This year business leaders, international political leaders, selected intellectuals and journalists will gather at the Swiss town of Davos for the ritual annual meet. This time the theme of the event is ‘Shared Norms for the New Reality’, underlining the increasingly complex and interconnected nature of the world.
Preceding this year’s meet was the a world economy that is yet to come out of the grip of the 2008 financial crisis, a sharp rise in food prices across the globe and most importantly the currency war.
The 2008 financial crisis showed us how each and every country depends on the other. If inflation is plaguing one country at the far west, the eastern ones too come into the grip of it. It doesn’t matter how well one country protects its financials, it cannot totally isolate itself if other countries are falling.
It is one of the biggest realities of today’s world that became amply clear in these last three years. Top 20 economies of the world too underlined this in the G20 finance ministers and central bank chiefs’ meet in June 2010. The top economies arrived at a consensus then not to cut stimulus too soon as it will jeopardise the economic recovery.
Later in November last year’s G20’s Seoul meet the same leaders too agreed on shunning currency devalutions. But much water has passed beneath since. The United States and China are still at loggerheads on the topic, each accusing the other of devaluating its currency to promote export.
The currency war is pushing up the value of other - Yen, Euro etc., adversely affecting the economies of Europe and Japan. Now any recessionary trend is also bound to affect the Asian as well as African countries.
Despite numerous meets, an amicable solution is yet to come out. Another big worry is the global food price rise.
Recently, the Food and Agricultural Organization said that the world faces a "food price shock" after the agency`s benchmark index of farm commodities prices shot up in December, exceeding the levels of the 2007-08 food crisis.
The warning from the UN body comes as inflation is becoming an increasing economic and political challenge in developing countries, including China and India, and is starting to emerge as a potential problem in developed nations.
The recent food crisis came after the 2007-08 crisis that saw riots for food in several, mostly poor, countries.
While India is grappling with food price inflation that rose to more than 18 percent in the year ending December, China has implemented direct controls to limit food price increases and vowed to eliminate speculation in commodity markets.
The rise in food prices is mainly due to floods in Australia, drought in Argentina and Russia and potentially crop damaging frosts in Europe and North America. But what worries analysts are that the protectionist measures that comes with it. Last year, Russia imposed a ban on the export of wheat – pushing of international wheat prices; this year Pakistan imposed a ban on exports of onion to India which is facing an acute shortage of the commodity.
Notably in 2008, at least 13 countries including Argentina, Cambodia, Kazakhstan, China, Ethiopia, Malaysia and Zambia imposed food export bans or export taxes, according to reports.
A lengthy spell of high food prices would result in disaster in the poorer countries. In 2007-08, countries like Haiti, Egypt and Cameroon saw vicious riots for food. These may turn into larger humanitarian issues if not checked at the earliest.
World Economic Forum, which sees intellectuals, journalists, world leaders and businessman’s gathering in a causal environment, is credited with many initiatives in the past. The Global Health Initiative (2002), Global Education Initiative (2003), and the Partnering against Corruption Initiative (PACI) are to name a few. The absence of formal politics in this forum is an ideal place for these persons to come out of their shell and discuss freely the real issues concerning the world today.
Hopefully, this year’s meet would bring something to cheer for.
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Monday, February 7, 2011
Is FDI in retail the answer to food inflation?
The onion tears are refusing to dry out. Adding to the concern is the all round price-rise, be it food or consumer loans or cars. The list goes on and on. It is not only causing a headache for the common people, even the leaders of ruling party are having their share of nightmares. A respected magazine the other day conducted a poll, predicting the downfall of Congress regime due to the significant rise in prices.
P Chidambaram, the predecessor of current Finance Minister Pranab Mukherjee, outlining government’s inflation recently said that government has “not all the tools to control food inflation”.
True.
RBI, through its fiscal policies, tries to curb the demand side pull by manipulating interest rates. The theory behind this is that if people have less money than they will buy less. Hence inflation will go down. This is more of a reactionary or ad-hoc arrangement.
A more advisable approach is to boost the supply side. But it’s a long term plan – a good example of this is the first Green Revolution.
