G-20 Summit: Financial Markets and the World Economy
Prepared remarks delivered at the Institute event "Korean Perspective on the G-20 Summit"
Why the G-20 Summit Now?
The G-20 leaders gathered here in Washington, DC, over the weekend to address the current global economic and financial turmoil. Since the turmoil is global in nature and serious in its magnitude, global leaders apparently felt that there was an urgent need for global efforts.
Why the G-20 Summit, Not the G-7?
The next question then is: Why the G-20 summit instead of the traditional G-7 summit? As you know, there have been many who argue for the necessity of expanding the G-7 as a global informal steering committee. C. Fred Bergsten made this point in March 2004 at the G-20 finance ministers meeting in Leipzieg, Germany. In fact, Fred advocated that the G-20 become a global steering committee. French President Nicolas Sarkozy in his UN address in September this year also proposed the expansion of the G-7 into a G-13/14. Most recently, Bob Zoellick, the World Bank president, has also suggested forming a new global steering committee of the G-14, although it should be flexible enough not to limit its members to 14.
Obviously, the G-7 leaves out major economic and financial players from the emerging world. Consequently, the G-7 is considered to lack political legitimacy and its operational effectiveness suffers as a result. It is not realistic to address global economic and financial problems without active participation by those major economic players, particularly when this summit was to address the current global economic and financial turmoil. Almost 100 percent of next year's growth is expected to originate from the emerging world since most of the G-7 countries will be in recession.
No wonder, then, that the Washington Post (November 15) described the summit as marking a "historic power shift." In fact, it should be seen as the belated global recognition of "the shift in the balance of economic power."
What Were the Achievements at the G-20 Summit?
Broadly speaking, the G-20 summit had two sets of agenda. Its first agenda aimed at how to address the still ongoing global financial crisis and to mitigate its impact on the real economy. Its second agenda focused on the issue of how to reform the existing international financial architecture, to prevent and remedy similar crises in the future.
With regard to the first agenda, there are already voices of disappointment since the summit did not come out with any action-oriented specific commitments to providing liquidity and implementing additional fiscal stimulus in a globally concerted manner.
However, one should recognize the fact that the G-20 leaders committed to "use fiscal measures to stimulate domestic demand to rapid effect, as appropriate." I am sure that when they meet again next spring, they will follow up on this commitment.
It is also worth taking note that they commended the newly introduced IMF's Short-term Liquidity Facility (SLF) and pledged to review the IMF's resource for augmentation. At the same time, the leaders committed to continued "vigorous efforts" to stabilize the financial system, for example, through swap facilities. It also requires a close follow-up in the next meeting.
I consider one of the important achievements of the summit its strong support for the revival of the WTO's DDA negotiations this year and its commitment to "standstill" on introducing new protectionist measures at least for one year.
Another important achievement, in my view, is the G-20 leaders' strong commitment to an open global economy and free market principles. I feel it is critically important because there is a grave danger of reverting to highly statist measures and over-regulation at the time of severe economic and financial stress.
Substantially detailed principles and an action plan have been laid out at the summit regarding the second agenda, i.e., reforming the existing international financial architecture. These almost fully cover major reform areas for the regulatory and supervisory regime and the international financial institutions' (IFIs) governance-related matters. Equally detailed principles were agreed on accounting standards, procyclicality of regulatory regimes, regulation of rating agencies, international coordination and cooperation at national-level supervisory agencies, etc.
In reforming the IFIs, one of the immediate actions to be taken is an expansion of the membership of the Financial Stability Forum (FSF) to include major emerging-market economies. The summit also recognized the necessity of improving the effectiveness of other IFIs by reviewing their mandates and governance structure. I suppose the independent-experts group to be established will have to put this on its priority list. The experts group will have to pay special attention to the mandate of the IMF, in particular. Although the issue of exchange rate regime was not mentioned in the declaration, since the global imbalance as one of the main causes of the current financial turmoil was not specifically discussed, it is a critical reform area not to be left out. Given that the inappropriate regulatory and supervisory regime was one of the major motivations for holding the summit at this point, it may not be too surprising to see that the declaration is rather long on these issues but short on other financial architecture issues.
The G-20 should be ambitious enough to prepare a well-balanced reform program for establishing a new financial architecture or the Bretton Woods II, which would be suitable to the rapidly changing global economic and financial environment.
We have learned from history that there is a danger in overreacting in times of crisis. We should not be too hasty in designing new financial architecture at this time.
Another significant decision of the G-20 summit was the designation of the G-20 finance ministers' leadership to act as a de facto secretariat, known as the G-20 troika. The future success of the G-20 will depend heavily on the leadership.
Will the G-20 Replace the G-7 as Global Steering Committee?
Answering this question, I would like to remind you again that the current G-20 summit was called to address the current global economic and financial crisis. The question is therefore whether or not the G-20 will remain a global steering committee after resolving the current economic problem.
Some considered the group "unwieldy." They would like to see the G-7 expanded, but the G-20 is thought to be too large. I personally would like to see the G-20, once it has successfully carried out the current mission, evolve into a global steering committee.
In conclusion, I must say that the half-day G-20 summit was a success in reconfirming the principles and mapping out the actions to be taken. I would, therefore, commend highly the initial endeavor of the G-20 leaders as a historic achievement for the global community.