G20 seeking workable solutions to keep momentum alive

Finance ministers to find middle ground on IMF reform, capital control

Finance ministers to find middle ground on IMF reform, capital control

By Cho Jin-seo

Anapji Pond is a historic site. Some 13 centuries ago, the kingdom of Silla built a palatial complex around this artificial pond, and it was here that the kingdom’s last Cabinet meeting was held in 935 A.D. before it fell to the emerging power of the Goryeo (Korea) Kingdom.

The “communique” from the tragic ministerial meeting was Silla’s declaration of surrender. So when the Seoul G20 Preparation Committee invited its foreign guests to Anapji for Friday’s welcoming dinner, they probably tried to remind everyone of a historic lesson ― act together, or we are bound to fall into another dark age.

The G20 members have a grave task of promoting globally harmonized economic prosperity. Many acknowledge that partisanship and national selfishness could lead to a worldwide economic disaster, as seen in the ongoing debate about a “currency war.”

Though the rhetoric is obviously exaggerated by politicians and the media, the essence of the debate is clear. The G20 needs to do something to quell the protectionism movement. A big deal of sort may be needed for major economies with conflicting interests, such as on exchange rates and asset bubbles. The International Monetary Fund needs to be reformed. On top of all of these issues, the G20 itself should seek a new identity as a permanent fixture with due legitimacy and influence.

The following is a brief introduction to issues to be dealt with in Gyeongju.

‘Currency war’

If the so-called “currency war” is a time bomb ticking toward the Seoul summit, it is a bomb waiting to be defused. To the relief to Korea’s G20 organizers and to the rest of the world as well, the hype regarding a “currency war” is finally showing signs of mitigation.

Earlier this week, China raised its key interest rate by a quarter of a percentage point. It is generally understood as a gesture of goodwill to the United States and to the rest of the G20 members that the country is at least listening to complaints from other countries and doing something for the world ― though no one is sure about what economic results this action will bring about eventually. Its currency has also been appreciating faster since September.

The United States offered flowers in return. Timothy Geithner, the treasury secretary, said before he left for Korea that it won’t be necessary to provoke China or other emerging nations to appreciate their currencies, at least during the Gyeongju meeting.
“Right now, there is no established sense of what’s fair,” he told the Wall Street Journal. He also said that “major currencies are roughly in alignment now,” suggesting that the value of the dollar doesn’t need to be weakened further.

The market reacted immediately, sending the dollar up against major currencies. Geithner said he would explain to other countries at the G20 ministers’ meeting that the United States was not trying to weaken the dollar.

According to AFP, the G20 has prepared a draft communique saying that they will “refrain from competitive undervaluation” of currencies. This may indicate that the nations had already settled major issues before they headed for Gyeongju.

This is a good news ― Strategy and Finance Minister Yoon Jeung-hyun and G20 preparation committee head Sakong Il have always downplayed the currency-war debate and they will be happy to see this media bubble calm down. Sakong told The Korea Times earlier this month that the feud was more likely a domestic issue for the United States ahead of its Nov. 2 mid-term elections. At a National Assembly hearing, Tuesday, Yoon said that he didn’t like the “currency war” rhetoric.

Yoon has always told reporters that the exchange rate will be dealt with at the Gyeongju and Seoul meetings as part of a broader discussion on global policy coordination, which is called the “Framework for strong, sustainable, balanced growth” or for short the “Framework.”

The Framework is supposed to be a list of policy instructions laid out for each of the 20 members ― 19 nations plus the European Union, and is going to be written down in very specific figures on monetary, fiscal and trade policies.

The agreement process ― called the MAP (Mutual Assessment Process) ― is a hard task. The country-specific instructions are not expected to be released until the final hours of the Seoul summit, as countries will fight hard to secure room to maneuver their economic policies at a national level. But as seen in the recent development around the currency issue, MAP seems to be working effectively, if not without noise.

The person who might be embarrassed by the success of the Framework is Guido Mantega, the Brazilian finance minister. Mantega started the “currency war” complaint on September 27. He was later blamed by IMF managing director Dominique Strauss-Kahn for using a too aggressive word.

Yoon also commented that Mantega was only using the media to justify Brazil’s strengthening of capital controls (after the statement, Mantega raised taxes on short-term foreign investment from 4 percent to 6 percent). With the heat on him, it is no wonder that Mantega is the only G20 finance minister absent from Gyeongju.

Capital controls

If not the currency debate, what else is important for the G20 now? Michael Hudson of the University of Missouri-Kansas City expects that capital controls will follow the weak dollar in an opinion piece for the Financial Times, Tuesday.

This seems an apt prediction. Geithner told the Wall Street Journal that he does not oppose capital controls in emerging nations as they try to defend themselves from excessive liquidity caused by the dollar. Even Korea may be preparing its own capital control schemes.

