While all the right noises emerged from the G20, its success will hinge on the outcome of follow-up measures.
Battered by the most severe crisis since the Great Depression, there were high hopes that the meeting of the 20 most powerful world leaders in London on April 2 would provide a significant impetus for reviving the world economy. Expectations were raised by the grandiose rhetoric that preceded the summit with the British prime minister characterising it as a “new Bretton Woods” and a “global new deal”, though it was later scaled back as “a part of a process”. The deal itself has produced a lot of optimism and stock markets have reacted with a sharp surge and the media has hailed the outcome as “the first bricks in the new world order”. In the final analysis, however, the success of the summit depends on the way the declarations get implemented.
The agenda for the summit included providing the stimulus for the revival of the world economy, coordinated calibration of stimulus measures, avoidance of protectionism by the countries, clamping down on tax havens, and reforming the global financial system by introducing stronger regulation and closer supervision. Happily, there were wide-ranging agreements in the summit including pumping an additional $1.1 trillion into the International Monetary Fund, multilateral development banks and international trade finance, agreement to crack down on tax havens, and strengthening regulation and oversight over all financial institutions including hedge funds and credit rating agencies. Funding to the international financial institutions is in addition to the stimulus amounting to $5 trillion already announced by individual countries. The meet also reaffirmed the commitment to the World Trade Organisation (WTO) to support free trade and check protectionism by the members.
The euphoria of the summit will wane in course of time and its success will depend on the way the members actually implement the agreements. Considering the magnitude of the problem, additional stimulus to enable international development institutions to spend an additional $.1.1 trillion can make only a marginal difference. An overwhelming proportion of this is providing additional resources of $500 billion and $250 billion by way of SDR to the IMF. The multilateral development banks will have an additional $100 billion and a further $250 billion will be provided to support trade finance. Thus, it is doubtful whether the additional stimulus will have much impact on aggregate demand in advanced countries and even in the countries eligible to receive the funds, the actual disbursement of these funds will take time.
Tightening financial rules and strengthening regulation and oversight of the financial sector, including hedge funds, has received considerable focus in recent times. The fact of the matter is that regulation and supervision have always lagged behind — and the complexity in the system and emergence of new financial products have always put regulators on the learning curve. The immediate response by virtually every country has been to go for government ownership, often without control, of the institutions. Governments have failed to respond to market needs swiftly and their ability to ensure effective regulation has been equally disappointing. How exactly the governments will translate words into action to strengthen the global financial system will have to be seen.
Another important declaration of the summit relates to ending banking secrecy and the leaders have agreed to deploy sanctions and name and shame the countries which are considered ‘non-cooperative jurisdictions including tax havens’. The OECD has named Costa Rica, Malaysia, the Philippines and Uruguay in the black list and listed another 38 countries including Belgium, Liechtenstein, Luxembourg, Singapore and Switzerland, as countries that have now agreed to commit to international tax standards. This has evoked strong reactions from these countries with the Philippines stating that it has one of the world’s strictest banking secrecy laws and Liechtenstein, Luxembourg and Switzerland questioning the method of preparing the lists. Ironically, Transparency International rates Singapore, Switzerland, Luxembourg and Austria as paragons of virtue with high Corruption Perceptions Index rankings of 4, 7, 12 and 15 respectively, even as they encourage and gain from corruption elsewhere. In any case, despite the pressure, the financial systems in these countries are unlikely to allow much transparency. Even if the US and Germany get access to more information on the hidden wealth of their citizens, countries like India, despite huge amounts of ill-gotten wealth parked in these countries, are unlikely to get much response to their half-hearted attempts.
Perhaps, the most disappointing outcome of the meet was the group’s response to the issue of protectionism. The group seems to have merely reaffirmed its commitment to the WTO. Notably, only recently the World Bank had reported that since the financial crisis, almost 17 countries in the group were involved in implementing 47 trade-restricting measures including increases in tariffs, erection of non-tariff barriers and enhancing budgetary support in terms of tax concessions and subsidies. We are well aware of the US measure to exclude outsourcing firms from being eligible for bailouts. Virtually every advanced country in the group — the US, Canada, France, Germany, the UK, China, Argentina, Brazil and Italy —were involved in direct or indirect subsidy to the automobile industry. China’s import ban on Irish pork, rejection of Belgian chocolates, Italian brandy, British sauce, Dutch eggs and Spanish dairy products; India’s ban on Chinese toys; and the European Union announcing new export subsidies on dairy products are measures which are surely against the letter and spirit of WTO. Nothing concrete has emerged in terms of reversing these measures in the meet and this means that the members decided to pay only lip service to the issue.
On the whole, it appears the rhetoric of success does not seem to match up with the reality and the euphoria will eventually wane. Nevertheless, the summit definitely has made some progress in focussing attention on important issues plaguing the world economy. The agreements on a wide range of issues will surely help to find global solutions to this unprecedented crisis of global proportions. However, it must be noted that the crisis that started in the financial system must be fixed first to infuse confidence. Much remains to be seen on the follow-up measures. There are miles to go before the reforms take deeper roots to create a new global financial system.
The author is Director, NIPFP. Comments at mgr@nipfp.org.in
