The following is my coverage of the recent London G20 Summit. This was to appear in "Rationale," the LSE Economics Society's magazine, but from all indications the publication, which has a notoriously disorganized editorial staff, is several weeks behind schedule and may not even come to print. So I wanted to get this out so that at the very least, the three people who actually read this blog can see it and offer comments.
LONDON - British Prime Minister Gordon Brown has put the executioners on notice: send the West’s free-market policy orthodoxy to the gallows.
“The old Washington Consensus is over,” declared Brown, minutes after concluding contentious negotiations at the Group of Twenty (G20) Summit in East London on April 2. “Today we have reached a new consensus to take global action together.
“We have resolved that from today we will together manage the process of globalisation.”
Seizing on the symbolism of the first international summit since the American credit crunch spread its contagion worldwide, the British leader recognised the changing structure of world power – one in which one prominent leader can openly blame “blue-eyed, white” bankers for the global recession, for example, and another can openly challenge the U.S. dollar’s credibility with little backlash, denial or impunity.
But for all the sensational rhetoric surrounding the apparent decline of American capitalism, April’s meeting signaled the most sweeping expansion of the very organisation that has served as the Washington Consensus’s guiding light and lightning rod alike: the International Monetary Fund.
The G20 nations stopped short of reforming international finance on the scale of Bretton Woods, but still made a bold pledge of $1.1 trillion in new funds for the global economy to boost liquidity in a time of declining trade and growth.
As anticipated, at least $500 billion will go toward restocking the IMF’s financial war chest to $750 billion, making the Fund larger than the economies of four G20 member states. Japan, which already pledged $100 billion to the IMF in February, is joined by the European Union and China in providing $250 billion of this capital infusion.
The G20 have also pledged $250 billion to support trade finance. Another $250 billion in the IMF’s neutral currency, Special Drawing Rights (SDR), will be allocated to countries based on their IMF quotas to provide an extra buffer as trade declines. The multilateral development banks will also benefit from an additional $100 billion for additional lending.
At least $19 billion of the new SDR will be available to low-income countries, said IMF Managing Director Dominique Strauss-Kahn, and countries with surplus SDR will be able to sell them to other countries that have balance of payments or liquidity challenges.
“It is the beginning of increasing the role of the IMF not only as a lender of last resort, not only as a forecaster, not only as an adviser in economic policy in an old traditional role,” Strauss-Kahn said, “but also of providing liquidity to the world, which is the role…of a monetary institution like ours.”
The IMF expansion aside, the G20’s final communiqué also features stated commitments to continued monetary and fiscal expansion to the tune of $5 trillion worldwide by the end of 2010, adoption of new global financial regulations, and protecting international trade and development.
The six-point agreement from the G20 communiqué, as laid out by Brown:
· Set new principles for the global banking system: bring shadow banking system, i.e. hedge funds, into regulatory framework; improve accounting standards; provide oversight of credit ratings agencies; and “name and shame” non-compliant jurisdictions that serve as tax havens. Part of this will entail the creation of “colleges” of regulatory agencies and the creation of the Financial Stability Board to report on developments in global financial markets.
· Clean up banks’ toxic assets through a common global approach.
· Collectively implement $5 trillion in macroeconomic stimulus by end of 2010; pledge central banks to monetary expansion; infuse capital into IMF for increase global liquidity and crisis response capacity.
· Continue to strive for poverty reduction through Bretton Woods institutions, necessitating increased accountability, transparency and fair representation of developing countries in these institutions’ governance; heads of staff should be appointed through a competitive, merit-based selection process.
· Protection of trade, 90 percent of which depends on finance; and a pledge of $250 billion in trade finance and additional funds through multilateral development banks.
· Promotion low-carbon growth and a move toward creating a post-2012 worldwide climate change regime.
Sir Nicholas Bayne, a former top economic diplomat with the British Foreign and Commonwealth Office and lecturer at the London School of Economics and Political Science, said the summit was a success in that delegations were ready to work together and put their main focus on aiding countries in the most difficulty with capital boosts for the IMF.
“But the key point will be to get the promised sums delivered,” Bayne said.
Just as significant as the results of the summit is what was noticeably absent from the communiqué. The G20 agreement lacked teeth on several specific issues such as climate change, specific financial regulations, and politically charged issues such as exchange rate policies and over-consumption in the United States, phenomena that may have helped produce unsustainable financial bubbles.
Ed Miliband, the British government’s climate change and energy secretary, said the G20 summit was a good opportunity to begin deliberations on climate change, but admitted there is another forum for that issue.