However, the current problem is more fundamental in nature. Many observers have identified this long ago – the middle-man syndrome.
From ages, Indian consumers have been haunted by this phenomenon.
India has mostly small and marginal farmers. It does make it difficult for them who are also mostly ignorant about suitable markets for their produce. Even if they know, it is not practical for them to take the risk of investing a large sum to transport their produce to the nearest mandi to sell it.
Mostly they sell it locally, if a suitable market is available, or sell it to the middle man. Food Corporation of India does buy wheat, rice etc. But it’s the middleman who gets to take away major part of the farm produce.
So any rise in prices is simply consumed by the middlemen, who usually resort to hoarding to maximize their profits. Recent price rise in onion and sugar may be attributed to this phenomenon.
If we can reduce the role of middleman in the food industry, not only will it benefit the end consumers like you and I, but it will also help farmers to get the right price of their produce.
A debate over allowing foreign direct investment in retail industry could do some good at least in the present scenario.
Consider this: according to a recent finding by a leading financial newspaper of India, Future Group’s Food Bazaar, Safal and Reliance Fresh are selling fruit and vegetables up to 40% cheaper than local vendors!
It attributed the reason to direct sourcing of these products by the said companies from farmers. Also, local vendors buy vegetables from wholesalers. But they do not have enough storage capacity, meaning a lot of wastage – contributing to price rise.
But if large retailers come into the fray, they can buy the products from farmers or wholesalers and can store it. Allowing 100 percent FDI in retail is more competition.
So, more players will come to the market and there will be more investment in agriculture and the food processing business. This will increase investment in agri sector and increase productivity. Farmers need not look at the government all the time – neither will the consumers.
A common worry is that it may affect small retail mom-and-pop shops. But that seems to be unfounded.
Competition does not always lead to erosion of marginal players instead, it encourages innovation and productivity. Increased FDI in retail can also lead to mass employment generation that big industries failed in.
The government keeps on blaming the rain gods, the hoarders etc.; everyone but themselves. It is time for them to take a decision.
P Chidambaram, the predecessor of current Finance Minister Pranab Mukherjee, outlining government’s inflation recently said that government has “not all the tools to control food inflation”.
True.
RBI, through its fiscal policies, tries to curb the demand side pull by manipulating interest rates. The theory behind this is that if people have less money than they will buy less. Hence inflation will go down. This is more of a reactionary or ad-hoc arrangement.
A more advisable approach is to boost the supply side. But it’s a long term plan – a good example of this is the first Green Revolution.
However, the current problem is more fundamental in nature. Many observers have identified this long ago – the middle-man syndrome.
From ages, Indian consumers have been haunted by this phenomenon.
India has mostly small and marginal farmers. It does make it difficult for them who are also mostly ignorant about suitable markets for their produce. Even if they know, it is not practical for them to take the risk of investing a large sum to transport their produce to the nearest mandi to sell it.
Mostly they sell it locally, if a suitable market is available, or sell it to the middle man. Food Corporation of India does buy wheat, rice etc. But it’s the middleman who gets to take away major part of the farm produce.
So any rise in prices is simply consumed by the middlemen, who usually resort to hoarding to maximize their profits. Recent price rise in onion and sugar may be attributed to this phenomenon.
If we can reduce the role of middleman in the food industry, not only will it benefit the end consumers like you and I, but it will also help farmers to get the right price of their produce.
A debate over allowing foreign direct investment in retail industry could do some good at least in the present scenario.
Consider this: according to a recent finding by a leading financial newspaper of India, Future Group’s Food Bazaar, Safal and Reliance Fresh are selling fruit and vegetables up to 40% cheaper than local vendors!
It attributed the reason to direct sourcing of these products by the said companies from farmers. Also, local vendors buy vegetables from wholesalers. But they do not have enough storage capacity, meaning a lot of wastage – contributing to price rise.
But if large retailers come into the fray, they can buy the products from farmers or wholesalers and can store it. Allowing 100 percent FDI in retail is more competition.
So, more players will come to the market and there will be more investment in agriculture and the food processing business. This will increase investment in agri sector and increase productivity. Farmers need not look at the government all the time – neither will the consumers.
