Nations Agree to Vet Each Others’ Policies

The Group of 20 nations agreed to establish an elaborate structure to coordinate economic policies, but without any enforcement mechanism to make countries live up to their word, critics warned the plan could be toothless.

For the U.S., winning approval of what the G-20 called “A Framework for Strong, Sustainable and Balanced Growth” was a major objective of the summit here that concluded Friday as leaders issued a communiqué documenting their agreement.
G-20 Summit

G-20 leaders struck a partial compromise on bankers’ compensation and bank capital requirements, though details must be resolved. The U.S. notched another gain, according to negotiators, persuading Europe to back a shift in ownership of the International Monetary Fund in favor of developing countries. On energy issues, the leaders embraced an effort to eliminate subsidies but didn’t set a deadline for action.

French President Nicolas Sarkozy said the pacts on financial rules represented a “revolution,” while British Prime Minister Gordon Brown said G-20 initiatives would save millions of jobs. U.S. President Barack Obama was less effusive, saying “we laid the groundwork today for long-term prosperity.”

The framework accord to coordinate policies comes at a time when U.S. consumers, who have been the main engine of economic growth, are expected to save more and spend less, reducing global demand.

Among the policy changes leaders envision: China and Japan would rely less on exports and more on domestic consumption; the U.S. would slash its budget deficit; and Europe would make tough structural reforms to prod business investment.

Under the framework, members will meet periodically to review each nation’s policies and see that they are making necessary adjustments. The IMF will do analyses.

The group will act by moral suasion, not sanctions. Work on the framework is to begin in November.

Some critics say the plan is likely to deteriorate into a talkfest — as have similar international efforts to get countries to make economic changes. The International Labor Organization, for instance, works largely by consensus on its labor standards and is criticized as toothless and ineffective.

“Without sanctions, this agreement doesn’t mean anything,” said University of Maryland economist Peter Morici. “The countries will just discuss changes and make statements.”

G-20 officials say sanctions aren’t needed to force action on the economic front because the depth of the recession and the need for change is clear.

“The whole logic is to use discussions and peer pressure to get consensus views” on economic policies, said Montek Singh Ahluwalia, a senior Indian economic official who represents New Delhi at the G-20.

The group noted the global economy has improved since the group last met in the spring.

“Our forceful response helped stop the dangerous, sharp decline in global activity and stabilize financial markets,” it said, but warned that a lot of work needs to be done to ensure growth, noting “a sense of normalcy should not lead to complacency.”

The G-20 said nations must continue stimulating the economy “until recovery clearly has taken hold” but also “develop a transparent and credible process for withdrawing our extraordinary … support.” But it didn’t provide a detailed strategy for unwinding stimulus, which it said would “vary across countries or regions and across the type of policy measures.”

On the issue of financial-sector regulation, leaders agreed that all countries should implement limits on compensation at financial firms immediately to align pay with “long-term value creation.”

However, they stopped short of suggesting that specific limits should be placed on pay. Leaders agreed that banks should face much more stringent capital requirements, but didn’t endorse a U.S. position that the largest banks should hold more capital than smaller ones.

Energy was another area where the U.S. fell short of its goals and didn’t reach an agreement on eliminating fossil-fuel subsidies, or win approval for a specific program to finance climate-change mitigation in developing countries.

On the IMF, leaders approved increasing by “at least” five percentage points, the stake in the IMF held by “under-represented” countries, which are largely developing countries.

The latter now have about a 43% share, compared with 57% for industrialized nations. Detailed negotiations over reallocating shares will be conducted at the IMF and are set to be finished by January 2011.

The U.S. argues that giving the developed and developing world more equal ownership of the IMF will boost the fund’s standing in poorer nations and make it seem less like a tool of U.S. foreign policy.