G-20 Summit, a useful step in the global restructuring process

The G-20 summit held in Washington on November 15, in response to the unprecedented global economic and financial crisis, should be viewed as a useful step in the process of restructuring global governance.

The summit itself lasted for only six hours; and the new administration in the US is still being formed.

Thus, its significance does not arise from the unrealistic expectation that it would provide an immediate solution to the current crisis. The global dimensions and depth of the crisis; differences among the US, Europe and the so-called non-industrial countries on how to reform the present Bretton Woods System; and the delicate complex task of reconciling need for stimulus in the short run with the necessity of addressing global macro-economic imbalances in a systematic manner preclude any quick resolution of the crisis.

It is essential that global macro-economic imbalances are not reduced by sudden reduction in US imports and lower exports from China, India and the rest of the world. That would not support economic growth.

The dilemma is that in the medium term, US savings must increase. As the fiscal stimulus and effective nationalisation of the financial sector in the US will increase fiscal deficits, and as household incomes fall, US savings cannot increase without significant reduction in household consumption.

China, therefore, must follow up on its promise of rebalancing its economy towards lesser role for exports and investments; and greater share of household consumption, but without turning to protectionism.

The summit, nevertheless, represented a decisive shift towards a more inclusive and representative global leadership forum, ending the pivotal role of G-7 industrial countries. This was one of the three themes the Indian Prime Minister emphasised on during the summit, all of which were represented in the final statement released at the end of the G-20 Summit on financial markets and world economy.

The precise nature of the representation of the non G-7 countries is, however, expected to be contested by the various stakeholders as geo-economics and geo-politics will be an integral part of such accommodation.

The second theme concerned protecting growth prospects of developing countries. The IMF projects that in 2009, global growth will be 2.2% and entirely accounted for by emerging markets, as advanced countries will experience negative growth. A global economic stimulus was seen to be necessary, but predictably, an agreement on a coordinated stimulus did not emerge.

The third theme was avoiding protectionist tendencies as these have been widely regarded as contributing to the severity and length of the Great Depression of the 1930s. The G-20 group agreed to refrain from raising new barriers to investment or to trade in goods and services and hoped to speedily conclude WTO’s Doha Development Agenda.

The action plan proposed by the summit focused strongly on strengthening regulation and improving transparency in financial markets. A ‘college of supervisors’ from different countries was proposed for monitoring international financial institutions; and major global banks were urged to share information about potential systemic risks with each other and with the authorities.

Most of the suggested reforms were left to national regulators to legislate and implement. These include better oversight of credit rating agencies, harmonisation of accounting standards, strengthening of banks’ risk management practices in line with international best practices, greater scrutiny of executive pay and shifting the trading of financial instruments such as credit-default swaps from unregulated over-the-counter markets into a system based on a central clearinghouse.

It is now recognised that globalisation of finance, manifested in excessive leverage and in the emergence of new financial institutions (hedge funds, private equity, sovereign wealth funds and their hybrids), results in unhealthy regulatory arbitrage. This is because regulatory regimes are national, while financial flows are global.

Europe has expressed its preference for global regulatory agencies. It is, however, not clear whether any of the stakeholders at the Summit are ready to cede parts of national sovereignty to international regulatory bodies.

At best, a common set of rules of conduct can be expected, but without any enforcement mechanism. The Santiago Principles agreed by the International Working Group of Sovereign Wealth Funds in October 2008 are a good illustration of this trend.

The G-20 stopped short of giving emerging economies a greater governance role in the IMF. Instead, membership of the Financial Stability Forum (FSF), a group of finance ministers and central bankers from industrialised countries, is to be expanded to include emerging economies. This may satisfy some emerging countries but not others.

It was proposed to review the lending resources of IMF, World Bank and other development banks, and the group collectively expressed readiness to increase multilateral lending to developing countries.

However, only Japan actually pledged an additional $100 billion to IMF. The reluctance of surplus countries such as China and Saudi Arabia to make financial commitments to the IMF signifies the differing views about whether to reform the current Bretton Woods institutions or to consider establishment of Bretton Woods II. Any progress would therefore be gradual.

The Summit has set the process of more regular meetings not only by the leaders, but also by the business groups of G-20. The Summit has established processes to help implement broad principles which were agreed upon. The next Summit is expected to be held before April 30, 2009, by which time the new US administration would be fully functioning.

India should participate more actively and constructively in the institutions of global governance and leadership. It should articulate its concerns and emphasise that it is essential that the legitimate core interests of one-sixth of the global population which it represents be given due weight in global institutions.

Its national interest lies in reforms of existing Bretton Woods institutions in such a way that its voice and weight is commensurate with its economic strength and potential, and not in creating a whole new set of institutions.

At the same time, India must recognise considerable merit in the saying “We have met the enemy, and it is us.” India’s weight and influence is dependent on competently managing its economic and broader developmental challenges, and in effectively pursuing its ‘open economy, open society’ paradigm.

India needs to move away from excessive pre-occupation with identity politics and trivialisation of national issues by the media, political parties and the elite, and towards developmental outcomes oriented agenda designed to improve the quality of daily life of its people.

Mukul G Asher (sppasher@nus.edu.sg) is a professor of public policy at the Lee Kuan Yew School of Public Policy, National University of Singapore. Deepa Vasudevan  (deepavasu@hotmail.com) is a freelance researcher. Views are personal.