A common worry is that it may affect small retail mom-and-pop shops. But that seems to be unfounded.
Competition does not always lead to erosion of marginal players instead, it encourages innovation and productivity. Increased FDI in retail can also lead to mass employment generation that big industries failed in.
The government keeps on blaming the rain gods, the hoarders etc.; everyone but themselves. It is time for them to take a decision.
It’s a long road ahead for MSMEs
After Independence, Indian planners had focussed entirely on the heavy and big industries, hoping for self reliance and mass employment generation.
This line of thought was carried on for about three decades. However, the failure of big industries in creating mass employment generation and distribution of wealth among citizens led the planners to shift their focus to the Micro, Small, and Medium Enterprises (MSME).
With Indian population set to rise at a rapid pace and people between the age group of 15-40 constituting the bulk, generating enough employment opportunities is the biggest task for the government.
The major advantage of the sector is its employment potential at low capital cost. As per the Ministry of Micro, Small and Medium Enterprises, this sector employs an estimated 59.7 million people spread over 26.1 million enterprises. It is estimated that in terms of value, MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country.
Outlining the achievements of the MSMEs, Madhav Lal, Additional Secretary & Development Commissioner MSME, and Govt. of India told Zeebiz.com ,“SMEs have continued to contribute about 8 per cent to the national GDP. They are contributing 40 per cent to the manufacturing output in the country and about 40 per cent to the export.” He was talking to Zeebiz.com during the first MSME expo organised by Indian Industries Association (IIA) in Noida from December 17-19.
But, Lal also rued the fact that though “the number of MSME in organised and unorganised sector is about 26 million but a very large percentage; over 95 per cent are there in the unorganised sector.”
“It is very difficult to say how every segment fared post downturn. Some might have not performed well, consider the segments which are totally dependent upon export. But there are some segments which have done infact better. On the whole the MSME are pretty vibrant and hope they will benefit in terms of growth,” the Development Commissioner added.
The bigger truth
Worldwide, the Micro Small and Medium Enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development. The labour intensity of the MSME sector is much higher than that of the large enterprises. The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports.
In India too, the MSMEs play a pivotal role in the overall industrial economy of the country. In recent years the MSME sector has consistently registered higher growth rate compared to the overall industrial sector.
The sector which survived the recent economic downturn (thanks largely to a strong demand in India) shows that it still needs government support.
The challenges and opportunities:
In an exclusive interview with Zeebiz.com Alfredo Pinto Saavedra, Ambassador of Colombia said, “There are difficulties in getting technological factor. Credit access, concentration of wealth in big global firm is another challenge. Especially SMEs in the micro sector face more difficulty. The real challenge is how we can articulate the challenge vis-à-vis the global change in values.”
The future ahead:
No doubt, with increasing government support and rise in young population, there would be a host of opportunities. With lack of employment in the government and traditional sectors, people will gradually move towards establishing their own industries.
“It is an excellent scenario for the young entrepreneurs. The people of India want to be self made,” said Pinto.
Talking on the upshot of Indian entrepreneurship he said, “apart from having entrepreneurial skills you need to have specialised knowledge, market understanding and ability to innovate. SMEs are growing in numbers but not in participation. While big companies are growing in size, SMEs are growing from small to micro. They are not significantly contributing to the GDP.”
This line of thought was carried on for about three decades. However, the failure of big industries in creating mass employment generation and distribution of wealth among citizens led the planners to shift their focus to the Micro, Small, and Medium Enterprises (MSME).
With Indian population set to rise at a rapid pace and people between the age group of 15-40 constituting the bulk, generating enough employment opportunities is the biggest task for the government.
The major advantage of the sector is its employment potential at low capital cost. As per the Ministry of Micro, Small and Medium Enterprises, this sector employs an estimated 59.7 million people spread over 26.1 million enterprises. It is estimated that in terms of value, MSME sector accounts for about 45% of the manufacturing output and around 40% of the total export of the country.
