on Thursday.

The meeting has been billed as a turning point in dealing with the world's biggest recession since the 1930s - a downturn which has caused bankruptcy in some countries, destroyed major banks and cost millions of jobs globally.

The crisis has hit poorer nations in Latin America, Asia and especially Africa twice as hard, leaving millions not only jobless but in poverty. The World Bank had estimated that 50 million people will fall into poverty due to the world economic crisis.

South African President Kgalema Motlanthe will represent the African continent during the summit.

South Africa's participation at the London G20 Summit takes place within the context of its continued commitment to the reformation of the global financial architecture.

"As they look at packages to salvage their own economies, G20 countries must be thinking about the economies of developing countries, particularly in Africa," said Foreign Affairs Minister, Dr Nkosazana Dlamini Zuma.

As the only African country in the G20, South Africa has consistently stressed that a global response is required to mitigate the impact of the crisis and prevent its contagion to emerging markets and developing countries, in particular Africa.

Business Unity South Africa (Busa) Chief Executive Officer, Jerry Vilakazi says the upcoming summit will be the ideal chance for developing countries to seek help in mitigating the effects of the crisis.

"It will allow political leaders to assess progress with previous attempts to resuscitate global economic growth and explore further interventions that can ameliorate the impact of the current global recession, especially on developing countries like South Africa," explained Mr Vilakazi.

On 19 March, the International Monetary Fund (IMF) said in a report, that advanced economies would suffer deep recessions in 2009 and there would be repercussions for other economies.

"In emerging and developing economies, as well as in low-income countries, growth will continue to be impeded by financial constraints, lower commodity prices, weak external demand, and associated spillovers to domestic demand.

"Activity is expected to expand only weakly in 2009 before recovering gradually in 2010. Some economies will suffer serious setbacks," reads the report.

The African Development Bank has also indicated that Africa's growth rate is likely to dip below 3 percent this year - the lowest rate since 2002.

According to data, the slowdown is due to the declining trade flows and the African Development Bank points to an expected shortfall of $251 billion in export revenues as demand declines in major export markets, falling commodity prices and depressed domestic economic conditions.

It is for precisely these reasons that the G20 leaders must try to answer how African countries will deal with slower aid and trade flows.

Mr Vilakazi said it was imperative for the summit to map out how African countries can bolster their global comparativeness and stimulate infrastructure development which is seen as a critical tool in increasing long term prosperity of the African continent.

T-Sec Economist Mike Schussler, agreed that the key issues likely to be discussed were reviving the world economy, restoring lending, tougher rules for banks, bigger role for the IMF and more help for developing countries.

He told BuaNews the G20 was likely to push for quick action by governments to resolve the situation, while on tougher rules for banks and the strengthening of the international regulation of banks to prevent future crises was also important.

"This is likely to include requirements to force banks to hold more capital against the possibility of future losses," he said.

The G20 summit would also want to beef up the finances of the IMF, which is running short of cash, said Mr Schussler. The IMF has already bailed out seven countries in the past six months, to the tune of $46 billion with more in the pipeline.

This means that the fund has only $150 billion left to lend this year.

"With this in mind, it would be wise for the meeting to give more powers to monitor risks within the banking system," said the economist.

Tough debates will centre around how to regulate the world economy, restructuring the international financial institutions and giving more power to emerging market countries such as China and Brazil.

This would mean taking away power and influence from European countries in the IMF and World Bank.

Plans to devise a new system of global regulation of finance may also be slow to materialise.

"They would first have to reach a consensus on what the principles of regulation should be, and whether these should override existing rules, such as the Basel Accords, which regulate banking," he said.

Mr Schussler said it was unlikely that any concrete measures will be outlined to curb the fluctuations in exchange rates, which have hit many developing countries hard.

"The world economy is in trouble and the London summit will need to map out a direction. However, I think the world might be disappointed because we will not get all the answers we are looking for."

However, United States President Barack Obama is expected to create a positive tone in his meetings with allies such as British Prime Minister Gordon Brown, French President Nicolas Sarkozy and German Chancellor Angela Merkel.

"I think President Obama wants to move forward. I think he will listen especially to the needs of the poor countries like Africa. "

The IMF has revised downward its forecast for the world economy on a number of occasions, and the latest one was alarming: the world economy for 2009 is projected to shrink for the first time in 60 years.

Though the IMF said global growth is forecast to stage a modest recovery next year, the projection is conditionally subject to a list of factors.

The G20 comprises the developed G7 and 13 others as a proxy for the rest of the world, one would expect this grouping to network, in the interests of the world economy and navigate it through the current troubled waters.

The current situation calls for regular consultation, cooperation and collaboration among G20 countries on macroeconomic policy interventions. Analyses have shown that the monetary authorities, in particular, have a pivotal role to play in this regard.

Nevertheless, expectations from the G20 are high, especially for developing nations.