G-20 to launch drive to rebalance world economy

Without agreements on key issues such as currencies, the G-20 is unlikely to feel able to commit itself to specific targets for rebalancing.

Britain, holder of the G-20's rotating presidency, is keen to use medium-term targets for global economic growth as a starting point for discussing each country's policy options. But it could take months or years to agree on other numbers.

“We will reaffirm the need to share a common policy goal but won't come up with numerical targets,” said one G-20 official, who spoke on condition of anonymity.

“Each country needs to set medium-term (five-year) policy goals which should be consistent with each other. We could use figures such as growth rate, balance of payments, budget deficits, (and) employment here, but there's no consensus over what could be used as a common format.”

Much of the talks in St. Andrews may therefore focus on the role of the International Monetary Fund, which the G-20 wants to act as a global referee during the rebalancing process.

“Giving the IMF a stronger mandate to oversee G-20 countries' macroeconomic policies was a step in the right direction,” said Cornell University professor Eswar Prasad, an ex-IMF official.

“The finance ministers need to develop an enforcement mechanism to make their commitments more credible. Otherwise, stricter surveillance by the IMF will have no bite and the large economies will continue to play the game by their own rules.”

The St. Andrews meeting may discuss the IMF's technical ability to monitor the global economy, and the extent to which it can make judgments independently without being influenced by member nations.

But there are still differences of opinion within the G-20 over how the IMF's resources should be expanded and how voting power in the fund, traditionally dominated by the United States and other rich countries, should be redistributed towards China and the developing world.

Until these issues are cleared up, which could take many months, the IMF may not be able to operate decisively.

One of the biggest imbalances in the world economy, the U.S. current account deficit, is shrinking. It has dropped from a peak of over 6 percent of Gross Domestic Product to 2.8 percent in the second quarter of this year, its lowest level since the fourth quarter of 2001.

But analysts say the fall is essentially cyclical and due to the U.S. economic slump. The U.S. economy returned to growth in the third quarter after four quarters of contraction.

“There is every reason to believe imbalances will recur once the U.S. recovers,” said UniCredit bank chief economist Marco Annunziata.

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