“The G20 shows that there is an understanding among world leaders that the world economic crisis and climate crisis can be solved together,” Miliband said. “It is promising but challenging to get an ambitious climate agreement. There are frameworks for climate change discussions (such as the United Nations) and we need to respect that.”
‘The IMF is Back’
U.S. President Barack Obama may have been the last leader to take the press limelight following the summit, but the IMF – which not long ago was fighting futility - was the real star.
“Maybe some of you were in the IMF press conference at the end of the annual meeting last October,” a beaming Strauss-Kahn said. “Some of you may remember what I said at this time was the IMF is back. Today, you get the proof.”
The massive expansion of the IMF’s coffers also enhances its role as forecaster and monitor of international economic developments. The progress of the G20’s initiatives will be measured against IMF projections and forecasts, building a stronger case for economic information to flow through the Fund’s research department.
“I’m really happy to be the head of an institution, which more than year ago in Davos, asked for a global stimulus,” Strauss-Kahn said. “Nobody, no other institution, was able to see that the crisis would be so deep that we would need a global stimulus. We asked for that and we have been followed.”
With the IMF’s expanded role, the complexion of the world’s response to the global economic crisis will have a distinct IMF flavour. The United States, unable to extract pledges of additional fiscal stimulus from skeptical France and Germany, must now look to the IMF as its last instrument of economic power during the crisis.
A less-publicised but equally powerful prong of the IMF’s post-G20 response will be the expansion of its new Flexible Credit Line, which does little to hack away at Washington Consensus orthodoxy and in some sense reinforces it.
The FCL is intended to provide “pre-conditional, precautionary” IMF financing to countries with “good” IMF track records, which would include countries that successfully implemented IMF adjustment policies and have a history of successful repayment of IMF loans. Mexico recently became the first country to take advantage of the FCL, gaining access to $47 billion in IMF credit.
In one attempt to balance its growth while enhancing its accountability and transparency, the Fund will also end a longstanding, informal tradition of elevating a European to manage the Fund. Now, as the communiqué points out, IMF staff will be selected through a competitive, merit-based process.
The G20 also agreed to accelerate reform of the IMF quotas that determines how much of a voting share a country may have on directing IMF programmes.
A review on the realignment of IMF quotas, which currently give the United States an effective veto with 17 percent of the vote (85 percent majority is needed to pass an IMF package), will now be due in 2011 rather than 2013.
“They are right to say quotas need to be changed but there is a timetable for that,” Brown said.
The IMF stopped short of recommending a transition away from the U.S. dollar as the world’s reserve currency, although Strauss-Kahn stressed the “symbolic” value of the SDR allocation. Prime Minister Brown denied there is any threat to the existing monetary order, especially considering recent renewal by China and Russia of time-old criticisms that the United States is an irresponsible custodian of the world’s reserve currency.
“Issues about international currency have not led to detailed proposals from anyone,” Prime Minister Brown told reporters.
The U.S. veto at the IMF will therefore remain during these crucial years of IMF expansion. The Washington establishment and its policy consensus likely still hold the keys to the car.
“The IMF is also back as a policymaker,” Strauss-Kahn said. “I’m not saying the different governments of the G20 are going to do all the time what we think is the right thing to do, but at least we are the partner to discuss with and analyse what kind of policy should be implemented.”
The American Chastening
On a day meant for concrete solutions to a rapidly spreading economic crisis, there was no shortage of symbolism and cynicism as new global powers came to the world stage.
On the morning of the summit, a journalist representing a Saudi newspaper put it this way.
"The world's problems will be saved all in a building that is owned by the Emirates," he said with a smirk, referring to ExCeL London, the East London Docklands convention centre owned by the Abu Dhabi National Exhibitions Company.
Even the London Summit logo indicates a shift in political and economic power. It depicts the earth and sun shining brilliantly along its arc. Europe is on the verge of rotating into the darkness of night, joining its friends in the United States, while a beacon of light emerges from the East. “Stability, Growth, Jobs” is the tagline.
And the U.S. president, known for his talents with the spoken word, was also battling a cough and cold that brought his normally rousing speeches down to earth, much the same way his country’s financial sector has been stricken by infectious leverage and toxic assets. Ultimately, President Obama was left atoning for the alleged sins of Wall Street, which are partly to blame for a crisis that will drop world GDP growth between 0.5 and 1 percent in 2009, according to the IMF.
