Skepticism as crisis gives emerging powers clout

WASHINGTON (Reuters) - The rich nations' financial meltdown has in theory handed developing countries greater say in running the global economy, but the new stakeholders will need to offer more than rhetoric to turn theory into reality.

In the first sign of how difficult it could be to update the global financial architecture to include fast-growing developing countries like India, China and Brazil, none of the emerging countries at the Group of 20 summit offered to kick in money for the IMF to fight financial contagion.

The G20 agreed to add emerging market economies on the Financial Stability Forum, where top bank regulators evaluate banking and market risk. They also agreed to study ways to give the emerging countries more seats at the IMF and World Bank.

Canada's Prime Minister Stephen Harper called the weekend session "the beginning of an unprecedented process where developed and developing countries will work together."

The Brazilians went further. Foreign minister Celso Amorim declared "the G20 has effectively replaced the G8" and President Luiz Inacio Lula da Silva echoed years of blunt advice from the West, telling rich countries to "solve their economic problems."

But hopes voiced by Britain, Japan and others that their emerging economy partners would offer up cash for the IMF proved premature at the weekend.

Saudi Finance Minister Ibrahim al-Assaf told Reuters the rich oil-producing kingdom had no plans to cough up more money for the IMF. "There were lots of rumors that we were coming here to pay the bill, there is no such thing," he said.

China, with a pile of foreign reserves approaching $2 trillion -- the largest in history -- likewise did not respond to lobbying by British Prime Minister Gordon Brown for countries running huge surpluses to contribute. Japan had also hoped that oil producers and surplus countries would chip in.

"Steady and relatively fast growth in China is in itself an important contribution to international financial stability and world economic growth," said President Hu Jintao, which announced a $586 billion domestic stimulus plan last week.

POLICY CHANGES SOUGHT

Even before this crisis, the structure of the G8 rich industrial democracies plus Russia had long been criticized as out of sync with economic reality that had been transformed by years of fast growth in China, India and Brazil.

Some participants said the first attempt to bring those countries together was an improvement on the old order.

"The G20 declaration is very detailed, very action oriented. If you look at the G7 or G8 leaders communique, it's five or six sentences, that's all," said South Korea's deputy finance minister Shin Je-yoon, who acknowledged that the G20 statement was also longer on plans than action.

Experts warn, however, that developing countries' lingering economic vulnerabilities, particularly their reliance on exports to rich country markets, put them at particular risk from the credit crunch.

The impact of the U.S.-bred financial crisis on China has quelled for now growing talk that Chinese growth had been "decoupled" from the health of Western economies.

Another impediment to stability in places like South America is a high debt burden, which analysts say could preclude the region from resorting to fiscal spending to offset the drag on economic growth from withering capital inflows.

"In Latin America, the scope for significant countercyclical fiscal policies is very limited due to the heavier debt burden," said Shelly Shetty, senior director for Latin American sovereign ratings at Fitch Ratings in New York.

Some U.S. economists are skeptical that China can become a part of a solution to the global credit crunch until it stops adding to the problem of huge global imbalances by keeping its currency artificially low to boost exports.

"The basic contribution of the developing countries to the current mess and the overwhelming disagreement with them is their undervalued exchange rates," said economist Peter Morici of the University of Maryland's business school.

"Until China and others are willing to stop intervening, we could admit four Chinese senators to the U.S. Congress and it would not help stabilize markets," he said.