Outlining the achievements of the MSMEs, Madhav Lal, Additional Secretary & Development Commissioner MSME, and Govt. of India told Zeebiz.com ,“SMEs have continued to contribute about 8 per cent to the national GDP. They are contributing 40 per cent to the manufacturing output in the country and about 40 per cent to the export.” He was talking to Zeebiz.com during the first MSME expo organised by Indian Industries Association (IIA) in Noida from December 17-19.
But, Lal also rued the fact that though “the number of MSME in organised and unorganised sector is about 26 million but a very large percentage; over 95 per cent are there in the unorganised sector.”
“It is very difficult to say how every segment fared post downturn. Some might have not performed well, consider the segments which are totally dependent upon export. But there are some segments which have done infact better. On the whole the MSME are pretty vibrant and hope they will benefit in terms of growth,” the Development Commissioner added.
The bigger truth
Worldwide, the Micro Small and Medium Enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development. The labour intensity of the MSME sector is much higher than that of the large enterprises. The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports.
In India too, the MSMEs play a pivotal role in the overall industrial economy of the country. In recent years the MSME sector has consistently registered higher growth rate compared to the overall industrial sector.
The sector which survived the recent economic downturn (thanks largely to a strong demand in India) shows that it still needs government support.
The challenges and opportunities:
In an exclusive interview with Zeebiz.com Alfredo Pinto Saavedra, Ambassador of Colombia said, “There are difficulties in getting technological factor. Credit access, concentration of wealth in big global firm is another challenge. Especially SMEs in the micro sector face more difficulty. The real challenge is how we can articulate the challenge vis-à-vis the global change in values.”
The future ahead:
No doubt, with increasing government support and rise in young population, there would be a host of opportunities. With lack of employment in the government and traditional sectors, people will gradually move towards establishing their own industries.
“It is an excellent scenario for the young entrepreneurs. The people of India want to be self made,” said Pinto.
Talking on the upshot of Indian entrepreneurship he said, “apart from having entrepreneurial skills you need to have specialised knowledge, market understanding and ability to innovate. SMEs are growing in numbers but not in participation. While big companies are growing in size, SMEs are growing from small to micro. They are not significantly contributing to the GDP.”
Action Replayy…scooters are back
Fashion never dies, it just rediscovers itself. From films to dresses, everything of yore days is now resurfacing. Now, it is the turn of the all-familiar uncleji’s scooter. Yes, the scooter! Remember the Hamara Bajaj ad…
Bajaj may have exited the scooter business but other players like Honda and TVS have joined the bandwagon, launching a range of scooters suiting the need of today’s customers, including the young ones.
According to the Society of Indian Automobile Manufacturers (SIAM), the domestic scooter segment witnessed sales of over 11 lakh (11,63,127) units during April to October, 2010-11 compared to 7 lakh (7,64,643) units in the same period last year.
This translates into a whopping 52 percent jump in sales in the first seven months of this fiscal year.
To be more precise, in October alone the segment witnessed 104.27 percent jump in sales to 1.8 lakh (1,88,633) units compared to 92,346 units in the same month last year.
"At one point, people had written off scooters. However, scooters have been repositioned and it has helped. It is doing exceedingly well by targeting a different segment of customers," SIAM director general Vishnu Mathur says.
Scooters’ glory days date back to the 1980s and the first half of the 1990s, after which the Indian consumer started shying away from the two-wheeler. A big factor was that scooters were looked down upon as the poor cousins of motor-cycles due to their weaker engines.
However, in recent times a number of popular models like Activa and Aviator have helped revive this segment’s dwindling sales. While models like Hero Honda Pleasure or the TVS Scooty Pep have a cute and stylish image, other products like Activa, Rodeo, and Duro are promoting their powerful engines to tap customers.
"Scooter is a product whose time has come. Many other players have also come into the market and is helping in expanding the segment," says Anil Dua, Hero Honda Senior Vice President (Marketing and Sales).
"Earlier, the scooter market was mainly geared and male oriented. When we entered in 2006, with Pleasure, we came with gearless (product) and targeted the women`s (segment) and the strategy worked," Dua adds.
The renewed vigour among scooter-makers can be gauged from another instance too.
