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London summit represents shift in balance of world power

WHATEVER the outcome of tomorrow's meeting in London, the mere fact that the G20 summit has been convened as the occasion to tackle the worst world economic crisis in a generation, represents a shift in the balance of world power.

After London, it's hard to believe that the G8, the exclusive club of rich northerners, will ever regain its place as the foremost global economic forum. The G8 summit scheduled for July 10, on the Italian island of La Maddalena, now risks becoming a side show.

The London gathering marks a joint response of both developed and developing economies to the economic crisis.

The reason for this is clear: the crisis which began in the United States sub-prime mortgage market is now leading the world into the global recession and it needs a global, not just a Western response.

"The global sourcing of goods and services means we now depend so much on each other that what happens anywhere can have an impact everywhere," British Prime Minister Gordon Brown said yesterday.

Nations at the summit represent 85 percent of world's economic output. Going into the meeting, their leaders were looking for action in five areas:

-- some sort of re-affirmation of the need for fiscal stimulus to help re-launch growth;

-- reform of the financial markets to ensure banker's high-risk gambling can no longer bring the world financial system to the brink of bust;

-- increased resources for the International Monetary Fund and World Bank so they can bail out nations in trouble, and a bigger say for emerging economies in running those bodies;

-- a rejection of protectionism and pledge to inject new life into world trade;

-- sticking to development and climate change goals.

In recent days, the White House has been playing down talk of a rift with Europe and Asia over its calls for a new global stimulus package.

Instead the United States is expected to go along with a compromise that says time must first be given to existing national plans to pump billions into the world economy.

"With regard to stimulus there is going to be an accord that G20 countries will do what is necessary to promote growth and trade," US President Barack Obama told the Financial Times in an interview published yesterday.

"There is a legitimate concern that with most countries already having imitated significant stimulus packages that we need to see how they work," he said.

Leaders are expected to announce a more than doubling of the International Monetary Fund's 250 billion US dollars reserve fund.

Japan has already lent the IMF an extra 100 billion dollars and the European Union has offered a similar amount.

However, more is being sought from other countries as fear grow that the IMF may have to step in to bail out more nations whose economies near collapse. Since September, the IMF has had to spendover 50 billion dollars on loans to almost a dozen countries from Hungary to Pakistan.

Chinese officials have said China supports the IMF's move to raise more funds and is ready to contribute within its capability, but a balance should be striken between the rights and obligations of the contributing countries.

Officials in Brussels have indicated the Europeans are willing to revise the current system whereby the top positions at the World Bank and IMF carved up between Europe and the United States. However the changes may not be finalized in London.

French calls for some sort of global regulator have been rejected by Britain, the United States and Germany, but the G20 leaders are expected to agree on boosting cooperation between their national financial oversight bodies to ensure greater control over the activities of cross-border businesses.

The Obama administration has already announced its plans to tighten controls over hedge funds, derivatives trading, venture capital markets and other potentially risky financial products. Leaked early drafts of the summit communique also cited the need to clamp down on secretive bank accounts and offshore tax havens.

Although the G20 leaders are expected to sign up to a ringing rejection of protectionism, there will be no immediate sign of breakthrough in the stalled Doha Round of world trade talks.

The summit may however announce more money to provide import and export credit to revive trade which is falling for the first time in quarter-of-a-century.

It's estimated that up 90 percent of world trade transactions rely on some form of credit and with the current collapse in lender confidence estimates of a shortfall in trade finance are as high as 300 billion US dollars.


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