April 02, 2009
Some useful progress, but still a way to go. That must be the conclusion of
the Group of 20 summit in London.
Gordon Brown, UK prime minister and
chairman of the meeting, set out a six-point plan to save the world. This
reflected some real achievements: a generous increase in funding for the
International Monetary Fund, a new issuance of special drawing rights and a
boost for trade finance. He sounded disappointingly thin on other key areas
– notably cleaning up banks and future fiscal stimulus. More detail would
have been reassuring.
Mr Brown cast the G20 meeting as part of a coordinated “fight back against
the global recession” and said the “global crisis requires a global
solution”. We may doubt aspects of the solution, but the crisis is
undeniable. World growth is expected to decline this year for the first time
since the second world war.
The World Trade Organization expects that trade
will fall by 9 per cent – a worrying prospect.
It has also become clear that this crisis will not soon burn itself out. An
important part of
John Maynard Keynes’ works was his explanation of how
economies could be caught in low growth traps. The longer the recession, the
greater the destruction of happiness. An extended downturn will also
increase the risk of the crisis expanding and deepening far beyond its
current spread. In new democracies, whether in Africa or central and eastern
Europe, this is a moment of genuine peril. In some poorer countries, it
could even lead to war and famine.
One particular risk is a potential financial crisis in emerging markets,
which could spread rapidly through a region.
The prospect of this is
stronger the longer recovery is delayed. Countries have already sought help
the IMF recently. More could follow. It is essential that the Fund has
the resources to prevent local problems becoming international. A financial
crisis in eastern Europe, for example, would be miserable enough. But it
would transmit losses through banks across Europe. The world does not need
another subprime crisis.
The G20 pledge to increase the IMF’s resources by $500bn, therefore, is
extremely cheering. Some of the money had been allocated already.
Nonetheless, it is an important achievement and a welcome sign that national
governments see the role that such international institutions can play.
The proposed new issuance of $250bn of special drawing rights by the IMF
would increase the world’s pool of reserve assets, freeing the hands of
emerging and developing economies. It, too, is an excellent idea which will
increase global liquidity.
The plan for $250bn over the next two years for trade finance is also
welcome. The proposal is larger than expected, but is mostly drawing
together existing programs. It will be delivered through export credit
agencies, investment agencies and development banks.
There is little to report on fiscal policy. No one country’s stimulus can
rescue the world from the mire; the US is not in a position to revive world
demand on its own – again. While deficit countries, such as the US and UK,
must expand demand, the surplus countries must do their part and expand
domestic consumption by more. The world needs to increase demand without
increasing its imbalances.
The communiqué offers little credible commitment to this end. Perhaps it was
unrealistic to expect much more. Arguments about stimulus generate much more
heat than light; even apparently miserly Germany has committed to a large
stimulus program. The IMF has been invited to “assess regularly the global
actions required” to “accelerate the return to growth”.
If the IMF is
robust, this might prove a useful mechanism for asserting accountability.
The weakest part of the package is the financial element. Banks are still
gravely wounded. The financial crisis lit the fuse for this recession. It
may also prolong the fire; the crisis will last much longer if major
countries refuse to clean up their banks. Given the range of countries at
the G20, a one-size-fits-all bank rescue policy was never feasible. But the
absence of detail about a common approach to cleansing the banks of their
toxic assets is extremely disconcerting. Stating vague commitments only
serves to create fears that little substance lies behind the words.
The world is better for having held this summit.
The possibility of
dangerous contagion is lower and useful progress has been made across a
range of issues, from the need to keep trade free to IMF quota reform. But
leaders must remember that the crisis, which started in the banking system,
will not be resolved until the banking system itself is fixed.
That is where
they must turn their attention now.
CNN - Gordon Brown at G-20
"New World Order is Emerging"