“The IMF seems to be shifting toward allowing countries to adopt capital controls or whatever means they can to reduce volatility, as long as they don’t touch the exchange rate,” Yoon told reporters when he was in Washington to attend the IMF general meeting on Oct. 10. He denied Korea’s immediate introduction of new capital controls. But this week at a National Assembly hearing, he admitted that the finance ministry was carefully reviewing various options.

On Thursday, Yim Jong-ryong, vice finance minister, confirmed that the ministry was weighing various options such as a bank tax and liquidity controls. One remaining problem is timing.

“We are very cautious with this because we don’t want to give the impression that we are regulating foreign capital only,” he told reporters in a lunch meeting. “Introducing new capital controls right after the G20 meeting will not look good.”

More radical, but still sensible options can be discussed to fix the global imbalance. In an opinion piece forwarded to The Korea Times, Shin Jang-sup, a professor at the National University of Singapore, argues that the G20 should buy U.S. household debt and write them off in order to save the American and world economy.

At the same time, France, the host of 2011 G20 summit, wants take on the global monetary system, suggesting that the current foreign exchange regimes may need a major overhaul. The country will definitely bring up the issue in Gyeongju and will enforce the communique includes a few sentences about it.

But with only 19 days left until the summit, it is unlikely for the ministers will add too many fresh ideas to the agenda. If they can settle with the existing Framework, that will be satisfactory for most of them.

IMF reform

Apart from the Framework, the G20 Seoul Summit’s hottest topic is going to be the reform of international financial institutions, referred to as “IFI reform” by acronym-loving government officials. At the core of the debate lies the IMF.

The G20 countries agreed last year that they would shift at least 5 percent of voting shares, which are called the quota, from advanced or rich economies to emerging ones. They also agreed to improve the boardroom structure of the organization, in order to better reflect the voices of underrepresented nations.

According to general plans, countries such as China, Brazil and India are likely to gain more say, while small European nations will have to yield some of their share. But the G20 has so far made no agreement on how and when the share will be redistributed, because of conflicting national interests.

Along with small European nations, Brazil, again, and Saudi Arabia are especially adamant about their claims, multiple sources say. “Brazil wants to be inside the top 10 nations in the quota list. Saudi Arabia is not happy because it is one of the largest losers in the proposed reform,” an official said.

Another issue is the battle between the United States and Europe regarding the board structure, veto power and the managing director’s seat. The IMF presidency has historically been taken by Europe, while the United States takes the World Bank top seat. The United States also wants to reduce the number of IMF board directors from 24 to 20, with cuts made from the European side.

In return, Europe demands to change the rule that at least 85 percent of the votes must agree for the IMF to make big decisions. Since the United States has a 16.74 percent share of the voting right, it is effectively the only nation with a veto. The Europeans wants to ease the requirement to eliminate this privilege held by the United States.

Realistically speaking, the issue is not going to be solved at a ministerial level, officials at Seoul’s preparation committee agree. It is so sensitive an issue regarding national interests, and too much of a burden for the ministers to take responsibility for, one official at Cheong Wa Dae said.

Seoul officials hope that the summit can finalize the IMF deal, so that it can become the jewel in a joint statement. Lee Jun-kyu, an advisor to minister Yoon, said in a press interview this week that Korea’s proposal on the IMF quota has received favorable responses from most G20 nations. He also said that they are likely to agree to select the next managing director from a non-European nation.

If this goes according to plan, IMF reform can save the faces of national leaders at the summit even if they fail to make significant progress on other issues.

The future of the G20

France and Korea want the G20 to have a permanent secretariat, like the OECD or the IMF.

“The G20 decided it would be the main global forum for economic and financial issues. But it must still give itself the means to work more effectively. Shouldn’t we create a G20 Secretariat to continuously monitor the implementation of decisions and deal with issues in conjunction with all pertinent international organizations?” French President Nicholas Sarkozy said.

“We welcome President Sarkozy's proposal to establish a G20 secretariat,” Sakong said this month. “If the Seoul summit is held successfully, then official discussions will begin on the institutionalization of the G20.”

The G20 leaders have met twice a year since the outbreak of the global financial crisis in 2008. Four cities have hosted the summits and officials of the host country played the role of mediator on various issues regarding economic recovery and financial regulation reform.

There is no mandate on how long the 20 nations continue to hold the presidential meeting. It has only been decided that there will be only one summit next year in France and only one in Mexico in 2012.

This means that the G20 still has time to discuss matters. But it would like to see the discussion begin in Seoul this year, as the summit here will mark the transition of the G20 from a financial crisis-management body to a more general decision-making body.

Opinions differ on how to make a headquarters office, where to put it, and who will run it. Barry Carin at Canada’s University of Victoria suggests that it should be a floating secretariat run by the summit hosting nation in any given year.