The G-20 Gets Overambitious

With economies around the world showing signs of recovery, the G-20 ran the risk of losing momentum and relevance. The Pittsburgh summit was successful in presenting a series of actions that should keep the need for dialogue on global economic coordination firmly in the spotlight.

Global economic framework. The G-20 officially launched a Framework for Strong, Sustainable and Balanced Growth, which is to be formally established on Nov. 6-7 during the G-20 Finance Ministers and Central Bank Governors Meeting. It aims to be a process of mutual assessment of policy frameworks and their implications for the pattern and sustainability of global growth, while trying to identify potential risks to financial stability. Supposedly, G-20 members will agree on shared policy objectives, with the aim of having collectively consistent policies, which receive constant IMF support.

However, it is unclear why such a scheme was launched, unless it aims to support “difficult” domestic policies, under a mantle of global cooperation. The only recent similar arrangement was the “multilateral consultation” on global imbalances, which the IMF launched in 2006, with participation from the United States, China, Japan, the euro-area and Saudi Arabia. This did little to push those consulted to address the problem–rather, imbalances have corrected due to the global financial crisis. It is telling that the IMF has not launched a second multilateral consultation.

Doha test. Successful conclusion of the Doha Round will be seen as one of the first challenges for the Framework. The stated G-20 aim is to conclude it next year, with trade ministers instructed to make significant progress by early 2010. However, the fact that the G-20 stated that it would review progress in its next meeting (in Canada in June) is not an encouraging indication of its expectations for relatively rapid progress.

IMF vote shift. A firm commitment was made to implement a shift in IMF quota shares of at least 5% from advanced to emerging economies by early 2011. This move was approved in 2008, and took several years to negotiate. This will imply a significant surrender of votes for some countries, mostly European. Yet no specifics were offered on the size and composition of the Executive Board, another thorny issue for emerging economies such as Brazil and India.

Strengthening financial regulation. In sharp contrast to the Framework, the G-20 was specific, and realistic, in its aim of strengthening the international financial system. The Financial Stability Board would play a central role implementing proposals to:

–develop internationally agreed rules by the end of 2010 to strengthen the quality of bank capital and mitigate pro-cyclicality, with the aim of implementing them fully by the end of 2012 (if the global economy has recovered fully from the crisis);

–improve over-the-counter derivatives markets, with all standardized OTC derivative contracts traded on exchanges or electronic trading platforms, where appropriate, at the latest by the end of 2012–non-centrally cleared contracts would be subject to higher capital requirements;

–develop internationally consistent firm-specific contingency and resolution plans by the end of 2010 for systemically important financial firms; and

–achieve a single set of high-quality, global accounting standards by mid-2011.

Bonus fudge. On the controversial issue of compensation for bankers, the G-20 adopted principles that bonuses should avoid excessive risk-taking; be aligned with long-term value creation and subject to clawback; and be transparent. More significantly, the G-20 may induce financial regulators to require corrective measures, such as higher capital requirements, to firms that fail to implement sound compensation practices.

Outlook. Even if the G-20 turns out to be something of a symbolic body rather than an organ of power, it should keep the need for global economic coordination in the spotlight. Its aim to spearhead unprecedented global economic cooperation is overambitious and may create excessive expectations. However, the strengthening of financial regulations, due to be implemented during 2010-12, is achievable.