What We Expect to Indonesia and Turkey in G-20 Summit in London?

Istanbul, Turkey | March 31, 2009 by D-8 Secretariat

D-8 Secretary General, Dipo Alam, writes on Turkish Today’s Zaman*), on the importance of Turkey and Indonesia in representing D-8, and moslem world in the emerging market economy.

Indonesia and Turkey will represents two democratic republics with major Muslim population (about 300 millions people). Both countries will play important role in the meeting on the second Summit of G-20, April 2nd, 2009, in London

Here are my expectations of what role Indonesian and Turkish leaders, representing two democratic republics with predominantly Muslim populations (about 300 million people), yet secular, will play in an important meeting of the second G20 summit, slated to be held on April 2 in London.

Both countries are emerging markets economies (EMEs) in the G20; they are members of the D-8 Organization for Economic Cooperation, a trade alliance of developing countries comprising 930 million people. Furthermore, US Secretary of State Hillary Clinton visited the two countries recently to convey the Obama administration’s “special message” to the Muslim world.

A detailed explanation of how the current global financial crisis began is unnecessary as it is clear how an ill-structured world economy, greedy banks and investors and a lack of efficient market supervision as well as the International Monetary Fund’s (IMF) failure to function as a watchdog all contributed. However, I will emphasize some important points that should be considered and shared by Indonesian and Turkish leaders at such an important meeting:

(1) Indonesia and Turkey gained some experience with the IMF’s bitter conditions in the mid 1990s. Furthermore, the IMF’s bad advice has to some extent led to the failure in its main surveillance task of central banks, banks and other financial institutions. The IMF Country Report No. 06/279, July 2006, p.7, suggested: “Mortgage securitization had helped channel foreign savings into the US housing market while allowing mortgage originators greater flexibility to diversify credit exposures and reduce systemic risk.” One year after this suggestion, the US subprime mortgage collapse took place and led to the current global financial crisis. Therefore, a reform of the IMF governance — before they ask for an additional $500 billion in capital, as suggested by EU leaders in Brussels lately — is a must and should be undertaken while considering the role of EMEs. This is as a consequence of the G7 and G8’s limitation in handling the current global crisis. They asked the G20 to participate in global economic governance. In other words, the dominant role of the US and Europe in IMF quotas that are reflected in some of their policies needs to be reformed to allow EMEs a larger role.

(2) On the idea of coordinating fiscal stimulus, both for job creation and to revitalize banks and markets, developed countries led by the US and the EU previously suggested that EMEs increase their stimulus packages in macroeconomic policies while remaining confident that regulations governing the surveillance of the IMF and the World Bank of central banks and financial institutions is in place. In addition, stimulus packages, aside from stimulating the market and creating jobs through recapitalized banks and infrastructure development, should also target the largest problems facing developing countries: food security and energy. Speaking on March 23, President Barack Obama told the Tribune Media Services, “America will support new and meaningful investments in food security.”

(3) There should be no double standards or inconsistency, in order to avoid an increase of trade protectionism. The World Trade Organization (WTO) has estimated that in 2009 world trade will shrink by 9 percent and that further protectionist measures will render global recovery efforts less effective. However, in reality the WTO has become a lobbying organization in favor of industrialized countries that puts pressure on the developing world. This was particularly true in the WTO’s last round of negotiations on agriculture. Developing countries, including the EMEs, are forced to open their agriculture market, but the EU continues to use unfair agriculture subsidies, non-tariff barriers, to block the import of agricultural goods from developing countries.

(4) World political tensions should be relaxed through peace dialogues, especially in the Middle East and other Muslim countries, by avoiding inhumane and very costly wars — e.g., in Iraq and Gaza and perhaps in Afghanistan. It is also expected that economic sanctions, especially those Iran faces, will be lifted and that the country will be encouraged to increase to optimum levels its oil and gas potential to improve its economy, that of the region as well as that of the world at large.

(5) Islamic finance, which is becoming more and more popular and has been accepted by Western financial institutions, should become more prominent in the world financial system and be offered as an option by the conventional financial system. London is interested in becoming the center of Islamic finance, and even Israel offers the sukuk bond. Turkey and other G20 members that have not fully incorporated Islamic finance options should not be “allergic” to the adjective “Islamic” in Islamic finance. A consultant who works for Bener Danışmanlık suggests that Turkey could learn from Indonesia’s success of recently issuing sukuk bonds. “Like Turkey, Indonesia faces declining exports and lower foreign direct investment because of the global credit crunch. The sukuk issue was, therefore, raised in order to support alternative financing for the 2009 Indonesian state budget and to help offset the cost of stimulus spending needed to boost domestic demand. The savings of the local population were raised to be directly used to support the local economy.”

Why then should we rush again to ask for the “bitter assistance” of the IMF while, in fact, it is they who need to sign a letter of intent to the world to not fail once again to oversee the practice of “zombie” banks and financial institutions?

*) Personal opinion of D-8 Secretary General based in Istanbul.

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