G-20 Summit: Restoring Stability, Growth and Jobs

The Group of Twenty (G-20) is composed of 19 of the world's most important national economies, plus the European Union. Its members have about two-thirds of the world's population and control some 85 percent of the world's economic output. The G-20 adds developing economies such as Brazil and Argentina in South America; China, India, South Korea and Indonesia in Asia; and Mexico, Australia, Russia, Turkey, Saudi Arabia and South Africa. The G-20 was created in 1999, and because it includes so many economic and political systems, it has become the steering committee for the world's economy and a key forum to discuss diplomatic differences. It used to be that only Finance Ministers and the Governors of central banks attended the sessions. But as the world economy went into a tailspin, the heads of the G-20 countries met for the first time in Washington in November 2008.
The second summit, involving Heads of Government, of the G-20 major countries, which together account for 90 per cent of the world’s Gross Domestic Product (GDP), 80 per cent of its trade and two-thirds of its population, was held in London April 2, 2009. The purpose of the meeting was to review the steps taken by them individually and collectively to meet the challenges of the economic crisis, take stock of the situation as it prevails today, job security, and plan future action to try and solve the problem that has cast its malign shadow on every economy, big, medium and small, around the world.

At the last count, 17 of the 20 member countries had introduced protectionist measures to coddle their national economies and nurse them back to health, of course in the mistaken notion that shutting the door to others is the best cure for a disease that has debilitated the powerful and the mighty in equal measure, and left developing economies in deep recession.

The G-20 Summit held at a difficult time when the world is going through a global financial crisis. The summit helped rejuvenate the world’s financial systems and provide alternative solutions to protectionism, world leaders have been moderate in their optimism. This is because there are no easy solutions to the present crisis. Matters have, in fact, been made more complicated by the rift between the European Union and the US — and within EU itself — over how to handle the global downturn and boost slowing world trade. Only in February 2009 the World Trade Organisation (WTO) had predicted that global trade will drop by nine per cent in 2009. The agenda of the London Summit included, stability, growth and jobs.

The world’s 20 biggest economies put up a united front and sewed together an unprecedented programme of action, including a $1.1trillion hike in the resources of international financial institutions, to fight the worst economic crisis of modern times and to restore confidence, growth and jobs.

The six-point pledge in a statement issued after the summit of leaders of the G-20 countries also contained steps to strengthen financial regulations and supervision. It agreed to establish a new Financial Stability Board (FSB) with a strengthened mandate and representation from all G-20 members. The leaders agreed to take action against tax havens and end the era of banking secrecy through an Organisation for Economic Cooperation and Development (OECD) mechanism for exchange of tax information.

G-20 leaders merely reiterated the need for large fiscal stimulus and expansionary money policy, but instead of announcing any fresh steps, they only provided an aggregation of all packages so far committing $5 trillion in spending by 2010. They also paid lip service to resisting protectionism and promoting trade and investment, without committing to a timeframe for resuming and concluding the Doha talks for trade liberalisation. Similarly, they made other politically correct statements, including some on “fair and sustainable recovery for all”. The G-20 statement is non-binding. In terms of delivering on the promises, there is nothing but a commitment for another summit meeting before the end of 2009.

According to the G-20 plan, the International Monetary Fund ‘s (IMF) resources will be bolstered by $500 billion, which would make available a total funding of $750 billion. Besides, $250 billion will be available to poor countries to tap as trade finance. Trade finance flows have been disrupted since the financial crisis broke out.

Restoring Stability, Growth and Jobs
The leaders of the G-20 Summit agreed to restore confidence, growth, and jobs; repair the financial system to restore lending; strengthen financial regulation to rebuild trust; fund and reform our international financial institutions to overcome this crisis and prevent future ones; promote global trade and investment and reject protectionism, to underpin prosperity; and build an inclusive, green, and sustainable recovery. By acting together to fulfil these pledges the member countries will bring the world economy out of recession and prevent a crisis like this from recurring in the future.

They decided to treble resources available to the IMF to $750 billion, to support a new Special Drawing Right (SDR) allocation of $250 billion, to support at least $100 billion of additional lending by the Multilateral Development Banks (MDBs), to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy.