Italian automaker Piaggio, which earlier used to sell scooters in partnership with Kanpur-based Lohia Machinery Limited as LML Vespa, has now decided to invest 30 million Euros in India to set up a scooter facility in Baramati, Maharashtra.
It will re-introduce the iconic Vespa scooter by early 2012.
Another reason behind such a phenomenal rise in the sales of scooters is the jump in fuel costs. With scooters giving better mileage than bikes, consumers offset the rise in fuel prices. While some bikes also give an equally good mileage these days, scooters score over motorcycles in terms of safety. Some also attribute it to the attachment masses have with the scooter.
A rise in nuclear families and working women too could be reasons. Working women and college going girls often prefer scooters as their most desired conveyance.
"As for the future of the segment, I think it will continue to grow at double digits as more products are being introduced and the overall economy is growing... Many players are coming into the market targeting different segments and it has helped in expanding the market," says NK Rattan, Head of Marketing & Sales at HMSI.
Yes, the scooter-mania is yet to grip the males, especially the young ones, in a significant way. “These scooties are easy to handle and are just tension free ride,” one of my fried, who has one, said. So, it is certainly interesting to see how long the scooters can go when the Harley Davidson cult is engulfing the highways.
Bajaj may have exited the scooter business but other players like Honda and TVS have joined the bandwagon, launching a range of scooters suiting the need of today’s customers, including the young ones.
According to the Society of Indian Automobile Manufacturers (SIAM), the domestic scooter segment witnessed sales of over 11 lakh (11,63,127) units during April to October, 2010-11 compared to 7 lakh (7,64,643) units in the same period last year.
This translates into a whopping 52 percent jump in sales in the first seven months of this fiscal year.
To be more precise, in October alone the segment witnessed 104.27 percent jump in sales to 1.8 lakh (1,88,633) units compared to 92,346 units in the same month last year.
"At one point, people had written off scooters. However, scooters have been repositioned and it has helped. It is doing exceedingly well by targeting a different segment of customers," SIAM director general Vishnu Mathur says.
Scooters’ glory days date back to the 1980s and the first half of the 1990s, after which the Indian consumer started shying away from the two-wheeler. A big factor was that scooters were looked down upon as the poor cousins of motor-cycles due to their weaker engines.
However, in recent times a number of popular models like Activa and Aviator have helped revive this segment’s dwindling sales. While models like Hero Honda Pleasure or the TVS Scooty Pep have a cute and stylish image, other products like Activa, Rodeo, and Duro are promoting their powerful engines to tap customers.
"Scooter is a product whose time has come. Many other players have also come into the market and is helping in expanding the segment," says Anil Dua, Hero Honda Senior Vice President (Marketing and Sales).
"Earlier, the scooter market was mainly geared and male oriented. When we entered in 2006, with Pleasure, we came with gearless (product) and targeted the women`s (segment) and the strategy worked," Dua adds.
The renewed vigour among scooter-makers can be gauged from another instance too.
Italian automaker Piaggio, which earlier used to sell scooters in partnership with Kanpur-based Lohia Machinery Limited as LML Vespa, has now decided to invest 30 million Euros in India to set up a scooter facility in Baramati, Maharashtra.
It will re-introduce the iconic Vespa scooter by early 2012.
Another reason behind such a phenomenal rise in the sales of scooters is the jump in fuel costs. With scooters giving better mileage than bikes, consumers offset the rise in fuel prices. While some bikes also give an equally good mileage these days, scooters score over motorcycles in terms of safety. Some also attribute it to the attachment masses have with the scooter.
A rise in nuclear families and working women too could be reasons. Working women and college going girls often prefer scooters as their most desired conveyance.
"As for the future of the segment, I think it will continue to grow at double digits as more products are being introduced and the overall economy is growing... Many players are coming into the market targeting different segments and it has helped in expanding the market," says NK Rattan, Head of Marketing & Sales at HMSI.
Yes, the scooter-mania is yet to grip the males, especially the young ones, in a significant way. “These scooties are easy to handle and are just tension free ride,” one of my fried, who has one, said. So, it is certainly interesting to see how long the scooters can go when the Harley Davidson cult is engulfing the highways.
