The London Summit of the G20, attended by leaders representing over 85 per cent

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of the world’s economy and population, agreed to a

29-point communiqué, which, as is common with such declarations, pushes all the buttons and is drafted expertly to provide a rousing call for ushering in global recovery. This has brought much needed cheer to markets across the world.

However, the communiqué also reflects an exercise in compromises to keep everyone on board. The US did not get the explicit commitment for each country making its fiscal stimulus at a minimum of 2 per cent of GDP. On the other side, the Europeans, especially the French, coached by American economist Joseph Stiglitz, did not get a supra global regulator for the financial sector.

But there are two clear winners — China and the IMF. The communiqué is silent on global imbalances and exchange rate misalignments. These are seen by some to be, along with the monumental regulatory mistakes in the financial sector, the fundamental causes of the present crisis. The Chinese will also be happy at the possibility of a Chinese heading either of the two Bretton Woods institutions, the next time round.

The London Summit, in that sense, can be seen as a rite of transition for China to emerge as a major player in the global scene. The Chinese media has gone to great lengths to show the US and China working together to help achieve common ground and bring about convergence. The London Summit has been, thus, about the emergence of the G2 — the new power relationship between the US and China — which will be the most influential factor in global issues in time to come.

This reflects ground realities as well. For, a successful recovery from the current recession is contingent upon the US and China meeting their respective challenges successfully. The unfreezing of credit flows in the US will happen only when all toxic assets in its banking system have been fully identified and taken off from the banks’ balance sheets. This is at the heart of the recently announced Tim Geithner plan. Second, the unprecedented slowdown in US consumption demand has to be compensated by a similar rise in domestic demand in China. This will allow the Chinese to switch their production capacities to cater to domestic demand.

The success of these plans is far from guaranteed. Can the US banks fully identify their toxic assets when these continue to rise either because of housing foreclosures or worsening state of consumer credit? Moreover, the Geithner plan could well flounder in its attempt to use private bidders for making the price discovery for toxic assets.

China’s effort to switch production to meet domestic demand may run into problems related to the required absorptive capacities at the level of its provinces and counties, who have so far encouraged savings. Moreover, the transaction costs of supplying to domestic markets can be significantly higher than servicing foreign export markets. Thus, China could find it difficult to achieve seamless transition from the extreme export-orientation of its domestic demand-led growth. The rest of the world would do well to figure out the fall-back options in case one or both of these challenges proves more intractable than envisaged.

Apart from the emergence of the G2, the other tangible result from the London Summit has been the phoenix-like rise of the IMF. This has happened through a trebling of its resources to $750 billion and the communiqué stating that it will be responsible, along with the Financial Stability Board, for developing an early warning system and as a provider of emergency financing for beleaguered economies.

It was not long ago that the principle task of the then newly-appointed IMF managing director was to prune staff and somehow keep it afloat financially. But it is not clear how the Fund has restructured its capacities and redesigned its diagnostic tools for it to play a more effective role, than in the past, in pulling individual economies out of the crisis. I have not so far seen any evidence of the Fund having drawn some lessons from the current crisis. Throwing money at the crisis may be a necessary but certainly not a sufficient condition for engendering a sustained recovery.

This has, perhaps, been the greatest weakness of the G20 process. The leaders, for reasons best known to them, have chosen not to ask for a complete overhaul or restructuring of existing institutions or given them new mandates or fresh instruments with which to tackle the challenges ahead. This surely implies that we will continue to treat the present crisis, and others to follow, simply as a repetition of past episodes and, therefore, apply the same worn out methods to handle them.

One would have thought that a crisis of this magnitude at the very centre of global capitalism would have goaded the leaders to look for fresh ideas and insights. Instead, we ended up with three times the old wine in the same old bottles. The beltway bureaucracies, which Obama professes to fight, win yet again!

The writer is the director and chief executive, Icrier