Business

Saturday October 3, 2009

The Pittsburgh G-20 summit – has it worked?

WHAT ARE WE TO DO
By TAN SRI LIN SEE-YAN


AMIDST cooled-down expectations that G-20 leaders face “waning enthusiasm for bold measures”, decisions at the conclusion of their summit last weekend were within expectations.

The preamble to their communiqué declared “it worked” in their response to the global economic crisis: “Our forceful response helped stop the dangerous, sharp decline in global activity and stabilise financial markets”.

That sounds rather presumptuous! Sure, there have been successes. And this has been an unusual period of desperate co-operation.

But the process of repair and recovery remains incomplete. There were many promises and more have since been made. For many nations, unemployment is still too high; clear signs of recovery in private demand are not here as yet; then, what real regulatory reforms since April?

Anyway, possible pitfalls that can trigger setbacks include: growing losses on commercial real estate; need for the re-capitalisation of European banks; continuing reluctance of banks to lend; work on how to make global economy less susceptible to crisis (or a second dip); uncertainty about the needed political will back home to push the global agenda; while restructuring global payments imbalances remains a serious problem.

G-20 promises

Be that as it may, the G-20 leaders now promise to do much more, including (i) avoid premature withdrawal of stimulus; (ii) plan for effective exit strategies; (iii) launch new framework for strong, sustainable and balanced growth; (iv) shift from public to private sources of demand; (v) reform and strengthen financial regulation and act together to raise capital standards; (vi) design, implement and monitor plans for global re-balancing; (vii) reform global institutional architecture, especially IMF and World Bank; (viii) phase out fossil fuel subsidies; (ix) fight protectionism and secure Doha-round deal in 2010; and (x) reach agreement on climate change at Copenhagen.

French President Nicolas Sarkozy, flanked by President Barack Obama and British Prime Minister Gordon Brown, speaking at the G-20 Summit in Pittsburgh. The G-20 accounts for 85%-90% of global income. — AP

The group is scheduled to meet twice in 2010 (first in London and then South Korea) to indicate what they have done so far is only a start.

It would appear that G-20 is sensitive to criticism that they lack political will to really act in earnest. They now have to live-up to their commitments on the listed broad reform agenda.

G-20 the new champion

They also know that success requires co-ordinated global governance which can only come through realistic global co-operation. So, much work still needs to be done. As of now, I would grade G-20’s performance with an “incomplete”.

In this context, a key decision was to use G-20 as the new champion of the global economy and financial system: “We designated the G-20 to be the premier forum for our international economic cooperation. We established the Financial Stability Board (FSB) to include major emerging economies and welcome its efforts to coordinate and monitor progress in strengthening financial regulation.”

It will replace the once elite G-7 of rich industrial nations.

G-20 comprises the original G-7 (US, Canada, Britain, France, Germany, Italy and Japan); 6 Asian nations (China, India, Indonesia, South Korea, Australia plus Japan); 5 others (Russia, Brazil, Argentina, South Africa, Turkey); and two observers from Europe (Netherlands and Spain); plus the European Union.

Together they account for 85%-90% of global income and 90%-95% of world payments.

The UN, IMF and World Bank also attend. Some bemoan 85% of world’s nations are not represented, and the under representation of Africa, Middle East and the very poor nations.

New global growth model

Symbolically, for the first time, this forum brings the system of co-operation up-to-date with structural changes in the global economy, to build a durable recovery.

Gordon Brown (Prime Minister, UK) is right in describing this move as offering “more chance of delivering results than anything since the Second World War”. Expectations are high.

The focus is on how the leaders will enforce commitments countries make, which can involve peer reviews – although there will be no sanctions. Similar efforts were attempted in the past, but failed. Realistically, memories of having grappled with the deepest recession since 1929 can be short-lived.

As I see it, five key challenges must be addressed to ensure that the world economy will be placed on a more stable and balanced growth path. This requires a new growth model that not only rebalances growth but also lifts the growth potential of all nations, especially the most vulnerable.

First, commitment to support and implement stimulative programmes until recovery is clearly secured. In the meantime, put in place a transparent and orderly process to withdraw the extraordinary fiscal, monetary and financial sector support, for implementation when the time is right and co-ordinated globally. This should contain expectations and build confidence.

