17 November 2008
editorial
Johannesburg — THE weekend's G-20 summit was never going to yield a package of practical proposals to save the world from financial and economic crisis. Nor was it going to be a new "Bretton Woods", the three-week conference in 1944 that created the International Monetary Fund (IMF) and World Bank.
The leaders of the advanced and emerging market economies who met in Washington at the weekend agreed to work together to stabilise financial markets and restore global growth. But they stopped short of specifics, referring all the thorny issues to their finance ministers to look at, with a view to a further summit in April. Most of the more practical plans they proposed in response to the crisis reflected measures already being undertaken by their member countries. And the proposals on which they disagree were, for the most part, sent off to committees for discussion.
For all that, the summit was more than just a public relations exercise. That it happened at all was important because it recognised, first, that the world's leading economies had to co-ordinate their efforts to resolve the crisis and, even more significant, that emerging markets were as important among those leading economies as the old.
The World Bank is forecasting that global growth will be as low as 1% next year, with high-income economies contracting 0,1% and developing countries growing only 4,5% (down from 6,4%). The world economy, in other words, could be worse than at any time in the past 60 years.
Concerted action is necessary. The G-20 signalled at least that there is common cause among the leaders of countries that account for 85% of the global economy.
They agreed to take whatever action is needed to stabilise the financial system, and to use fiscal measures to stimulate domestic demand and to help emerging markets gain access to the finance they needed.
They agreed too that the Bretton Woods institutions should be reformed, including granting developing countries greater representation.
But there remain big disagreements between the US and Europe, for example, over cross-border financial regulation.
Though the US, and even the UK, want their financial institutions to be global, they are not about to let them be supervised by global, rather than domestic, supervisors. The US isn't too keen either on European calls to regulate ratings agencies and CEs' salaries. Those differences will not easily be settled so we are not about to see new global regulators or new global rules.
Nevertheless, there's quite a lot in the fine print of the G-20 communique that represents progress. The meeting backed the idea of a "college of supervisors" (proposed by UK Prime Minister Gordon Brown) through which the various countries' financial regulators would co-operate to keep an eye on systemically important global banks. It agreed that the Financial Stability Forum should be expanded to include emerging markets, and that the forum should work with the IMF.
The idea is that the forum should focus on harmonising regulatory standards while the IMF focuses on surveillance, of macro-economic and financial stability.
Important too was a commitment to try to revive global trade talks. Though the Doha round may or may not restart by year-end as hoped for, one promise at the weekend was that the G-20 will not raise trade barriers over the next 12 months - crucial given that faced with recession, countries might well have turned to increased protectionism , making things worse for all their trading partners but particularly for emerging markets.
It's not much yet. But the Washington weekend could prove to be the beginning of a process that will help to make the world economy a more stable creature.
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