The leaders undertook an unprecedented and concerted fiscal expansion, which will save or create millions of jobs which would otherwise have been destroyed, and that will, by the end of next year, amount to $5 trillion, raise output by four per cent, and accelerate the transition to a green economy. They were committed to deliver the scale of sustained fiscal effort necessary to restore growth.

Their central banks have also taken exceptional action. Interest rates have been cut aggressively in most countries, and our central banks have pledged to maintain expansionary policies for as long as needed and to use the full range of monetary policy instruments, including unconventional instruments, consistent with price stability.

Financial Supervision and Regulation
Major failures in the financial sector and in financial regulation and supervision were fundamental causes of the crisis. Confidence will not be restored until the member States rebuild trust in our financial system. The leaders decided to take action to build a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector, which will support sustainable global growth and serve the needs of business and citizens.

The London Summit agreed to ensure our domestic regulatory systems are strong. But leaders also agreed to establish the much greater consistency and systematic cooperation between countries, and the framework of internationally agreed high standards, that a global financial system requires. Strengthened regulation and supervision must promote propriety, integrity and transparency; guard against risk across the financial system; dampen rather than amplify the financial and economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage excessive risk-taking. Regulators and supervisors must protect consumers and investors, support market discipline, avoid adverse impacts on other countries, reduce the scope for regulatory arbitrage, support competition and dynamism, and keep pace with innovation in the marketplace.

Global Trade and Investment
World trade growth has underpinned rising prosperity for half a century. But it is now falling for the first time in 25 years. Falling demand is exacerbated by growing protectionist pressures and a withdrawal of trade credit. Reinvigorating world trade and investment is essential for restoring global growth. We will not repeat the historic mistakes of protectionism of previous eras. To this end:
* the leaders of the Summit reaffirmed their commitment made in Washington: to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing WTO inconsistent measures to stimulate exports. In addition we will rectify promptly any such measures. They extended this pledge to the end of 2010;
* the leaders agreed to minimise any negative impact on trade and investment of our domestic policy actions including fiscal policy and action in support of the financial sector. They decided not to retreat into financial protectionism, particularly measures that constrain worldwide capital flows, especially to developing countries.

Strengthening Global Financial Institutions
Emerging markets and developing countries, which have been the engine of recent world growth, are also now facing challenges which are adding to the current downturn in the global economy. It is imperative for global confidence and economic recovery that capital continues to flow to them. This will require a substantial strengthening of the international financial institutions, particularly the IMF. The leaders of the London Summit have, therefore, agreed to make available an additional $850 billion of resources through the global financial institutions to support growth in emerging market and developing countries by helping to finance counter-cyclical spending, bank recapitalisation, infrastructure, trade finance, balance of payments support, debt rollover, and social support. To this end:
*they agreed to increase the resources available to the IMF through immediate financing from members of $250 billion, subsequently incorporated into an expanded and more flexible New Arrangements to Borrow, increased by up to $500 billion, and to consider market borrowing if necessary; and
* the leaders decided to support a substantial increase in lending of at least $100 billion by the MDBs, including to low income countries, and ensure that all MDBs, including have the appropriate capital.

Riding Expectations
Though the London Summit has a lot of expectations riding on it, the truth is that at the end of the day it might be more about intent than specifics. Notwithstanding French President Nicolas Sarkozy’s threat to walk out of the summit if a consensus did not evolve on stronger financial regulations, the meet is most likely to end with a show of solidarity by the world leaders on the global economic crisis.

One of the main reasons for this is that although the leaders at the summit are united in the agreement that something needs to be done to pull the world out of the present gloom, there are differences on how to go about it. France and Germany have not minced words in criticising what they term as the Anglo-Saxon model of capitalism and are pushing for more stringent accounting norms, regulation of trader bonuses, stricter control and registry of hedge funds, and a clampdown on tax havens. The US and the UK on the other hand are not as keen on regulations as they are on spending more to create demand and shock the global economy into recovery mode.

The differences apart, this G-20 Summit was important even if it were just to get the leaders together under the same roof. The global economic crisis will perhaps require much more than mere talk to remedy. But the exchange of views and opinions among the leaders of the world’s top 20 economically influential nations is something that was much needed at this difficult hour.