Second, a pre-condition for sustained growth requires reform in the distribution of global demand. This needs a practical global mechanism to avoid excessive payments deficits and surpluses, requiring (a) adjustments across the global economy, and (b) reform to raise growth potentials and avoid creation of asset bubbles. Increasing living standards in emerging markets remains a critical element.

Third, international financial institutions (especially IMF and World Bank) must be redesigned and strengthened to effectively deliver. This includes measures to rebalance power and reshape governance within them, to reflect today’s realities in Asia in particular. This should boost their legitimacy in global development.

Fourth, programmes to ensure benefits of recovery extend to the world’s poorest. Their access to multilateral resources and involvement in broader development issues, including food security and aid effectiveness, remain critical in order not to leave them behind.

Fifth, support for global efforts at addressing issues on climate change, starting at Copenhagen. Urgency is needed to bridge the funding gap to support technology, adaptation and mitigation action in developing nations. These can be facilitated by both private funding through international carbon markets and providing access to greater public resources.

Global imbalances: What next?

Somewhat lost in the heated outcry over the lack of definitive progress in financial regulation and supervision reform (especially curbs on banker’s pay), is the critical issue of global imbalances – the root cause of the crisis.

“If we don’t correct them, we’ll have the recipe for the next major crisis. And this of course could be totally unacceptable” (J.F. Trichet, president, European Central Bank).

Indeed, these imbalances have deeper roots in global macroeconomic policy.

Why is this so? Large and persistent deficits and surpluses (i.e. fundamental disequilibrium, in IMF talk) are both bad. They generate even larger capital flows which can become destabilising. Simply put, current account surpluses mean excess of national savings over investment.

These surpluses are invested abroad in private assets or piled up as foreign exchange reserves. They are re-routed through the global markets, raising liquidity world-wide and at home.

Toxic assets would not pose such a threat had these surpluses been smaller and less persistent. Unfortunately, there is no international mechanism to allow these disequilibrating flows to adjust by themselves.

Four key elements need to be addressed

(i) Are these imbalances self-correcting? To a degree, rebalancing is happening automatically because of the crisis. The Chinese surplus at 11% of GDP at its peak will fall to 7% in 2009. In the United States, its deficit is likely to drop from its high of 6.5% to 3% this year. But, the underlying problem just won’t go away. Both surplus and deficit countries have to separately adjust through their own mix of macroeconomic policies.

There is no guarantee that these will act in concert to resolve the problem. Only by accident. Hence, need for global policy co-ordination, which is not easy, given these are very sensitive issues. Similarly, a US-only adjustment will not do.

(ii) The euro-zone’s problem is different since it, as a whole, runs a small deficit. But, there are large cross-country imbalances within the zone. Besides, Germany runs a persistent surplus, like China. When it comes to surplus and deficit, the euro-zone does not behave like one zone; each’s policy response is uncoordinated and nationalistic. This issue can only be resolved on a country-basis and not as one currency area.

(iii) What then is the best policy approach? There is no one-size-fits-all solution. Each country will tailor-make its own adjustment policy – reflecting in reality what is happening now in the United States, Germany, Britain, France, China and Japan. G-20 leaders were tongue-tied in finding the right words to reflect their collective stand: there exists a “compact that commits (the group) to work together to assess how policies fit together, to evaluate whether they are collectively consistent with more sustainable and balanced growth, and to act as necessary to meet our common commitments.” What gobbledegook!

(iv) Can this be policed? It can’t. Caps on imbalances won’t work in practice; neither would penalties should the cap be broken. In essence, the G-20 has no legitimacy here. The real issue is this: none of the surplus or deficit nations are ready to surrender sovereignty over macroeconomic policies in the future. Least of all, follow the advice of the IMF and under pressure from its peers. Not even for the common good and world economic stability!

All we know now is that G-20 leaders have started a conversation on this difficult but critical issue. It’s just too early to know where this will lead by end 2010.

>Former banker Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time promoting the public interest. Feedback most welcome; email:
starbizweek@thestar.com.my

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