G-8’s Economic Dominance Faces Challenge From China, India

July 10 (Bloomberg) -- Leaders of developing countries confronted advanced nations with a demand for a greater role in the management of the global economy, signaling the drift in power away from the financially distressed West.

Five countries with almost half the world’s population -- China, India, Brazil, Mexico and South Africa -- challenged the hegemony of the U.S. dollar, balked at the industrial world’s strategy for fighting climate change and sought more clout in global markets and institutions.

The encounter yesterday in L’Aquila, Italy at the annual Group of Eight summit dramatized the ascendance of emerging nations -- led by China -- as the worst economic calamity since World War II batters the U.S. and its European allies.

“Everyone was of the opinion that the G-8 isn’t any longer the most ideal structure for dealing with the governance of the world economy,” Italian Prime Minister Silvio Berlusconi told reporters after chairing the session.

Leaders of the G-5 -- representing 3 billion people with gross domestic product of $7 trillion -- appeared as a united front for a fifth time at the summit of the G-8, the advanced world’s forum founded in 1975.

“What is happening here is simply the acknowledgment of a reality,” Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, said in a Bloomberg Television interview. “Be it the fight against poverty, climate change, trade -- whatever you want that is global in nature -- you need those large emerging economies.”

Climate Clash

The eight -- the U.S., Japan, Germany, Britain, France, Italy and Canada, along with Russia, a member since 1998 -- unite 880 million people with combined GDP of $32 trillion.

Russia, which has joined Brazil, India and China in the BRIC bloc, views the G-8 as a forum for “brainstorming,” said Sergei Prikhodko, an aide to President Dmitry Medvedev. “It’s too early to talk about burying the G-8.”

The G-5 took aim at the advanced economies’ call for a 50 percent cut in greenhouse-gas emissions by 2050, saying the policy would suppress the economic growth needed to lift millions out of poverty. No target can be set until world climate talks wrap up in December, they said, insisting on money and technology to help clean up the atmosphere.

“While we don’t expect to solve this problem in one meeting or one summit, I believe we’ve made some important strides,” President Barack Obama said.

Growth Gap

The contrast was highlighted July 7 when the International Monetary Fund said developing countries are leading the way out of the economic morass spawned by the industrial world.

Emerging economies led by China will expand 4.7 percent next year, the IMF said, up from an April prediction of 4 percent. The Washington-based lender forecast growth of 0.6 percent in the advanced economies, up from expectations of stagnation.

China is “better situated to deal with this crisis,” billionaire investor George Soros said in a Bloomberg Radio interview July 7. “The Chinese in my opinion are going to gain in power and influence in a way that people currently don’t recognize.”

In a statement in L’Aquila, the G-5 warned the industrial world against backsliding on aid commitments and sought “a new global governance,” including better representation in the IMF and United Nations.

After parallel summits July 8 in a region rebuilding from an earthquake in April, the G-8 and G-5 met yesterday to work out a statement to at least paper over the diverging worldviews.

Dollar Dispute

Central to their dispute is the status of the dollar, its role as the world’s dominant reserve currency under threat from the $2.3 trillion in debt run up by the U.S. since the start of 2008 to stem the financial crisis.

The G-5 -- mainly China -- held around $1 trillion in U.S. Treasury debt in April, giving them leverage over decisions made in Washington.

While officials from China, Russia, India and Brazil grumbled outside the conference room about the dollar’s hegemony, there was “not a serious discussion” of currencies on the inside, U.K. Prime Minister Gordon Brown said.

“There has been concern on the dollar, but there hasn’t been a coherent strategy put forth,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “We don’t think that’s going to be an issue weighing on the dollar for the balance of this year. It’s a much longer term issue.”

Brazilian and Russian officials said they intended to raise the issue at a G-20 meeting in Pittsburgh in September. The dollar “may well be” brought up there, Brazilian Foreign Minister Celso Amorim said. Arkady Dvorkovich, Medvedev’s economic aide, said currencies are a G-20 matter.

Hu’s Absence

Chinese President Hu Jintao didn’t need to show up in L’Aquila to project his influence. The Chinese leader hustled back to Beijing before the summit started to deal with ethnic disturbances along China’s western border, leaving State Councilor Dai Bingguo as a representative.

“Hu’s absence ironically demonstrated China’s presence,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo.