year in review:
FACTBOX: What it takes to rebalance the global economy
(Reuters) - When G20 leaders meet this week in Pittsburgh to try to turn the financial crisis into an opportunity to rebalance global growth, the devil will be in the details.
Shifting the global economy so that countries that run large current account deficits in the West and major exporting nations with external surpluses located mostly in the East gradually become more balanced will require political will, leadership, cultural change and time.
China's private consumption makes up a little more than a third of overall gross domestic product, while in the U.S. and British economies consumption accounted for nearly three quarters of GDP in boom time.
The flip side is savings. Chinese and Indian households last year saved about 40 percent and 32 percent of their disposable incomes, respectively, while the personal saving rate in the United States was just 3.2 percent.
The United States is pressing its G20 partners to agree on a "framework" for bringing about better global balance. Below are statistics and anecdotes to illustrate what might need to happen to make that goal a reality.
WHAT KEY ASIAN ECONOMIES CAN DO TO SPEND MORE:
* STRENGTHEN CHINA'S SERVICES SECTOR
If Beijing takes the G20 effort to heart, China would likely lose jobs in the manufacturing sector, but could offset those losses with more jobs on the service side of the economy. Economic planners already expect the service sector to grow to about half the economy from little more than a third now, driving up incomes and leading China away from its investment-intensive growth model.
The McKinsey Global Institute said last month that meeting a series of policy objectives, including growing the services sector, increasing the availability of consumer credit and improving the social safety net, would boost consumption by 8 trillion to 15 trillion yuan ($2.1 trillion) by 2025.
* INCOME GROWTH NEEDS TO SPREAD
In China and India, incomes are much higher in large urban centers. Emergency actions in both countries during the crisis targeted rural populations, and longer-term infrastructure projects should help employment and income growth.
In China, wealth has accumulated on the eastern seaboard. For example, in 2008 GDP per capita was $9,072 in Beijing but $2,594 in Chongqing, a western Chinese city of 31 million people.
India's GDP per capita was $999 in 2008, exceeded by Mumbai's $2,600 and New Delhi's $1,734.
* BARRIERS TO MORE CONSUMPTION
The obstacles are a deeply entrenched penchant for personal saving in China and a fragmented retail sector in India.
A survey conducted by China's central bank in late May showed 47 percent of respondents would like to save more, up 9.5 percent from the first quarter and the highest since the survey began in 1999. Only 15.1 percent said they would spend more.
India is still waiting for reforms to its retail sector, expected to reach $833 billion by 2013, that would relax foreign direct investment limits on retailers.
WHAT WOULD IT TAKE FOR THE UNITED STATES TO SAVE MORE?
* A DOSE OF CONSUMER RESTRAINT
Thanks to the housing bust and financial crisis, this is already happening. The saving rate, which had dwindled to 1.2 percent in the first quarter of 2008, more than quadrupled to 5 percent by the second quarter of this year.
What is unclear is whether this is a short-term reaction to a severe drop in household wealth from plunging home and stock values or evidence of a lasting behavioral change.
Even if Americans revert back to their free-spending ways once the economy recovers, it is unlikely they will have access to the same level of easy credit as in the boom days, when household debt soared to a record high.
WE ALSO HAVE:
SDRS ...
General allocations of SDRs. General allocations have to be based on a long-term global need to supplement existing reserve assets. Decisions to allocate SDRs have been made three times. The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72 in yearly installments. The second allocation, for SDR 12.1 billion, was distributed in 1979–81 in yearly installments.
The third general allocation was approved on August 7, 2009 for an amount of SDR 161.2 billion and will take place on August 28, 2009. The allocation would mean a simultaneous increase in eligible members’ SDR holdings and in their cumulative SDR allocation by about 74.13 percent of their quota.
Tue Sep 22, 2009 7:50pm EDT
G20 support builds for rebalancing world economy
WASHINGTON (Reuters) - Leaders from some of the largest Western powers rallied support Tuesday behind a U.S. plan to build a more balanced global economy and warned against returning to business as usual once recovery takes hold.
