Opinion - Editorials

Global cooperation to manage the oil shock

It was inevitable that the prevailing high oil prices should dominate the agenda not only of the Group of Seven industrial nations (G-7) but also of the other high power meetings of the World Bank and IMF, held simultaneously in Washington. The international community of finance ministers, central banks and other senior finance officials assembled was obviously seized of the dimensions of the problem. However any meaningful solutions would call for a greater degree of international co-operation than is in evidence now. In the event, remedial measures on which a consensus could be evolved extended over a long time frame and also required a better co-ordination of national economic policies. Beyond these, no specific agreements of any significance could be reached. The G-7 nations could do no better than advocate the removal of barriers to the development of alternative energy sources. That is a course of action that has been engaging practically all countries and even the oil companies.

The Washington meetings did focus on one major deleterious consequence of the oil shock that coincided ominously with their sessions. At the G-7 meeting, Rodrigo Rato, the Managing Director of the IMF, talked of the possibility of an abrupt correction in the financial markets in the wake of the oil shock, whose fallout could, at best, be partially minimised by co-ordinating economic policies of major industrial nations. Indeed, when these meetings had barely started, the Wall Street witnessed its worst session in two years with the Dow Jones Industrials index plunging by 191 points. Given the globalisation of the financial markets and the pivotal role the U.S markets have acquired, stock markets throughout the world reacted in the same fashion. In India too following a sharp drop in the benchmark indices, there was speculation as to whether the latest stock market boom had ended. Concerns over oil prices have been one major factor, although others such as the weakening commodity prices in Brazil, the disappointing performance of companies such as IBM and even the lacklustre earnings outlook projected for iconic companies such as Infosys in India contributed to the decline.

A medium to long term strategy to help the global financial system gain greater stability calls for steps that have been articulated many times in the past. These include a resolution to the burgeoning current account deficit in the U.S., an increase in the savings habit of U.S. consumers, and measures to perk up the economies of the European Union and Japan. None of these or the suggestion to make the exchange rate policies of China and other Asian countries more flexible can be undertaken unilaterally by any one country. For all the inherent limitations in seeking a global approach to resolve major contentious issues, there is no other way to contain or minimise certain extreme consequences of major developments such as the oil shock.

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