A couple of years before the East Asian crisis hit South Korea, a dragon statue was discovered at the bottom of a pond not far from the presidential residence in Seoul. Dismissing superstition, the government had it placed in a prominent museum. When disaster struck, as had been forewarned, in the form of the East Asian crisis, Korean officials saved face and fortune by placing an imitation of the dragon at the bottom of the pond. Much to the relief and pride of the previously sidelined Feng Shui practitioners, South Korea recovered rapidly.
When the leaders of the G20 group of nations congregated in Seoul on November 11-12, it is not known if they discovered a dragon that bestows economic growth. But they could not find a consensus on what ails the global economy or what must be done to revive it.
The American delegation, led by President Barack Obama, persistently pointed to China, even if not directly, while the Chinese, led by President Hu Jintao, pointed back at the Americans. It almost confirmed views that the G20 is really about the G2, going by the way the currency wars between the United States and China dominated both days of the summit. In the current global economic context, exchange rates are crucial, as a favourable rate can make exports more competitive and boost the economy.
'This is a situation which required corrective action, but who should take these corrective actions, surplus countries or deficit countries?'
-Prime Minister Manmohan Singh
"I think some point to the Chinese, the Chinese say the real problems are in the United States because of easy, loose money and if you ask the Americans, they will say that it is because some surplus countries are keeping their exchange rates deliberately undervalued," Prime Minister Manmohan Singh said on the return flight to New Delhi.
"Now this is a situation which required corrective action, but who should take these corrective actions, surplus countries or deficit countries? This will emerge only if the Mutual Assessment Process is allowed to take shape," Singh said. In this process, the G20 members submit medium term forecasts of their economies. The International Monetary Fund checks for clashes between the outlooks.
Part of the reason a consensus was elusive was the tacit support from India (and Germany) for China, with which Beijing did a remarkable job of warding off the pressure from Washington to reduce the undervaluation of its currency. Ahead of the arrival of the G20 leaders in Seoul, India's stand at meetings of the Sherpas, or the advance team of bureaucrats that prepares the stage, was that the Chinese currency is not the most important thing behind the imbalances in the global economy.
"Research has been put forth suggesting that the under-valued Chinese currency is the most important thing behind the growth imbalances in the global economy but my view is that exchange rate policies are not the only or the biggest issue," India's Sherpa and Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia, had said.
Two days later, much of Singh's address to the plenary strengthened the position of China to the disadvantage of the United States. "We must at all costs avoid competitive devaluation and resist any resurgence of protectionism," said Singh, known as the "Wise Economist" among the G20 leaders.
India chose not to upset its new friend either, endorsing the American position by calling for China to desist from undervaluing its currency. "Exchange rate flexibility is an important instrument for achieving a sustainable current account position and our policies must reflect this consideration," Singh said. Singh linked the imbalance in the global economy to that in development across the world. His suggestion: use rich-country savings to plug the infrastructure deficit in the developing world.
"We should leverage imbalances of one kind to redress imbalances of the other kind," Singh said. In other words, instead of just focusing on setting right one global growth imbalance by getting China to act on its currency, the rich should invest in the developing world to redress the bigger imbalance. It remains to be seen how far his suggestion will fly.
Later, an Indian delegate explained that India has been trying for some time to get the G20 to talk of more funds for the World Bank precisely for this reason. "Since it is the IMF that developed countries looked to for bail-outs post-Lehman, and the World Bank is seen as a lender only to low-income countries, the G20 has not bought India's position on funding of infrastructure," explained a source in the Indian delegation. But Indians are content to interject as the wise men, treating subjects on merit, unlike China, which works to a strategy. Saying all the politically correct things, China worked its way out of the pressure mounted on it in the run-up to Seoul.
"The Chinese stand was that their inflexible exchange rate policy was addressing the development imbalance between Africa and China and the inequality between eastern and western China," says a top Indian official. "No one could counter that." Explaining India's decision not to be assertive at summits such as the one in Seoul, the source in Singh's delegation said, "We are the lowest per-capita country in the group and thus systemically not important."
Economic growth has only just begun to accelerate in India. World leaders have factored in the future high growth to include India at the high table. Also, India is largely unaffected by the debate over the currency wars since it is a net importer. It counts the stated stand of the G20 over climate change and the resumption of the Doha round of WTO as gains.
Even in the behind-the-scenes meetings of the so-called BRIC countries - Brazil, Russia, India and China - India failed to evolve a consensus on funding infrastructure in developing countries as the interests of each of the economies in the sub-group are differently aligned. In the end, the summit exposed that American authority has weakened and the Chinese enjoy greater clout. And India is happy, as an Indian delegate said, to feel that it can "bridge the differences".