The G-20 Summit in London: Are there any winners? Simona SOARE
April 6, 2009
On April 2, 2009 the leaders of the G-20 states met in London to negotiate the changes of the current international financial order, to repair the financial system so as to restore lending and to mend the reforms of the international financial institutions seen as global solutions to the current international financial global crisis, whose severity has been compared to the 1929-1933 economic crisis. As many international economists were expecting, the summit did not produce the global solution that was truly required by the crisis, but rather a set of principles that were reaffirmed at the international level, featured in the final communiqué of the summit: “to repair the financial system to restore lending; to strengthen financial regulation to rebuild trust; to fund and reform international financial institutions to overcome this crisis and prevent future ones; to promote global trade and investment and reject protectionism.” Moreover, the leaders agreed to invest some $1.1 trillion in the IMF over the course of the next two years to restore its leading capabilities and thus mend the flow of capital particularly to developing countries which were acknowledged as the engine of recent world economic growth (AFP, AP, Reuters, New York Times, Washington Post, The Times, Financial Times, Le Monde, Stratfor, www.g20.org).
It is almost common to say that a global crisis requires a global solution. However, in a globalized world such as the one we are living in, this is vividly the case. The G-20 London Summit merely acknowledged that “prosperity is indivisible”, and it recognized the role that emerging economies play in the world economy – i.e. that of the engine that has been driving economic growth over recent years. Hence, any global solution to the current economic-financial crisis must necessarily be a broadly-agreed one, which gives these emerging economies a say in the negotiations as well. The leaders of the G-20 countries agreed to “treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs, to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an additional $1.1 trillion programme of support to restore credit, growth and jobs in the world economy.” These figures are calibrated on the IMF’s March 2009 estimation that world growth in real terms will resume and rise to over 2% by the end of 2010. Paul Krugman emphasized that “the G20 outcome was better than I expected, with something substantive and important emerging — namely, much bigger funding for international financial institutions (IFIs), plus expanded trade credit. This will help smaller, currency-crisis countries a lot.”
Beyond the disagreements between economists and political analysts concerning the results of the summit, however, it revealed a battle between two visions of the new economic and financial world order: a capitalist, globalized one of open markets and free capital flows, and one based on economic nationalism and revival of protectionist measures. The final communiqué of the summit emphasized protectionism as a serious threat facing the world economy and committed increasing funds to avoiding it; hence, the G-20 states committed themselves “to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports. […] We will not retreat into financial protectionism, particularly measures that constrain worldwide capital flows, especially to developing countries.” Starting with the 2008 food crisis, Keynes’ “restrictions and exclusion” seemed to be making a comeback. Paul Krugman warned that “many governments rushed to protect domestic consumers by banning or limiting exports, leaving food-importing countries in dire straits.” Moreover, he emphasizes that after the war in Georgia, in August 2008, “militarism and imperialism” are also making a comeback and they “mark the end of the Pax Americana — the era in which the United States more or less maintained a monopoly on the use of military force. And that raises some real questions about the future of globalization.” Robert Kagan, in his latest book, The Return of History and the End of Dreams (2008) also supports this argument and concludes that the reform of the international order should focus on a league or a concert of democracies that could pool resources to fight against autocracy, economic nationalism and protectionism.
Another substantial message that the G-20 Summit in London sent the world was that the reform of the international financial system is likely to be based in a greater proportion now on the IMF “as a critical forum for multilateral consultation and cooperation on monetary and financial issues as well as in promoting international financial and monetary stability.” Some analysts even see this particular turn as an attempt by Western democracies to clamp down growing Chinese and indeed Indian economic clout since the two have little influence in the IMF. Others, such as John G. Ikenberry, signal we are entering another liberal economic world order. The plan for the reform of the IMF is seen as a part of a broader, comprehensive plan to reform all the IFIs, to strengthen their long-term relevance, effectiveness and legitimacy, in order to strengthen regulation and supervision, integrity and transparency and ensure early warning against risks and discourage excessive risk-taking. Deflation was also a major problem tackled in London, a problem which the leaders of the G-20 nations sought to address and prevent even at the risk of growing, yet controlled inflation.
Moreover, the G-20 decisions seem to already cause effects in the system. Japan’s Prime Minister announced on April 6, 2009, a $100 billion bail-out plan that is meant to maintain jobs in the Japanese economy and truly restart its engines. Moreover, on the same day, the Thai Prime Minister announced that ASEAN member states and their partners will meet in Pattaya, between April 10-12, 2009 to discuss the implementation of decisions reached in London.
Though the summit was reflected in the international press as a historical event, it was not without its problems. For instance, the United States and Germany were truly divided on at least two issues: on the one hand, it was the issue of the US fearing that Germany would not match the American stimulus package and hence would use this increased demand in the American market to expand its exports (Germany is already one of the world’s largest exporter). Since Germany did not back down on its position, the United States simply dropped its demand. On the other hand, the United States wanted the EU to help finance the bailout and stimulus package in the case of the Central European banking system, whereas the Germans wanted the IMF to do it. Eventually, the US committed $100 billion to the IMF, of which a substantial portion would go to the states in Central and Eastern Europe (at present the ratio stands at about 80%). The demand put forward by the IMF was that Central European EU member states join the euro-zone at once – an issue which Germany is likely to refuse as well; such opposition is predictable given that Germany has already refused a Hungarian bail-out proposal of €180 billion to be paid by the EU to save Central European emerging economies. The differences between the US and Germany are basically about burden sharing – the US wanted to broaden representation of industrialized and emerging economies because it was seeking broader and more balanced burden sharing in coming out of the current crisis. However, the Obama administration seemed quite willing to forgo this imperative and agreed to pay the higher price of overcoming the crisis; even so, the US is one of the economies that stand to gain most from the revival of economic growth. On the other hand, Germany, and indeed the Europeans in general, were seeking to pass the buck of dealing with the crisis onto the American shoulders and expected Washington to come up with the bailout plan, threatening inclusively with more protectionist policies if this was not the case.
