News Analysis: G8 summit to wrestle with "3F crisis" 2008-07-06 14:35:56   Print

    by Wang Jingzhong and Tian Fan

    TOYAKO, Japan, July 6 (Xinhua) -- As leaders of the world's leading industrialized powers gather in the resort town of northern Japan for their three-day summit beginning Monday, the world will focus on what "prescriptions" they will write for financial turmoil and fuel and food price hikes, dubbed as the 3F crisis that is threatening the global economy.

    The world economy had become hostage to the 3F crisis, said French Finance Minister Christine Lagarde while attending a meeting of finance ministers from the Group of Eight (G8) club in Osaka, Japan, in June.

    The turbulence of the world's financial market triggered by the U.S. subprime loan crisis has prompted huge flows of hot-money into commodities such as oil and food, sparking a surge in the prices and stoking inflation worldwide.

    Inflationary pressures also weaken central banks' capability to stimulate economic growth and stabilize the financial market.

    Under these circumstances, rising oil prices and stabilization of the financial market will figure prominently at the G8 summit in Toyako, according to the official website of the summit. Soaring food prices will be a separate issue high on the agenda of the leaders of the G8 club which includes Britain, Canada, France, Germany, Italy, Japan, Russia and the United States.     


    Since the emergence of the U.S. subprime loan crisis last summer, financial institutions in Western countries have suffered billions of dollars in direct losses, resulting in a slump in major stocks worldwide.

    The condition of the credit crunch in the financial market has improved somewhat in the past few months after the U.S. Federal Reserve cut interest rates and injected billions of dollars into the market.

    International Monetary Fund (IMF) chief Dominique Strauss-Kahn has struck an optimistic note, saying the worst of the credit crisis appeared over.

    But many analysts have warned the slumping U.S. housing prices had not been reversed fundamentally while the credit and money market conditions could deteriorate further.

    Meanwhile, the devaluation of the U.S. dollar and soaring oil prices would further increase further global inflationary pressures, they said.

    "The world economy continues to face uncertainty and downside risks persist," said a statement issued by the G8 finance ministers at the end of their meeting.

    "Further declines in housing prices in the U.S. and greater strains in the financial market may adversely affect the global outlook," says the statement.

    At their meeting, the ministers made repeated calls for a stable financial market, but they provided few choices for concrete action, especially on the issue of the U.S. dollar's exchange rate.

    Europe and Japan have been complaining about the devaluation of the U.S. dollar, but there is no sign yet that the U.S. side will take any substantial action, although U.S. Treasury Secretary Henry Paulson had said that a stronger dollar is in the interests of the United States.

    Analysts say it is difficult for G8 members to adopt a coordinated currency policy as they face different economic cycles and inflationary pressures.     


    "The impact of surging oil and food prices is being felt globally but is most acute for import-dependent poor and middle-income countries confronted by balance of payments problems, higher inflation, and worsening poverty," a new IMF study warns.

    It warns that the jump in oil and food prices has pushed some developing countries to the "tipping point," putting governments in a difficult position of balancing the interests of the poor and economic growth.

    The G8 finance ministers also noted in their joint statement that elevated commodity prices, especially those of oil and food, pose a serious challenge to stable growth worldwide.

    Since the beginning of this year, oil prices have soared some 40 percent, staying above 140 U.S. dollar a barrel currently. Several Asian countries have slashed fuel subsidies, raising prices for millions of consumers.

    The world is also grappling with an emerging food crisis as prices of rice and other agriculture products rise. The price hikes have set off riots and protests from Africa to Asia and elevated fears of a global food crisis.     


    To rein in soaring oil and food prices, it is necessary to find out the root causes of the hikes, but countries concerned have so far offered different explanations apparently due to their divergent interests. That is the reason why it is so difficult for them to write a joint "prescription," analysts say.

    Even within the G8 club, their views differ greatly. France, Germany and Italy place greater blame on speculators for the oil price hike, while U.S Treasury Secretary Henry Paulson cited the unbalanced supply and demand as the main cause.

    In a bid to seek consensus, the G8 has even called for an investigation involving the IMF into the recent wild swings in energy prices.

    On the cause of surging food prices, a sharp difference remains between developed countries and most of the developing countries.

    In recent years, the United States, the European Union and Brazil have actively promoted biofuel production, mostly with corn, rapeseed and sugarcane.

    Many countries, arguing that cars have grasped a substantial amount of "food" from human beings, call on the biofuel producing countries to slash the huge subsidies for this sector.

    However, the U.S. has denied that its development of bio-fuels led to the shortage of global food supply, insisting that bio-fuel production has a very "limited" effect on food prices.

    But the IMF notes in its recent study that rising biofuel production in advanced economies has boosted food demand. In particular, rising corn-based ethanol production has accounted for about three-quarters of the increase in global corn consumption in2006-07.

    "This has not only pushed up corn prices, but also prices of other food crops," said the agency.

    Many analysts note that high food prices have exacerbated global poverty, and that the G8, the rich club of countries, is obligated morally to take actions to tackle the problem.

Editor: Amber Yao
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