“We exercise our leadership best when we are listening, when we lead by example and show some element of humility,” Obama told reporters.
“There were occasional comments [by other delegations], usually wedged into some other topic that indicated from their perspective that this started in America or this started on Wall Street, or this started with particular banks or companies,” he added. “Perhaps what helped was my willingness to acknowledge that - and it's hard to deny - that some of this contagion did start on Wall Street.”
While the summit revealed a new global economic landscape, it by no means created a permanent transformational shift. The United States and United Kingdom had considerable bargaining power during the summit, and used the fact that the summit was limited to one day of discussions to create pressure for parties to come to agreement. British officials reflected to that sentiment as they assured the media that G20 delegates would nail down an agreement.
“I don’t think we’ll get that many people back around the table soon so we’ve got to take action today,” said Lord Peter Mandelson, British business secretary, hours before G20 leaders were to emerge from the discussion room.
“There is some lively discussion but we are going to reach an agreement today,” added Stephen Timms, Labour Member of Parliament for East Ham and financial secretary to the Treasury. “Everybody recognises that we need to deliver.”
The Saudi reporter, who was less impressed than most by Obama’s international popularity, predicted the summit would be about the United States and its allies pushing creditor countries to finance fiscal expansion in the United States and elsewhere.
“I think it is the sort of thing where Saudi Arabia, Japan and China will be told, ‘look, you have to pay up,’” he said.
Bayne said there is more coordination between non-G8 participants on forming policy than is usually reported, but he added that countries may not be ready to assert themselves in the G20 environment.
“So far this has not led to major initiatives in the G20 or elsewhere,” he said. “They are biding their time and testing the water. China's reserve currency idea is a first indicator. More may surface when Korea takes over the G20 chair in 2010.”
What Comes Next
The lessons of the past and present may show that international cooperation is crucial to solving global economic crises. But just as important is the legitimacy of the organisation shepherding such cooperation.
President Obama has garnered praise from allies such as Turkey and Mexico for reaching out to the developing world. But as the G8 prepares to meet in Italy in July and the G20 again in Pittsburgh in September, other nations are justifiably concerned that they are yet again confined to the backseat of global decision making.
As pointed out by Daniele Archibugi, a research director at the Italian National Research Council in Rome, the G20 represents 85 percent of global GDP but also includes only one country from Africa. Spain and the Netherlands have greater GDP than Saudi Arabia and Argentina, and while the former were invited to the G20, they are not officially included in the G20 while the latter two are. Countries with large populations but small aggregate economies, such as Bangladesh, do not even receive invitations to the summits that determine so much of their future.
“The inability of the G20 to come up with solutions is largely dependent on its institutional nature,” Archibugi wrote in The Guardian on March 28. “In a world that demands greater accountability in world politics it is inconceivable that everyman's problems should be addressed in summits held outside the confines of democratic logic.”
Bayne said the G8 is not necessarily obsolete. While the G20 has been engaged primarily with financial and macroeconomic issues, the G8 has a much broader scope of issue areas to work on.
“If the G8 can effectively co-opt the leading emerging markets they can still play an effective agenda-setting and initiatory role,” he said. “The Japanese chair did not do this in 2008, for fear of China. Italy this year and Canada next year may do better.”
Strauss-Kahn and Obama also endorsed an increasingly multilateral approach to the economic crisis response, but it remains unclear how this will be put into practice before the next major institutional reform, the 2011 IMF quota review, comes through.
"Last time you saw the entire international architecture being remade," Obama said of the Bretton Woods meetings following World War II. “Well, if there's just Roosevelt and Churchill sitting in a room with a brandy, that's an easier negotiation. But that's not the world we live in, and it shouldn't be the world that we live in.”
Strauss-Kahn said extending the G20 to be G24 or G25 with the addition of several “low-income countries” would provide an accurate representation of the world economy.
“Everybody has their own recipe – there was 12, then 13, 14, 15 and finally it has been the G20,” Strauss-Kahn said. “If we really want the G20 to be a body of governance of globalisation, then we certainly need the G20 to be increased to include some country representatives of the low-income countries.”
The rest of the world, still declining into recession, may not be able to wait that long. **
You can view the G20 communique at http://www.londonsummit.gov.uk/en/summitaims/summit-communique.
The G20’s Specific Plans for Strengthening the International Financial System: http://www.londonsummit.gov.uk/resources/en/PDF/annex-strengthening-fin-sysm.
IMF Resources and the G20 Summit: http://www.imf.org/external/np/exr/faq/sdrfaqs.htm.
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