On September 24-25, leaders from the world’s top 19 nations, plus the EU, gathered in Pittsburgh to discuss the global economic condition. The major news coming out of the summit was that the G-20 decided to replace the G-8 as the “premier forum” for international economic policy coordination. However, there were other decisions made, and some interesting thoughts presented in the Summit’s lead statement.
Here is a review of the “Leaders’ Statement: The Pittsburgh Summit”:
The G-20 statement starts off with some stark audacity:
When we last gathered in April, we confronted the greatest challenge to the world economy in our generation. Global output was contracting at pace not seen since the 1930s. Trade was plummeting. Jobs were disappearing rapidly. Our people worried that the world was on the edge of a depression. At that time, our countries agreed to do everything necessary to ensure recovery, to repair our financial systems and to maintain the global flow of capital.
The G-20 is taking credit for the recent stabilization of the financial markets, the return of industrial output, recovering international trade, and the thawing of the credit markets. There isn’t much of causal proof offered for how stimulus and cheap money policies have begun nursing the economy back to health. And it could be argued that the economy had already begun to turn around by the time the G-20 met in April 2009, since March was the month the stock market bottomed out.
However, at the same time it could be argued that governments haven’t helped bring about a true recovery, but rather a faux-recovery that is supported by government subsides but not real restoration of private sector based economic health.
The G-20 agreed to a broad set of commitments. Some of more relevant to financial regulatory reform were:
- "To launch a framework that lays out the policies and the way we act together to generate strong, sustainable and balanced global growth. We need a durable recovery that creates the good jobs our people need. We need to shift from public to private sources of demand."
- "We committed to act together to raise capital standards, to implement strong international compensation standards aimed at ending practices that lead to excessive risk-taking, to improve the over-the-counter derivatives market and to create more powerful tools to hold large global firms to account for the risks they take."
- "To reform the global architecture to meet the needs of the 21st century."
The last goal will largely be tackled by shifts in IMF quota sharing and changes at the World Bank. The other two relevant commitments are broad positions that don’t yet carry a lot of weight. But it’s nice to know the leaders of the world’s top 20 governing bodies want a “sustainable” and “durable” recovery as opposed to a fast and short-lived one.
Strong, Sustainable, Balanced Growth
Expounding on the commitment to a framework for sustainable growth, the G-20 committed to continuing stimulus programs but also to developing “transparent and credible” exit strategies for fiscal and monetary expansions. The world leaders tasked their finance ministers with this, and several other goals, including broad ideas like “raising living standards” and expanding “domestic demand.”
The significant aspect of these commitments, if it comes to pass, is a very explicit goal for G-20 to agree upon future policy objectives and work in coordination with each other to manage the global economy:
"G-20 Leaders will consider, based on the results of the mutual assessment, and agree any actions to meet our common objectives. This process will only be successful if it is supported by candid, even-handed, and balanced analysis of our policies. We ask the IMF to assist our Finance Ministers and Central Bank Governors in this process of mutual assessment by developing a forward-looking analysis of whether policies pursued by individual G-20 countries are collectively consistent with more sustainable and balanced trajectories for the global economy."
How this will affect trade or domestic agenda’s remains to be seen. But I am somewhat concerned, especially given Barack Obama’s propensity to compromise, about what all this might mean for G-20 concerns pre-empting American concerns. Clearly, given America’s position in a globalized world, we must bear global economic impacts in mind when setting our own economic policy. But this doesn’t mean we should have our economic policy dictated to us by an international body that doesn’t have nearly as much of our best interests in mind as we do for it.
Strengthening the International Financial Regulatory System
The G-20 committed to ensure financial institutions in their respective nations do not “return to the excessive risk taking” that was supposedly plaguing global markets last year. This is good in principle, except that the G-20 doesn’t appear to understand the role of government in creating the crisis. The Summit statement says:
Since the onset of the global crisis, we have developed and begun implementing sweeping reforms to tackle the root causes of the crisis and transform the system for global financial regulation.
However, there were a lot of government policies at the “root” of the crisis that have not been dealt with. It’s not just transparency and OTC derivatives.
The G-20 established a Financial Stability Board and commissions the finance ministers along with central bank heads to “developing by end-2010 internationally agreed rules to improve both the quantity and quality of bank capital and to discourage excessive leverage.” Given that the last time the world tried to set universal capital requirements (Basel II) the process took 10 years and clearly didn’t prevent a crisis, I am skeptical about the success of this push.
The G-20 also wants corporate executive pay curbed, exchanges for derivatives, and a resolution plan for the world’s largest firms that are too big and interconnected to the system to fail. Furthermore, the summit of leaders committed to reducing tax havens.
Open Global Economy
On free trade, the G-20 issued some nice sounding words, but it is unclear what kind of commitment nations will have to them:
It is imperative we stand together to fight against protectionism. We welcome the swift implementation of the $250 billion trade finance initiative. We will… refrain from raising barriers or imposing new barriers to investment or to trade in goods and services… We will not retreat into financial protectionism.
With this statement coming on the heals of the Tire v. Chicken trade/tariff skirmish between the United States and China, I think the commitment is somewhat weak.
Finally, the G-20 issued a list of core values designed to usher in “a new era of sustainable global economic activity grounded in responsibility”:
- We have a responsibility to ensure sound macroeconomic policies that serve long-term economic objectives and help avoid unsustainable global imbalances.
- We have a responsibility to reject protectionism in all its forms, support open markets, foster fair and transparent competition, and promote entrepreneurship and innovation across countries.
- We have a responsibility to ensure, through appropriate rules and incentives, that financial and other markets function based on propriety, integrity and transparency and to encourage businesses to support the efficient allocation of resources for sustainable economic performance.
- We have a responsibility to provide for financial markets that serve the needs of households, businesses and productive investment by strengthening oversight, transparency, and accountability.
- We have a responsibility to secure our future through sustainable consumption, production and use of resources that conserve our environment and address the challenge of climate change
- We have a responsibility to invest in people by providing education, job training, decent work conditions, health care and social safety net support, and to fight poverty, discrimination, and all forms of social exclusion.
- We have a responsibility to recognize that all economies, rich and poor, are partners in building a sustainable and balanced global economy in which the benefits of economic growth are broadly and equitably shared. We also have a responsibility to achieve the internationally agreed development goals.
- We have a responsibility to ensure an international economic and financial architecture that reflects changes in the world economy and the new challenges of globalization.
See the Pittsburgh G-20 official website for the Leaders’ Statement in full and other resources regarding the Summit’s accomplishments.