In the midst of the global financial meltdown that was originated in Wall Street, New York, for the first time, the G- 8 countries, met with emerging economies of the G-20 countries in an international conference dubbed as the world financial summit in Washington, D.C. last week-end to deliberate what needed to be done to have the global economy back on track.
The fact that the G-20 participated in the summit for the first time with the G- 8 underscored the seriousness of the global financial meltdown which by necessity required the G-20 countries' views and suggestions. It is no longer a matter for the G-8 countries alone to deal with. The G- 8 countries are Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States.
Who are those G-20 countries other than the G-8 countries which are also in the G-20? They are Argentina, Australia, Brazil, China, India, Indonesia, Mexico, South Africa, Saudi Arabia, South Korea, and Turkey. The European Union is also a member in the G-20. Apart from the EU, most of these countries are emerging economies that are primarily exporting manufactured goods.
They need the market of insatiable consumers of the United States. When credit is frozen in the largest economy of the world, exports from the rest of the G-20 countries will be seriously affected. The ultimate consequences on their economies are horrendous: manufacturers would find it very difficult to export their products , which would in turn have to cut down their production output and lay off their employees, and so on.
The general economic situation in these countries is no different from that of the United States: when you lose credit or income, overall consumption will drastically go down. The economy will not tick, but stagnate. Given today's level of globalisation, any policy prescription to solve such economic stagnation cannot be discrete from any other economies as they are all interdependent.
Hence, the need for the global financial summit of the G-8 and the emerging economies of the G-20 together. Possibility for reforms in financial practices and institutions has already prompted some observers to dub the summit "Bretton Woods II."
Even before the meeting started, differences across the Atlantic between Europe and the United States about the need for government intervention became apparent, suggesting the closer integration required for global financial regulation would be difficult.
Prompted by the recent suggestion of reconstituting international financial regimes in a "Bretton Woods II" overhaul, French President Nicolas Sarkozy called for change in the global financial system, and he pressed for a powerful supra-national regulator with a power to control global banking giants and offshore hedge funds.
On the other hand, US President George W. Bush asserted in New York on November 14 that the global financial crisis is "not a failure of the free market." He suggested the adoption of modest financial reforms, as opposed to the tighter regulations Europeans favour, by saying, "Our aim should not be more government. It should be smarter government." He urged the world leaders not to shun the free market system or restrict trade.
As the host of the summit, President Bush managed, and reined in, the form and substance of deliberation at the summit within the palatable range of his political framework and fended off European demands for global regulation. Or were the G-20 leaders gracious to their host and a departing president of the United States? A joint communiqué acknowledges "market principles, open trade and investment regimes" as part of "a shared belief" along with "effectively regulated financial markets."
As a result, the outcome of the summit, as reflected in the communiqué, was modest in scope, and in view of the host's government in a transition to be out of power in two months, no government was prepared to commit itself to any major decisions.
Instead, the leaders chose to defer more substantive questions to the future date after a new US administration is installed in January next year. For that, the G20 leaders tasked their finance ministers with drawing up a series of recommendations by March 31 to be brought before a new summit scheduled for April next year, most likely in London.
The most significant historical value of this world financial summit was that it took the forum of the G-20, thus enabling the emerging economies of the G-20 to sit with the G-8, for the first time in history, and reached a broad agreement on principles and action plans, "as appropriate," overcoming their many political and economic differences. Throughout the communiqué it is evident that "the tug of war" between the protagonists of "free market principles" and the protagonists of a stronger regulatory system was played out.
While the G-20 leaders attributed one of the root causes of the present financial crisis to "policy-makers, regulators and supervisors, in some advanced countries," who "did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions," they also underscored the importance of "a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems."
The communiqué is full of statements of principles of complementary opposites. For example, the G-20 leaders recognise "the necessity to improve financial sector regulation," but quickly add that "we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows, including to developing countries."
The G-20 leaders have expressed general principles with specific action plans, such as a new effort to strengthen transparency and accountability, tighten supervision of banks and credit-rating agencies, scrutinise executive pay and increase controls on complex derivatives.
They also make it clear that "regulation is first and foremost the responsibility of national regulators," but they continue to state that our financial markets that are global in scope requires "intensified international co-operation among regulators and strengthening of international standards, where necessary, and their consistent implementation . . . to protect against adverse cross-border, regional and global developments affecting international financial stability."
At the same time they caution these regulators that they "must ensure that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace." They will ensure that "regulation is efficient," but it "does not stifle innovation, and encourages expanded trade in financial products and services." And the G-20 leaders underscored "the critical importance of rejecting protectionism."
Likewise, the G-20 leaders are committed to strengthening "our regulatory regimes, prudential oversight, and risk management," and they will ensure that "all financial markets, products and participants are regulated or subject to oversight, as appropriate to their circumstances." The key to this pledge is, of course, the phrase "as appropriate to their circumstances."
Other similar phrases like "as appropriate," "where necessary," "appropriately regulated," and "as deemed appropriate to domestic conditions" all indicate the trace of "a smoking gun" to avoid the application of a policy prescription.
In terms of reforms of international financial institutions, the communiqué underscored that "the Bretton Woods Institutions must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges."
It also suggested that "emerging and developing economies should have greater voice and representation in these institutions" "to increase their legitimacy and effectiveness." In this connection, Japan's prime minister, Taro Aso, urged China and others to contribute to the IMF's $250 billion bailout pool, aimed mostly at poorer countries. Japan on Friday said it was ready to put in as much as $100 billion. Such a proposal is in accord with the G-20's policy prescription.
The implementation of the principles and decisions agreed at the summit will be reviewed at the next summit to be convened by April 30, 2009. Indications so far from Barack Obama, the forthcoming 44th President of the United States, are that he would take a different set of policy choices from that of Mr Bush.
Since the forum has expanded to include emerging economies, the forthcoming review will no doubt further contribute to the reconfiguration of authority and control of the international financial architecture. Such change itself is a consequence of the policy prescription of the G-20 leaders to provide legitimacy and effectiveness to the global decision-making process.
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