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FINANCE: Inflation to Overshadow Aid at G8 Talks

Abid Aslam

WASHINGTON, Jun 12 2008 (IPS) - Inflation is to dominate two-day talks of wealthy nations' finance ministers despite warnings that millions of people face death because of a shortfall in development aid.

Industrial countries must fill a 30-billion-dollar gap in aid or risk the loss of five million lives, the charity Oxfam International said in a report timed to coincide with the Jun. 13-14 meetings of finance ministers from the Group of Eight (G8) largest economies: the United States, Japan, Germany, France, Britain, Canada, Italy, and Russia.

In 2005, G8 leaders pledged to increase aid by 50 billion dollars a year by 2010. Unless they pick up the pace, Oxfam said, the group's members will fall short of this target by 30 billion dollars. This sum could save five million lives in 2010 alone were it spent on providing health care and containing the spread of HIV/AIDS, the charity said. It based its calculation on United Nations statistics.

Oxfam called on G8 finance ministers to take bolder and quicker action or risk a "credibility crunch" – a play on the credit crunch spawned by inadequately supervised U.S. mortgage and financial markets.

To be sure, African development is the second item on the talks' agenda, with climate change also on the list of topics to be touched upon. Trumping all else, however, will be discussion of runaway fuel and food prices, which have prompted riots around the world.

Much of this discussion is expected to centre on the weak U.S. currency, as a growing chorus of researchers has highlighted the dollar's role in driving up the prices of oil and other commodities.

A study by the International Monetary Fund (IMF) concluded that for every 1 percent fall in the value of the dollar, oil and gold prices rise by more than 1 percent.

A separate research paper from the Dallas Federal Reserve, a regional branch of the U.S. central bank, last month said the weaker dollar was to blame for about one-third of the 60-dollar increase in oil prices between 2003 and 2007.

Such findings appear to be setting the stage for a possible abandonment of the longstanding U.S. practice of allowing the dollar to fall as a way to boost exports.

Last week, Ben Bernanke, the U.S. central bank chairman, offered the clearest signal yet that a new stance might be in the offing. He noted the strong correlation between the weaker dollar and inflation and said the Federal Reserve was watching the dollar closely with the U.S. Treasury.

Shortly after, Treasury Secretary Henry Paulson said he would rule out neither a dollar-buying intervention nor any other option to boost the U.S. currency.

For all the expectation and intrigue thus whipped up, measures to shore up the dollar and currencies pegged to it are unlikely to garner any ink in the G8 finance ministers' concluding statement because central bankers will not be taking part in the talks.

Likewise, coordinated action to tackle skyrocketing oil and commodity prices is unlikely to emerge from this weekend's talks despite broad agreement that inflation is hurting G8 and other economies alike.

In part, this is because the absence of central bank chiefs will place decisions on traditional remedies, like interest rate hikes, beyond the talks' purview. Additionally, G8 officials have fallen out over specific policy options.

France has urged concerted action to lower oil prices but Canada, a net oil exporter, has chafed at this. Russia, the world's second-largest oil exporter, also is widely regarded as hostile to any reduction in price.

Some G8 governments have called on China, India, and other developing countries to cut fuel subsidies in a bid to dampen demand and thereby apply downward pressure on the price of oil. These countries have balked at specific or precipitous commitments, however – precisely because rising prices are fueling public anger.

These tensions also could get an airing at this weekend's talks, as finance ministers from Brazil, China, Indonesia, South Africa, South Korea, and Thailand have been invited to take part in so-called outreach sessions.

The Osaka talks are to lead to the G8 leaders' summit scheduled for July on the Japanese island of Hokkaido.