G20 likely to come out against competitive devaluation

Meeting under the shadow of a raging currency war and controversy around global trade imbalance, the summit of G20 leaders is expected to come out with a consensus document against competitive devaluation and to put in place a process to analyse economic problems and recommend steps to restore balance.

As the summit opened this morning after serious differences surfaced in the run-up over the rate of Chinese yuan and US proposals for capping the current account deficit of countries that distort global trade, negotiators were working hard to bring out a joint communique that is likely to say the nations would "move towards more market determined exchange rates systems" and keep away from competitive devaluation of currencies.

Prime Minister Manmohan Singh, who is leading the Indian delegation to the summit of the grouping of advanced and emerging economies, spoke out his forthright views on the issue when he told the G20 nations that "we must at all costs avoid competitive devaluation and resist any resurgence of protectionism".

While China has strongly resisted US attempts to persuade it to revalue its yuan on the ground a lower yuan gave it unfair advantage in exports, the US injected a new element by pumping in $600 million into the market which effectively will depreciate the dollar.

Planning commission deputy chairman Montek Singh Ahluwalia finds that the currency war was more in the media and not on the G20 table.

He said the final communique would be a strong endorsement of the mutual assessment process (MAP) mandated by the Toronto Summit, by which the countries will evolve "indicative guidelines" measuring economic imbalances so that timely action could be taken to remove imbalances in global economy.

Ahluwalia told journalists that Prime Minister Singh was keen on working out the MAP "as quickly as possible" before the next summit under the French presidency.

He ruled out the possibility of the summit fixing a cap on current account deficit or surplus for countries.

The mutual assessment process is a process by which the nations make a projection of their economies on trade deficit or surplus and the International Monetary Fund (IMF) would analyse and recommend correctives.

But it would not be IMF conditionalities as in global governance sovereignty of countries mattered the most when decisions are taken.

In his speech, the prime minister said it was not not easy to reach agreement on what are sustainable current account balances for individual countries given the structural differences across countries, the many uncertainties that prevail, and the multiple goals that each country has to balance.

"It is even more difficult to agree on a particular combination of policies to achieve these targets," he said.

It is a country-led projection and the MAP would see whether it is entirely possible to raise or reduce surpluses and deficits. There are also no penalties on countries in regard to implementation of issues being discussed in the MAP.

The prime minister's views on channeling surplus reserves in advanced economies for infrastructure building in developing countries has been received well at the summit.

The African Union, which was represented at the summit, and World Bank chairman Robert Zoellick specifically drew attention to this idea hailing it.

The prime minister was also appreciative of the issue of development brought on the agenda by hosts South Korea saying it was a long term issue the nations should focus on.

On current account deficit or surplus debate, Ahluwalia said it depended on which country mounts huge figures on this account and what is its impact on the global system.

India, he said, for example is comfortable with even an increasing deficit because it contributes to rebalancing the global economy.

The Seoul communique is expected to also endorse the basic elements of a G20 framework for strong sustainable and balanced growth, including an ambitious outcome in the form of the Seoul Action Plan.

The final document is also likely to say that the G20 will pursue policies to reduce and current account imbalances and to give developing nations like India and China more say at the International Monetary Fund IMF) by shifting the voting rights by about 6% in favour of developing nations.