ECONOMY: G20 in New North-South Battle

By Mario Osava Reprint | | Print |

Mario Osava

SÃO PAULO, Nov 8 2008 (IPS) - Brazilian President Luiz Inacio Lula da Silva called for "a pact between governments to create a new global financial architecture," while stressing the need to open up the global financial bodies controlled by the industrialised world to emerging economies.

In his opening speech to the G20 meeting of finance ministers and central bank presidents Saturday in Sao Paulo, Brazil’s economic capital, President Lula described as "irresponsible" the "disorder" that has marked global finances in the past few years and is now threatening the "real economy" with "a generalised recession," the loss of millions of jobs and a rise in poverty.

The Group of Seven richest nations (G7), where "the crisis originated…is no longer sufficient to govern the world’s economic affairs," said Lula, who called for "a new, more open and inclusive governance" for the world’s financial system.

"We are all paying for this adventure" undertaken by speculators who made "excessive profits, investing money that they didn’t have," and turning the world into a "gigantic casino," Lula complained.

He also criticised the "blind belief in the market's self-regulation capacity," pointing out that many of those who condemned state intervention in the economy are now turning to the state for help.

Lula’s address bolstered demands for greater participation in decision-making in institutions like the International Monetary Fund (IMF) by the emerging economies that make up the Group of 20 (G20), along with the members of the G7 and the European Union, represented as a bloc.

Furthermore, the current financial crisis has "revealed weakness in risk management, regulation and supervision in the financial sectors of some advanced economies," said a joint statement released by the finance ministers of the leading emerging markets – Brazil, Russia, India and China (BRIC) – after their first formal meeting, held on Friday ahead of the two-day G20 gathering.

"We call for the reform of multilateral institutions in order that they reflect the structural changes in the world economy and the increasingly central role that emerging markets now play," says the eight-point statement.

BRIC, which has begun to act as a group, announced that it would hold another gathering of its ministers on the eve of the annual IMF and World Bank meetings in April.

Lula listed six principles that he said should govern the called-for institutional reforms. The first, representativeness and legitimacy, requires greater participation in decision-making by emerging and developing countries.

The other five are collective action, given that "the costs are shared"; good governance in domestic markets, with greater regulation, supervision and risk evaluation; the responsibility of each country to avoid transferring risks and costs to others; transparency; and prevention.

In the short term, developed countries and the IMF must come up with measures to restore liquidity in the international markets, said Lula, who rejected unilateral actions and added that "Brazil believes countries must avoid the temptation of resorting to financial and trade protectionism as a mechanism to overcome the crisis."

He also urged the quick completion of the Doha Round of World Trade Organisation multilateral trade negotiations, which he said were "no longer an opportunity, but a need," because increased trade is an "antidote" to the crisis.

The G20, whose action has so far been limited to the gathering of finance ministers and monetary authorities, is thus taking shape as a new scenario for North-South disputes, given the clear need for the creation of new regulatory bodies and concerted action with respect to the crisis, and for the overhaul of institutions whose credibility has been seriously undermined by the financial meltdown.

The São Paulo meeting is drawing up proposals to be discussed at the Nov. 15 anti-crisis summit called in Washington by outgoing President George W. Bush, which will bring together the presidents and prime ministers of the G20 countries. Spanish Prime Minster José Luis Rodríguez Zapatero, who was initially excluded, has also been invited.

Brazil and other emerging countries want the G7 to be replaced by the G20, where they represent a majority, with Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey.

The group would represent a new power bloc unlikely to be accepted by the rich countries, especially the United States, which is in an uncertain position however, with a lame duck president who will be succeeded by Democratic President-elect Barack Obama in January.

A Dutch proposal to transform the IMF into a new "financial stabilisation" body with broad global oversight powers, shows that the industrialised North has also put forward proposals for change, albeit of a more moderate nature.

Brazilian Finance Minister Guido Mántega said an expansion of the G7 by means of the incorporation of emerging countries, to a G13 or G14, could be discussed. He added, however, that the emerging economies will insist on real power in the IMF, and want the wealthy nations to be stripped of their veto power.

Referring to his discussions with his counterparts from the other BRIC nations, he said "we have come to the conclusion that there must be a reformulation, a reorganisation of the world financial system."