As popular protests against authoritarian regimes spread, the finance ministers and central bank chiefs of the group of 20 leading economies convened over the weekend in Paris - the first meeting under France's 2011 presidency of the G20.
A compromise that was sealed at the last minute has the potential to reduce imbalances between deficit and surplus countries in the world economy. But the deal falls well short of the French president Nicolas Sarkozy's promise to address the pressing problem of soaring food prices that partly triggered the social unrest in Tunisia and Egypt.
Amid official concern about the prospect of currency and trade wars, the world is seeing yet another hike in food and commodity prices, up by 20-30 per cent since last year according to estimates by the IMF. That is reducing the disposable income of the poorest and fuelling both misery and inequality.
G20 finance ministers and central bank chiefs talked tough about the social crisis but did little to deal with higher costs of food and essential commodities such as energy - with oil prices firmly above the symbolic $100 mark. Instead, they merely agreed on a set of indicators to detect future global imbalances. In the current context, this is a little bit like drilling the fire brigade in Rome while the entire empire is burning.
The main reason for inaction is that the United States and China, the G2 within the G20, are locked in an increasingly bitter feud about currency and trade. "The maintenance of undervalued currencies by some countries has contributed to a pattern of global spending that is unbalanced and unsustainable," the chairman of the US Federal Reserve, Ben Bernanke, claimed at the Paris summit. The US treasury secretary Timothy Geithner went further and accused Beijing directly of leaving its currency "substantially undervalued". That gives China an unfair trade advantage that helps reinforce a two-speed global recovery, so Washington's argument goes.
For its part, Beijing was for a long time reluctant to discuss the value of its own currency or its preferred policy of investing vast trade surpluses in US treasury bonds. Until this weekend the Chinese leadership refused to incorporate real exchange rates and foreign currency reserves in assessing global imbalances.
The Paris deal on indicators to detect structural imbalances is a classic compromise. It includes exchange rates and currency holdings but excludes interest payments received by China on its foreign currency reserves, estimated to be more than $2 trillion. At the insistence of emerging markets, the list of indicators extends to public debts and budgetary deficits as well as private debt levels and savings rates - measures that reveal just how much deficit countries such as the United States and the UK have been living beyond their means.
However, the main indicator that is missing from the G20 deal is in relation to food and commodity prices. There is overwhelming evidence to suggest that price movements are in large part driven by speculative manipulation. Clearly ordinary demand and supply forces such as bad harvests and population growth cannot account for a 20-30 per cent hike in the cost of foodstuffs over the past 12 months.
As Robert Zoellick, the president of the World Bank, told reporters during the G20 summit, "We are reaching a danger point" in low-income countries. He said he urged G20 officials to "put food first in 2011", even as they squabble over technical details to gauge global imbalances.
The two issues, food prices and imbalances, are of course closely linked. One factor for price hikes is "hot money" - highly mobile global capital in search of short-term profits that moves in and out of emerging markets or developing countries rich in commodities - including Middle Eastern and North African countries with vast energy reserves. Another factor is a growing number of complex financial instruments such as derivative trading. These allow investors to speculate on future commodity prices by way of proprietary bets on price movements using futures and swaps.
Nor is this activity confined to western investment bank giants such as Goldman Sachs and Morgan Stanley that generate substantial trading revenues from commodity speculation. Emerging markets that are cash-rich, chief of all China, also contribute to the volatility of global capital movements, especially China's sovereign wealth fund - with resources thought to be much larger than even Beijing's foreign currency holdings.
Paradoxically, the financial crisis has reinforced commodity speculation. With low interest rates and volatile stock markets, unprecedented volumes of "hot money" are poured into commodities. Faced with low consumer confidence on the back of low growth and high unemployment, global finance has a greater preference for short-term speculative profits instead of long-term investment in the real economy.
So what could the G20 do? First of all, it should include measures of 'hot money' in the list of indicators to detect global imbalances. Second, it should consider temporary bans on certain speculative practices like naked short-selling. Over time, the aim must be reconnect global finance to agriculture, manufacturing and industry.
Third, the G20 should urgently focus on commodities trading as part of its proposed reforms of the global financial system. So far, US and EU proposals to regulate banks and finance corporations do not affect global commodity trading houses like Trafigura, Glencore or Vitol. Fourth, one concrete policy idea is to break up large retail conglomerates that form cartels and exert monopoly - excessive buying power through market dominance that crowds out small- and medium-sized enterprise and drives down prices paid to farmers.
At the Paris summit, the US treasury secretary Timothy Geithner declared that Washington would support policies to reduce the potential for manipulating commodity prices, notably greater transparency and oversight of the commodity and derivative markets. Now is the time for the G20 to act.
Adrian Pabst is a lecturer in politics at the University of Kent, UK, and a visiting professor at the Institut d'Etudes Politiques de Lille (Sciences Po), France