G20: Synergy or symbolism
With the world recovering from one of the severest financial crises, in September 2009 prominent leaders of major economies called for better coordination among nations on economic issues. On September 25, they decided to replace G8 (congregation of eight top industrialised countries) by the G20 forum – recognising other emerging nations’ importance and valuing coordination among them.
But soon after, differences cropped up. A year has since passed, making it an ideal time to mull over the achievements and challenges of the forum.
G20 is a congregation of the Group of Twenty Finance Ministers and Central Bank Governors of major 20 economies: 19 countries plus the European Union, which is represented by the President of the European Council and by the European Central Bank. Their heads of government or heads of state have also periodically conferred at summits since their initial meeting in 2008. Collectively, the G20 economies comprise 85% of global gross national product, 80% of world trade (including EU intra-trade) and two-thirds of the world population. This means that the group almost represents the whole world economy.
Issues
Stimulus: If 2008 saw one of the worst financial crises since 1930s, the year 2009 saw one of the best coordination efforts among all the nations to revive the belligerent economies. In 2009, major countries gathered in a loosely held forum called G20 and inked agreements to continue with their stimulus to boost their respective economies – thus bolstering efforts to bring the world out of the economic recession.
But, with inflation and nations’ debts rising fast, countries were forced to rethink their strategy. Recently, the G3 — America, Europe and Japan — were caught in fierce policy debates on stimulus and exit strategies. At the heart of this debate are two issues that pit the short-term against the medium term. First issue is, whether additional fiscal stimulus at this stage will jeopardise medium-term fiscal sustainability; the second issue relates to whether continued expansionary monetary stance — QE2 in popular jargon — will be an adequate substitute for the waning fiscal stimulus and the implications an ultra loose monetary policy may have for medium-term inflationary trends.
As each country has its own financial authority, it is difficult to forge a concession on a common roadmap. Countries like US and Japan are still having their zero-rate policy which results in a heavy flow of foreign currency to emerging markets for better returns – fuelling inflation in these markets.
Many countries have recently put taxes on such money to discourage such flow of hot money.
Currency wars: The world in recent times is seeing an interesting battle between the US and China. While Washington accuses Beijing of deliberately devaluing its currency to promote its exports, China says it cannot opt for a free-float method for Yuan as it would send its mainly export-oriented industries into bankruptcy.
The row nearly threatened diplomatic ties between these countries. Europe has voiced similar fears while Japan, and other Asian countries, recently moved to weaken their currencies to protect exports, sparking concerns of a return to the `beggar-thy-neighbour` policies at the heart of the 1930s Great Depression.
Sensing the severity of the situation, the leaders of the European Union have urged their Group of 20 counterparts to avoid a damaging currency war so as to prevent any return of trade protectionism.
In a declaration, they insisted that the G20 countries use their summit in South Korea next month to "avoid engaging in exchange rate moves aimed at gaining short-term competitive advantage".
Will it affect trade (Doha round):
Concluding the nine-year old Doha round is definitely on the platter of G20 leaders this time. Started in November 2001, the aim of the Doha Development round is to lower trade barriers around the world, which allows countries to increase trade globally. However, talks have stalled over a divide on major issues, such as agriculture, industrial tariffs and non-tariff barriers, services, and trade remedies.
Last year, a G8 summit in Italy and a Pittsburgh meeting of the Group of 20 committed to a 2010 end date that now looks impossible to meet.
Climate: One of the major highlights of the G20 meeting is undoubtedly the protests held by climate activists.
Though previous summits of the Group hardly dealt with non-financial issues, of late there has been a heightened concern on climate change. The EU has already passed climate change laws which are considerably more ambitious than Kyoto. But with economic issues high on the agenda, it will be interesting to see whether G20 can talk on climate.
G20 was created as a multilateral forum for better coordination among nations. It is mostly a loosely held organisation. The European Union, which almost failed, is an important indicator of the limitations of such forums. Individual necessity and domestic political compulsions of leaders disable them to walk the extra mile in such forums. The G20 is undoubtedly going through testing times. But, like a Chinese proverb goes – Journey of a thousand miles start with one step – there is some sort of initiation at the least. Hopefully, this would lead to a financially more stable world.
