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|G20 - No Magic Solutions|
Corriere della Sera - November 14th 2008
When the world is collapsing all around us, in a crisis that is now genuinely global, the very least we can expect of our governments is that they should meet each other to discuss what to do about it. For that reason alone, we should welcome the summit being held in Washington on November 15th, bringing together 20 of the biggest economies. We should also welcome the fact that the host, George W. Bush, has made this an inclusive meeting, attended not just by the “G8” rich countries but also by China, India, Brazil, South Africa and many other developing countries. But our praise should stop there. For this meeting is not going to produce any dramatic changes or magic solutions.
What it has already produced is an opportunity for grandiose claims by political leaders. Both Gordon Brown and Nicolas Sarkozy have sought the headlines by calling for the meeting to be as significant a reordering of global affairs as the conference in 1944, held at Bretton Woods in New Hampshire, that shaped the post-war financial and trading system. The French president has added that he wants an agreement on new ways to regulate finance; the British prime minister has added a call for a globally co-ordinated fiscal stimulus programme.
These claims and proposals are unhelpful. The 1944 meeting, which was attended by 44 countries, occurred after two years’ preparation. This weekend’s summit has had just a few weeks’ planning time. Such a summit cannot possibly redesign the “international financial architecture”, as Mr Brown likes to call it. And if it did produce a new design, it would be likely to be a bad one, drawn up in a hurry.
Nor, indeed, can it, or should it, produce a genuine global fiscal stimulus plan. The fact that the British Treasury has this week been briefing journalists that such a plan will be produced at the summit offers a good reason for cynicism. The reason they are pushing this idea is that several countries—
Rather than such grandiosity, what we should hope for from the G20 meeting is something more limited. A productive meeting is one that would emerge with a clear list of what problems need to be solved at this broad, global level, and with some sort of a programme for trying to find solutions to them. In truth, that list can be quite limited, for most of the world’s economic problems are domestic in each country, and require domestic solutions. The limited list, however, includes some very difficult problems.
My list would just have three items on it. One concerns financial regulation: an international commission needs to be set up to work out what aspects of regulation need to be agreed and enforced at a global level, about which can and should be left to national governments, and what sort of agency should be given the job of drawing up and enforcing those rules. This sounds urgent to politicians, but economists know that it is not: the damage from the old system has been done, and what is needed is a new system to deal with the next boom, which unfortunately is a long way off. The commission could be given at least a year to do its work.
The second topic concerns the resources and operation of the International Monetary Fund, which with its sister the World Bank was set up at the 1944 meeting. Emerging powers such as China have too little voting power, but also contribute too little money. The IMF has become weak and highly bureaucratic, as it has little real power. A solution requires, most probably, a change in the voting system, an injection of more money and, perhaps, a merger with the World Bank to produce a single institution with real clout.
For this problem to be solved, China and other emerging powers must show that they agree on the nature of the issue and on helping pay for the solution. It is not at all clear that they will. The same applies even more strongly to the third item, namely the manipulative currency arrangements that, by limiting convertibility and building up massive reserves, have produced the present vast imbalance between huge current account surpluses in China and some other countries, and the huge deficits in America, Britain and elsewhere.
It is a short agenda. But agreeing on solutions will require many more meetings like the one on Saturday. This is just the beginning.