The G-20 summit meeting in London, which ended on Thursday (April 2), produced a good result. It is premature to call it “a new Bretton Woods,” or a “new global order,” or even “a turning point”—but the leaders did much better than was expected only two months ago and they delivered on many of the elements of the “Grand Bargain” that I had called for this past February.1 Overall I would grade their accomplishments with a solid B or maybe even a B-plus. As always, there were pluses and minuses.
At the top of the plus side was the summit communiqué’s pledge of help for emerging market economies, which has to be a crucial element in any overall plan to bring about a global economic recovery. The main accomplishments here include: a trebling of funding (to $750 billion) for the International Monetary Fund (IMF), mainly through an expanded New Arrangements to Borrow (NAB); a $250 billion allocation for Special Drawing Rights, or SDRs; support for $100 billion of additional lending by the multilateral development banks (MDBs); and up to $250 billion in support for trade finance. These welcome steps came along the lines of what was proposed earlier by US Treasury Secretary Timothy Geithner. Another achievement was the enlisting of Mexico to sign up for the IMF’s new Flexible Credit Line, which should help deal with the “stigma” that IMF borrowing still carries in the eyes of many developing countries; it doesn’t help to create a large trough if you can’t get the horses to drink.
Another big plus was in the area of global financial regulation and supervision. Much of the meat on this crucial issue is contained in the final report of the G-20 Working Group 1 on “Enhancing Sound Regulation and Strengthening Transparency.” The 25 recommendations put forward in that final report cover the great bulk of the specific reforms that I had earlier regarded as essential.2 The communiqué is of course not as specific as the working group report. But it does emphasize key reforms in the areas of coverage of regulation, bank capital, macroprudential regulation, credit rating agencies, Wall Street compensation, early warning, and elevating the mandate of the Financial Stability Forum (now renamed the Financial Stability Board).
Although far from perfect, the antiprotectionist pledge in the communiqué was a plus—in the sense that it goes to the end of 2010, asks countries to promptly notify the WTO of any protectionist measures, and calls on the WTO to monitor and report publicly (on a quarterly basis) on their adherence to this pledge. Such “naming and shaming” was necessary to discourage a repeat of the widespread noncompliance with the earlier nonprotectionist pledge made at the Washington G-20 summit. The leaders also get points for including a separate pledge to “…refrain from competitive devaluation of our currencies.” It remains to be seen of course whether this commitment to avoid beggar-thy-neighbor exchange rate policies will be honored and whether the IMF will start doing its duty to monitor compliance with it.
There was also some progress made on reform of the international financial institutions (IFIs). The communiqué suggested they will now make the selection of the next leaders of the International Monetary Fund and the World Bank based on merit, although they did unfortunately throw out the wording that would have said “without regard to nationality.” It was a positive step to make all G-20 countries members of the new Financial Stability Board and to continue with the vote and voice reforms that are necessary to give emerging and developing countries a role in the IFIs that is commensurate with their growing weight in the world economy.
What about the minuses? Clearly, there were some important ones.
The biggest disappointment was the failure to agree on a meaningful and monitored fiscal stimulus pledge that would address the shortfall in global demand. They did not agree to a two-year program of fiscal stimulus equal to two percent of GDP (each year). The European countries apparently argued they wanted to wait and decide on further stimulus later, depending on how the first dose of stimulus worked. I think that was a mistake.
Another shortcoming was not doing more on the specific problem of huge and widespread declines in emerging and developing-country exports. These export declines are both temporary and largely beyond the control of emerging and developing countries (that is, they are mainly the result of the global recession, along with some problems in trade financing). The ideal solution would have been to expand the IMF’s Compensatory Financing Facility (CFF) to deal with this problem. Instead, the IMF abolished the CFF, and none of the new facilities or lending reforms will be an adequate substitute for it.
The leaders also lose points for not doing more to discourage beggar-thy-neighbor exchange rate policies and to strengthen IMF surveillance over these policies. In particular, they should have endorsed the Managing Director’s proposal to send special IMF consultation missions to countries in cases where there are serious questions about a member’s exchange rate policies. Just announcing their opposition to “competitive depreciations” is not enough. In a similar vein, more should have been said about tackling the problem of “global imbalances,” since this too was one of the contributory factors to the crisis—even if crisis management has understandably put this issue on the back burner for now.
Last but not least, reforms of financial regulation should have given more emphasis to prompt-corrective-action and orderly closure rules for all systemically-important financial institutions and to pricking asset price bubbles before they become too big.
Still, when all is said and done, a B is not a bad grade. It means “above average,” and the London Summit was surely that.
1. Morris Goldstein, “A Grand Bargain for the London G-20 Summit: Insurance and Obeying the Rules,” VoxEU.org, February 19, 2009.
2. Morris Goldstein, “Reforming Financial Regulation, Supervision, and Oversight: What to Do and Who Should Do It,” VoxEU.org, February 24, 2009; and Morris Goldstein, “A Ten Plank Program for Financial Regulatory Reform,” [pdf] speech on “Addressing the Financial Crisis,” National Economists Club, Washington DC, December 18, 2008.