But soon after, differences cropped up. A year has since passed, making it an ideal time to mull over the achievements and challenges of the forum.
G20 is a congregation of the Group of Twenty Finance Ministers and Central Bank Governors of major 20 economies: 19 countries plus the European Union, which is represented by the President of the European Council and by the European Central Bank. Their heads of government or heads of state have also periodically conferred at summits since their initial meeting in 2008. Collectively, the G20 economies comprise 85% of global gross national product, 80% of world trade (including EU intra-trade) and two-thirds of the world population. This means that the group almost represents the whole world economy.
Issues
Stimulus: If 2008 saw one of the worst financial crises since 1930s, the year 2009 saw one of the best coordination efforts among all the nations to revive the belligerent economies. In 2009, major countries gathered in a loosely held forum called G20 and inked agreements to continue with their stimulus to boost their respective economies – thus bolstering efforts to bring the world out of the economic recession.
But, with inflation and nations’ debts rising fast, countries were forced to rethink their strategy. Recently, the G3 — America, Europe and Japan — were caught in fierce policy debates on stimulus and exit strategies. At the heart of this debate are two issues that pit the short-term against the medium term. First issue is, whether additional fiscal stimulus at this stage will jeopardise medium-term fiscal sustainability; the second issue relates to whether continued expansionary monetary stance — QE2 in popular jargon — will be an adequate substitute for the waning fiscal stimulus and the implications an ultra loose monetary policy may have for medium-term inflationary trends.
As each country has its own financial authority, it is difficult to forge a concession on a common roadmap. Countries like US and Japan are still having their zero-rate policy which results in a heavy flow of foreign currency to emerging markets for better returns – fuelling inflation in these markets.
Many countries have recently put taxes on such money to discourage such flow of hot money.
Currency wars: The world in recent times is seeing an interesting battle between the US and China. While Washington accuses Beijing of deliberately devaluing its currency to promote its exports, China says it cannot opt for a free-float method for Yuan as it would send its mainly export-oriented industries into bankruptcy.
The row nearly threatened diplomatic ties between these countries. Europe has voiced similar fears while Japan, and other Asian countries, recently moved to weaken their currencies to protect exports, sparking concerns of a return to the `beggar-thy-neighbour` policies at the heart of the 1930s Great Depression.
Sensing the severity of the situation, the leaders of the European Union have urged their Group of 20 counterparts to avoid a damaging currency war so as to prevent any return of trade protectionism.
In a declaration, they insisted that the G20 countries use their summit in South Korea next month to "avoid engaging in exchange rate moves aimed at gaining short-term competitive advantage".
Will it affect trade (Doha round):
Concluding the nine-year old Doha round is definitely on the platter of G20 leaders this time. Started in November 2001, the aim of the Doha Development round is to lower trade barriers around the world, which allows countries to increase trade globally. However, talks have stalled over a divide on major issues, such as agriculture, industrial tariffs and non-tariff barriers, services, and trade remedies.
Last year, a G8 summit in Italy and a Pittsburgh meeting of the Group of 20 committed to a 2010 end date that now looks impossible to meet.
Climate: One of the major highlights of the G20 meeting is undoubtedly the protests held by climate activists.
Though previous summits of the Group hardly dealt with non-financial issues, of late there has been a heightened concern on climate change. The EU has already passed climate change laws which are considerably more ambitious than Kyoto. But with economic issues high on the agenda, it will be interesting to see whether G20 can talk on climate.
G20 was created as a multilateral forum for better coordination among nations. It is mostly a loosely held organisation. The European Union, which almost failed, is an important indicator of the limitations of such forums. Individual necessity and domestic political compulsions of leaders disable them to walk the extra mile in such forums. The G20 is undoubtedly going through testing times. But, like a Chinese proverb goes – Journey of a thousand miles start with one step – there is some sort of initiation at the least. Hopefully, this would lead to a financially more stable world.
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