British Prime Minister Gordon Brown said there was substantial backing among the Group of 20 nations for creating a new framework to shrink surpluses in export-rich countries such as China and boosting savings in debt-laden nations including the United States.
Canadian Prime Minister Stephen Harper also supported the idea of a rebalanced global economy, saying world growth can no longer hinge solely on "overextended" U.S. consumers.
But French Economy Minister Christine Lagarde said she feared growing signs of economic recovery could undermine commitments to rework and regulate the world financial order.
"We are currently seeing, notably in the United States, sufficient signs of recovery that numerous players are saying ... let's go back to our old habits and carry on with our business as we did in the past," she told a news conference.
The G20 club of rich and developing economies holds a two-day leaders summit in Pittsburgh from Thursday and the United States wants to see rebalancing high on the agenda.
Also up for discussion are the issues of how to nurture an economic recovery, rein in risk-taking by banks and bankers, and save the planet from global warming.
It is the third leaders' meeting since the collapse of investment bank Lehman Brothers a year ago and they are moving now from ways to end the worst global recession since the 1930s to discussing ways prevent it happening again.
The G20 wants to figure out how to build a lasting economic recovery which is less prone to painful boom-bust cycles.
U.S. Treasury Secretary Timothy Geithner said on Tuesday the world's biggest economy was at the "beginnings" of a recovery, and the key was to ensure that the recovery was self-sustaining.
"To make sure that as we recover from this crisis we are laying the seeds for a more balanced, more sustainable recovery: That is the agenda," Geithner said.
BROAD SUPPORT
U.S. plans for a more balanced global economy could meet resistance from China, which is unlikely to agree to reforms that would threaten its growth, analysts said.
It was also unclear whether Germany and Japan, two other big exporters, would back the proposal. But Britain's Brown, currently chairman of the G20, said there was broad backing.
"I have been talking to many countries in Asia, as well as in Europe, and I have been talking to President Obama and others, and I believe that there is support for that framework," he said.
"We are looking at how we can put in place for the future the mechanism or path that can lead us to making decisions about better ways of creating growth."
A document outlining the U.S. position ahead of the summit said big exporters should consume more while debtors like the United States ought to boost savings.
The G20 must also address the sensitive issue of reforming the International Monetary Fund, to win full support from emerging economies, said Ouseme Mandeng, head of public sector investment advisory at Ashmore Investment Management in London.
"They are the two sides of the same coin," he said. "There are opportunities to present a new vision in the post-crisis world. I'm not sure if they have the courage to do so."
China and other fast-growing nations are clamoring for more say at the IMF and other international financing institutions.
The United States has backed a plan to shift 5.0 percent of voting power to certain emerging economies from rich nations.
However, Europe has yet to fully support that proposal and the emerging economies have pushed for a 7.0 percent shift.
In an interview with Reuters, IMF Managing Director Dominique Strauss-Kahn said European countries "understand it is time to move" on reforming voting power in the IMF, and he expected China to be the biggest beneficiary.
BANKING AND CLIMATE CHANGES
Curbing huge pay packages for bankers is also high on Europe's to-do list for the summit. At a meeting of G20 finance leaders in London this month there was general agreement on the need to change the risk-taking culture of banks to ensure employees are not rewarded for making risky investments that later collapse.
G20 officials also concurred that there should be tighter restrictions on how much capital banks must hold to absorb losses when loans go bad, but offered no specifics.
Britain's top financial regulator said the G20's regulation coordination arm, the Financial Stability Board, would ask leaders to back its guidelines on how banks must structure pay policies to avoid big, risky bets by traders.
The FSB will state "it is essential that priority use of high profits should be to rebuild the capital needed to support lending, allow official measures to be removed, prepare institutions to meet higher capital requirements, and that bonus and dividend policies should be consistent with this priority," Financial Services Authority Chairman, Adair Turner, told bankers in London.
On climate change, rifts remain between rich and developing economies over how quickly to cut carbon dioxide emissions and who should foot the bill. However, there were signs of progress Tuesday as Chinese President Hu Jintao announced goals to slow growth in his country's emissions.
The G20 is under pressure to show progress before 190 nations gather in Copenhagen in December to try to reach a deal to slow climate change.
