The just completed G-20 Summit in Pittsburgh covered a wide range of global economic policy issues resulting from the dual financial and economic global crisis. A brief assessment of what was (not) achieved follows.
1. Do We Have a New Global Economic Government?
The G-20 leaders proclaimed themselves a new global coordinating institution. This is welcome, it follows along the lines I have been propagating for the last 3 years. However, this new institution, while an improvement over the very elitist G-7/8 because of its larger constituency, it lacks legitimacy for 2 reasons: it has not been mandated by anybody (i.e. the UN), and its membership is still restricted to the large industrial and emerging countries. While they comprise 90% of world GDP, they lack a voice for the poorest countries (and they can only speak for themselves and not all the other non-represented countries). The 4 EU countries could have given up 3 of their seats to less developed countries: in this way, at least all income groups of countries would have been represented. This is also true for the newly mandated Financial Stability Board. Direct inputs from all types of countries would make future decisions more sustainable and also better “owned” by all countries.
2. The G-20 pronounced on many of the most important economic policy issues: maintaining the stimulus for the time being, the need for coordinated exit strategies, better regulation of financial markets, especially large institutions and previously non-regulated institutions (e.g. hedge funds, rating agencies, over-the-counter derivatives), food and energy security, green growth, free trade and the need to give emerging, developing and transition countries more say in the International monetary Fund and the World Bank.
But: They leave most of the implementation to individual countries, based on a still-to-be-established common framework at the global level. Thus regulatory arbitrage – one of the causes of the crisis – will persist as many countries will once again attempt to attract capital by lowering their regulatory standards. This will also eliminate some of the positive effects of the fight against “tax havens”.
While much talk is about the global reach of the crisis, the G-20 leaders see the future in country-specific, albeit “coordinated” solutions, thus obviating their global aspirations.
3. The G-20 – while recognizing that large persistent macro-economic imbalances were another root cause of the crisis and tasking the IMF to survey this in the future – have failed to pronounce on the ever-widening income gaps between countries and within countries. While these contribute to the macro imbalances, they restrain consumption and thus domestic growth in surplus countries and – more dangerous – lead to domestic and international violence, less cohesion and mass emigration from impoverished countries and regions. Future growth needs not only to be more “balanced” and “greener”, but also much more equitable, to benefit all segments of the world and nations.
4. There is recognition that financial institutions “too big to fail” have been one of the root causes of the crisis. Analytically, the G-20 diagnose the risks correctly and identify appropriate mitigating measures, but they could not decide on decisive steps to eliminate the future near-breakdown of the system directly. Once again, they make vague references to higher capital requirements for large banks, to “living wills” and other mitigating instruments. While mandatory capital requirements according to risk are a very effective instrument, the present timidity leaves many loopholes for large institutions. The recognition of the pro-cyclicality of Basel II requirements and the fact that the US has promised to adopt these (revised) risk-based capital requirement principles is positive.
5. With respect to reining in value-destroying short-term trading activities and speculation, the will to regulate all types of financial business is positive, but even higher capital requirements will likely not deter automated trading in minute-phases, bonus-generating phoney trades, etc. If financial transactions volumes are dozen times world GDP today, they need to be brought back in line with “real” transactions. The large absorption of world resources by financial activities (which have also lead to an increase in FTSE 100 CEO salaries by a factor of 4 to 4 million £ during the last 10 years) needs to be stopped outright. The G-20 has not dealt with this fundamental issue per se, their attempts at making transactions more expensive by means of higher capital requirements are insufficient. They also have not pronounced on the desirability of a financial transactions tax (“Tobin Tax”) which might have thrown some sand into excessive trading activities – and brought in sizeable tax revenues.
6. It is welcome that the IMF will be given 500 billion $ more in funds to help mainly (not only) the poorest countries. It will need monitoring to see whether this money will come forth in reality. Let us remember that at the previous G-20 Summit 1.1 trillion $ had been promised for the IMF.
The World Bank will set up a new Trust Fund for Food Security: no decision on how this will be funded. The Bank is also tasked with increased efforts towards access to energy for poor countries, development of renewable energy and energy efficiency. A renewed call for more resources from the multilateral development banks, which stresses the possibility of temporary measures, is a repeat of previous calls, as are calls for greener development.
7. The commitment to phase out fuel subsidies in the medium term (which year???) while safeguarding access to energy for the poorest is welcome – if it will be carried through. Energy security is given special (verbal) attention. The World Bank, the International Energy Agency and OPEC are called upon to cooperate in this task. All this should help towards combating climate change, as does the commitment towards making the Copenhagen Summit a success. But time is of utmost importance in this undertaking, thus vague “medium-term” targets without quantitative commitments might not be enough.
8. The strong emphasis on development issues is welcome. Analytically, most of the important issues in poverty alleviation, food and energy security, climate change issues, etc. are dealt with, as are the issues of stolen assets, of bribery and corruption. Many of these require cooperation between developing and developed countries. The latters’ commitments to fulfil their ODA promises are stressed. All this is positive, but requires implementation and close monitoring.
It probably would have been asking too much to ask of G-20 leaders to make efforts to change the existing global economic system radically – even though the near meltdown of the global economy plus the early pronouncements one year ago created hopes to that effect. Thus, the G-20, anointing themselves the new global economic government (without having the legitimacy or even asking for it) act more like first-aid helpers putting bandaids and bandages on profusely bleeding wounds, instead of amputating deceased matter in order to save the body global economy.
Given this restriction, they have touched upon 90% of the important issues, promising coordination and joint frameworks, but shying away from more than consultative joint efforts. Thus countries or regional associations, like the EU, will have to implement some of these commitments, once more creating space for clever financial and business engineers to exploit uneven playing fields to their own (private) advantage to the detriment of the stability of the world economy.
But let us give credit where credit is due: the crisis has shown that there is scope for coordination and the leaders, this self-anointed (if illegitimate) global economic government, have made some steps forward and promised better coordination. The Summit has also shown that global leadership is very weak, that national priorities have once more overridden the concern for the world.
The Summit has also shown that the time for such summits has run out. A true economic policy governance structure should work diligently at the problems and issues according to their immediate need and not produce the summitry pressure to have to come out 2, 3, 4 times a year with grand-sounding pronouncements. The world citizenry is getting saturated with ever-grander promises and the concomitant lack of progress in implementation. In this sense it is unfortunate that the Pittsburgh G-20 announced that annual meetings will only follow in 2011, after 2 meetings once more to be held in 2010. More Summits, more (hollow) promises? The time is ripe for actions on a global level!