2010-07-05 14:24

Wealthy economies' decline and developing ones' rise makes it necessary to remodel the economic governance framework

Global recovery is moving into a more complicated phase in the post-crisis era. The top priority of the G20 summit held recently in Toronto was to strengthen the recovery and laying the foundation for sustainable and balanced growth.

Although the global economic and financial order dominated by developed economies has not changed fundamentally, the longstanding global economic disequilibrium and uneven wealth distribution during the recovery process have gradually turned the situation, relatively stable for decades, into a multi-faceted problem.

In the aftermath of the financial crisis, emerging economies, showing expanded domestic demand and government spending, have played a major role in leading the recovery.

For example, China's economy registered a year-on-year increase of 11.9 percent in the first quarter of this year. India's economy expanded 8.6 percent and Brazil 9 percent, all of which were faster than that of the developed world.

The rapid rise in the stature of developing countries and simultaneous decline of the wealthy economies provide an opportunity to break the traditional governance framework dominated by the rich club.

Against this backdrop, the G20, after three successful summits, has finally replaced the G8 and stepped into the center of global governance.

Nevertheless, contradictions and differences still exist, not only among developed countries, but also between developed and developing countries. This shows that the recovery is uneven across countries and rebalancing global wealth distribution is imperative.

On the one hand, both sides want their own specific policies to dominate the G20 agenda.

Washington is focusing on financial rebuilding and attempts to restore its financial stability and competitiveness, and regain its absolute leadership in global financial matters.

The EU, however, faces the task of fiscal tightening in the aftermath of sovereign debt crises. Compared with the 750-billion-euro aid package, fiscal self-help and a sound constraint mechanism could truly provide fundamental solutions to the European debt crises.

The euro zone countries will defend the common currency, adopt fiscal restraints and restore government credit, even at the cost of an economic slowdown or recession.

The process of reforming the global financial system and fiscal rebuilding will be propelled by the financial and debt crises. This is in the core interests of the US and the EU regardless of how wide their differences are.

On the other hand, besides caring for global short-term recovery, China and other developing countries are hoping the global economy develops in a more balanced and healthy way, and gives them more say in global financial restructuring.

The reform process will prove to be harder, as the international monetary system dominated by the US dollar hasn't been completely overthrown.

Over the past two decades, with global division of labor and industrial production experiencing a major change, a new economic landscape has emerged.

Developing countries mainly depend on booming industrial production and trade, while developing countries rely on virtual financial transactions.

Such an increasingly interdependent global division system has made global production more efficient and contributed much to the 20-year prosperity of the global economy. But it has also aggravated the global wealth distribution imbalance.

Judging from a variety of standards, the US dollar is still the world's most important currency. The current utilization rates of dollar in international trade valuation, foreign exchange reserves and international financial transactions are 48 percent, 61.3 percent and 83.6 percent respectively.

Besides targeting international financial organizations, reform of the international financial system also covers many institutional frameworks, including the international exchange rate system, the international expenses and receipts adjustment mechanism, the creation and allocation of international liquidity, management of international capital flows and coordination of international monetary and financial policies.

On reforming the international financial system, the US is willing to accept only minor changes to international financial institutions, such as moderate tightening of financial oversight and symbolic increase in developing countries' voting power in the IMF and the World Bank.

The US has set two benchmarks on the issue - that no country be allowed to weaken its dominance over the international financial system and no reform should alter the dollar's status as the world's leading currency.

The unbalanced international debt circulation system hasn't been reversed. The global financial crisis has not only intensified the imbalance between deficit-ridden nations and surplus ones, and between consuming and manufacturing nations, but has also projected the imbalance between debtors and creditors.

The operational model of the US economy heavily depends on two aspects. The first is government spending, which depends on issuing treasury bonds to make up for the deficit between revenue and expenditure. The other is household consumption, a large part of which comes from bank loans.

Through the securitization of assets, banks then transfer their loans risk to buyers of securities. In this sense, the US debt economy is the root cause of global economic imbalance.

While pinning their hopes on emerging economies to sustain recovery, developed countries should show more respect for the long-term interests of developing countries.

Only through reestablishing the currency and debt systems will a framework for strong, sustainable and balanced growth become a reality.

The author is an economics researcher with the State Information Center.