On September 24-25, 2009 G20 leaders will hold their third summit in a single year. Officials’ attempts to play down expectations of what will be accomplished prompt questions about what leaders should attempt. To their credit, they have established the priorities. Now they have to deliver with action on (a) global financial standards to make the international financial system safer; (b) a policy framework for reducing the global macroeconomic imbalances that contributed to the crisis; (c) direction to trade ministers to complete the Doha negotiations; and (d) reform of the International Monetary Fund to give the large developing countries more say.
As immediate growth prospects improve the focus is shifting to sustaining the recovery and applying the lessons from the crisis to improve the future functioning of the world economy.
The most tangible action at Pittsburgh will be on financial regulatory reforms to reduce the risks posed by large cross-border institutions whose business failures would, like Lehman Brothers, have such serious systemic consequences that taxpayers are forced to bail them out. US Treasury Secretary Geithner’s call for higher capital cushions in banks and lower leverage ratios will reduce leverage throughout the system; the Basel Committee on Banking Supervision’s proposals to strengthen national governments’ powers to intervene and cooperate in resolving problems are one step, and forcing such institutions to prepare plans for their own windup in the event of insolvency, known as “living wills,” are another. Other steps are also needed to increase the transparency of derivatives transactions and oversight of credit rating agencies.
Government supervision of bank managers’ remuneration is also likely to be agreed, in part to paper over differences about centralizing global financial supervision, which French President Sarkozy pushed to address the too-big-to-fail problem. The reality is that most non-European governments are unwilling to cede sovereignty to a global super-regulator and for good reason. The size and reach of a global regulator cannot make up for the local knowledge and judgment of national regulators who must be very knowledgeable about the institutions they oversee. Nor is there any one model for a national financial supervisor. The UK model of a single independent regulator failed to prevent a crisis in which the banks had to be temporarily nationalized while the decentralized arrangements in the United States had severe short comings as well. Large complex institutions like Citigroup, with an entire floor of supervisors onsite, were at the heart of the financial crisis.
Macroeconomic cooperation is the other important issue for Pittsburgh but one where little progress will be evident. Cooperation on fiscal and monetary stimulus prevented the collapse of the international financial system. Now attention must shift to reducing the large current account surpluses and deficits that contributed to the crisis. The “engine that could”-- the US consumer -- is now busy repairing balance sheets, saving more and spending less. Public and private saving will have to rise for the United States to dig out of its deficit hole, which in 2009 will be at least 13 percent of GDP. Future growth will have to come from the large exporters: Germany, Japan, China and other East Asian economies who must now import more. This kind of switch will require painful reforms, such as Asians relying less on the export-oriented regional production system targeted at the US consumer, and more on Chinese and other Asian consumers. The latter are habitually high savers, however, and have very different buying habits. Government rebate schemes have encouraged Chinese to buy stoves, cars, and TVs, but these are one-time purchases. Social safety nets are needed in Asia to assure people they can save less and spend more and these will take years to construct.
The third priority -- trade openness – is where Pittsburgh is likely to be dismissed as a talk shop. The US duty on low-end Chinese tires imposed on September 18, while technically legal, signaled that support for US health care reform trumps openness. The only way the G20 can restore credibility on openness is to give a clear order to complete the Doha round by a specific date in 2010.
Global governance is the fourth priority and part of the plumbing that makes the global architecture work. G20 leaders rely on existing institutions like the International Monetary Fund to implement their decisions. The IMF suffers from credibility problems following the Asian crisis decade ago when it was perceived to be less than helpful in their time of need. Giving emerging market economies a greater say in its governance in line with their relative economic clout (and the Europeans less) will help to restore its proxy status as the international lender of last resort.
In short, Pittsburgh needs to act on financial reforms; it needs to kick off a new phase of international cooperation on the difficult medium-term actions needed to rebalance world growth away from heavy reliance on US consumption. Asian reforms will be central to this process – which is a good reason to hold the next summit in Asia. South Korea, which takes over the chairmanship of the G20 in 2010, is well placed to push forward the rebalancing agenda. But Pittsburgh must launch it.
Tuesday, September 22, 2009
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