G20 Accord: New Rule Book For The World Economy?

• April 3rd, 2009
• Posted by 7thmin

The “G20” economic summit in London (3.4.09) has signaled a change in the way world business activity is to be managed – in its response to the economic crisis.

Lee Duffield sets out to make sense of the claims about how a dinner meeting and set-piece round table by 20 heads of government might make a great difference.

OPEN ARGIE-BARGIE LEADS TO ACCORD

Preparatory decision-making, on what would be collectively resolved at the summit, took place during the fairly-public round of meetings and deal-making that led to today’s agreement; like Gordon Brown’s visits to three continents last week, (see EUAustralia, “Lula: Blond Beasts …”, 29.3.09; “Tough Times at G20”, 2.4.09).

A first achievement of the gathering from the major economies has been to agree on what should be done, and act jointly.

As chairman, the British Prime Minister, Mr Brown called it a “coming together”.

“We have reached a new consensus to take global action together”, he said.

It would start with setting up a new financial stability board to coordinate action across frontiers, and there’d be information-sharing to create an “early warning system” against future economic shocks, like the financial collapse in 2008.

“TOGETHERNESS” DOCTRINE

The “togetherness” doctrine will mean fresh pressure on individual countries not to keep on bringing in trade protectionist measures, like industry subsidies or new tariffs, that work against the others.

Equally that will imply continued free access to markets for goods and services, an in-principle reprieve for “open-slather” exponents in the finance industry – but read on.

ACTIONS TO FOLLOW

As to what the 20 governments would do, (against refrain from doing); they have rejected status quo on the level of economic regulation, in favour of having more regulation.

If carried through it should mean a great policy shift in the way that international financial activity is to be ruled.

Details now must be worked on at the level of officials and Ministers of the governments taking part.

•    Regulations are projected for supervising the management of the balance sheet problems of trans-national banks which took on massive and toxic bad debt.

Banks might expect to have to improve their cash and liquidity position through holding more capital against loans; meaning tighter policies on lending — less cavalier lending also, during the champagne boom-times.

•    Corporations are to learn of ceilings on payments to their Chief Executive Officers and other higher-ups.

•    Agreement was made at the G20 that the members would finance a huge capital boost for the International Monetary Fund (IMF), said to be in the order of one-trillion US dollars, more than doubling the organisation’s reserves.

The money will be applied to support weaker national economies, from Eastern Europe through the developing world, where the threat of collapsed states brings up a spectre of global ruin.

Other measures getting approval:

•    Standardised, new controls on the operations of hedge funds, which have been operating outside the range of government supervision – though blamed much less for the current crisis than the sub-prime bank lending.

•    Trans-national transparency regimens for tax havens.

Inter-government pressure has already been imposed during recent months on Luxembourg and Switzerland, and the enclaves like Lichtenstein or Monaco, to at last drop blanket confidentiality practices that permit foreign tax evaders to escape disclosure requirements in their home countries.

SHIFT IN WORLD POWER

The “Group of 20” format for this world summit has recognised a shift in power and influence, and broadening of key forums to include emerging economies, led by India, China or Brazil.

Some 80% of economic activity – production or trade – is accounted for by the nations represented: 19 leading economies including Britain, France, Germany and Italy, and the European Union as an entity.

The outcome this time brought forward many expressions of hope for a practical change.

The German Chancellor, Angela Merkel, had been demanding a renovation of the rules.

“This crisis was not caused by the forces of nature”, she said.

President Nicolas Sarkozy of France, who had attended as a demanding proponent of binding, international regulation for improved standards of governance, he declared at the end he was optimistic about seeing new openness, and “new rules”.

The American President Barak Obama said the decisions at London had been needed as a coordinated response, to tighten a “failed regulatory system”, and manage a crisis where the “global economy is contracting … and the international financial system is frozen”.

The United States and other countries had operated “by consensus instead of dictating our terms”, he said.

He wanted to emphasise moves that would reduce high unemployment in America and elsewhere, and the release of more money to assist poorer regions.

“We are protecting those who don’t already have a voice and are suffering greatly”, he said.

That would include measures set out to improve food security in the world.

“It is not just charity; these include future markets … and future drivers of economic growth”, he said.

SHAPE OF AGREED-ON CHANGES

Recapping:

At the start of the G20 this time the language of the trade in policies had key points spelt out, which came to some resolution on the day:

Countries involved in the agreement might have been putting protectionist measures in place, here and there, but they should act strongly on transparency rules to avert a wholesale outbreak of trade-war protectionism like in the 1930s. That was agreed on the day.

Some led by the United States, and including Australia, would put faith in more government spending for stimulus, even if that aggravated taxpayers at home, should it mean salvaging irresponsible bankers and investors. (European opponents of exponential spending brought up the fear of major inflation to follow). Bigger spending in home budgets was not endorsed, though the extra large-scale funding was agreed on for the IMF.

Others, like most of the European Union, wanted agreement that governments should intervene more actively to regulate business activity, specifically banking. It was agreed.

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