New economies want power before paying
Anyone who expected the major emerging economies to write fat checks in exchange for being invited to the first G20 leaders’ summit on rescuing the world economy will have been disappointed.
But that should only have surprised the naive.
Despite intensive lobbying by British Prime Minister Gordon Brown of Saudi Arabia and China, the rising powers were never likely to make a cash down-payment to the International Monetary Fund before getting more seats and votes at the top table.
IMF Managing Director Dominique Strauss-Kahn said after Saturday’s Washington summit that his organization will need at least another $100 billion in the next six months to bail out countries stricken by the credit crisis.
Among the world’s major reserve holders, only Japan, an established member of the Group of Seven most industrialized nations, offered the IMF a $100 billion unilateral loan.
The Saudis, Chinese, Russians and Indians want to be sure of winning a permanent say as equal partners in the management of the global economy, and of locking incoming U.S. President Barack Obama into a new world financial order, before they open their wallets.
Even then, they face serious constraints due to domestic development priorities, nationalist public opinion and uncertain energy prices that will limit any contribution.
Here is some of their thinking:
SAUDI ARABIA – Saudi Finance Minister Ibrahim al-Assaf was most outspoken in explaining, in a Reuters interview, why the oil-rich kingdom was not about to pick up the bill for the financial crisis.
“We (Saudis) have been playing our role responsibly and we will continue to play our role responsibly but we are not going to finance the institutions just because we have large reserves. These reserves are for the development of the kingdom of Saudi Arabia,” he said.
Economists say Riyadh has taken a bigger hit from the crisis than it has publicly acknowledged. Its ambitious industrialization plans, as well as its largesse to domestic interest groups, may require a higher oil price than today’s.
Oil has tumbled from a record $147 a barrel in July to just $55 today, which is likely to prompt deeper production cuts. So producer nations face a double revenue hit on price and volume.
At this price, Saudi Arabia and all other Gulf Cooperation Council states except Kuwait can expect to post a fiscal deficit next year, according to economist Mushtaq Khan of Citigroup Global Markets.
Politically, it would be hard to justify helping bail out the widely hated West at a time when Saudi investors have seen their stock market plunge and their foreign investments tank.
The Saudi government may also wait to see whether Obama takes up a King Abdullah’s Arab League peace initiative with Israel and gives priority to Israeli-Palestinian and Israeli- Syrian peace, in contrast to outgoing President George W. Bush.
CHINA – Chinese President Hu Jintao made clear Beijing’s main contribution to stabilizing the world economy was a massive domestic investment program that should help cushion growth at a time when exports may shrink due to recession in the West.
The $586 billion two-year economic stimulus, much of it to be spent on modernizing the creaking infrastructure of the world’s most populous nation, was a bold move by the cautious standards of China’s collective leadership.
The Chinese, sitting on almost $2 trillion in foreign currency reserves, are waiting to see if Obama will share real power with emerging nations. They also want guarantees against protectionism by a Democratic administration and Congress.
“The question is whether developed countries are ready to accept China as a major player. If you want China to take out money when the crisis happens, but give China little power when voting, nobody is going to play with you,” a senior official in the country’s $200 billion wealth fund said.
Jin Liqun, supervisory board chairman of China Investment Corp. and a former vice finance minister, said industrialized powers “should address developing countries with humility”.
Although China is not a Western-style democracy, public opinion still matters.
Most media commentary has resolutely opposed any “bailout” of the West by succumbing to pressure to buy more U.S. Treasury bonds, Standard Chartered China analyst Stephen Green notes. But he said China could transfer some of its dollar reserves from U.S. Treasuries to IMF Special Drawing Rights, especially if it is given more voting rights in the IMF.
RUSSIA – Russian leaders have been dismissive of the IMF as a tool of U.S. dominance of the global economy. Although it still has $500 billion in reserves, Moscow is fast burning through its foreign currency pile as it tries to stabilize its own markets and bail out oligarchs in financial trouble.
A lower oil price also threatens future Russian state revenues and investment plans.
President Dmitry Medvedev and Prime Minister Vladimir Putin think in terms of power rather than economics.
Any Russian cash for the IMF would probably have to be part of a wider bargain with Obama covering missile defense, NATO enlargement, nuclear and conventional arms control, non-proliferation and perhaps Georgia and Kosovo as well.
The Russians don’t rule out such a deal but intend to talk with Obama from a position of strength. That is why they have blown hot and cold in the last two weeks, threatening to deploy missiles in Kaliningrad, on Poland’s border, but also voicing hopes of better ties with the new U.S. president.
INDIA – India, which still sees itself as a developing nation and has less IMF voting power than Belgium, is waiting to see whether Obama accepts a new distribution of world economic and political power before making commitments.
Finance Minister Palaniappan Chidambaram told a World Economic Forum event that the G20 had come to stay as the single most important forum to address global financial and economic issues, and much better than the G7.
But he said: “It is not clear to us whether the new (Obama) administration is fully on board with what the outgoing administration has put on the table.”
India too will be looking for guarantees against U.S. protectionism while demanding the right to protect its own millions of subsistence farmers.
All these countries say they are willing to become “responsible stakeholders” in a new world financial system. Just don’t expect them to pay up before they see the reality of power.