That was easy, wasn’t it?
The leaders of 20 major economies gather in London, commit more than a trillion dollars of funds to support the world economy, agree to avoid protectionism and take the first baby steps towards rewriting the rules of the financial game. And look, the worst downturn since the 1930s has become less of a threat.
That, at least, is what some diehard optimists and stock market traders seem to believe.
I doubt it is going to be that easy.
True, the Group of Twenty (G-20) meeting held in London in April has delivered far more than what many had expected. It is never easy for 20 politicians, with 20 groups of voters to mollify, to sit across a table and agree on anything substantive. But the current crisis is so severe that the resultant fear has worked like glue. This is much like what happened in India in the worst moments of the 1991 crisis, when the possibility of complete economic collapse forced competing parties and interest groups to back the initial economic reforms.
There are two other positives. First, the very fact that it was the G-20 rather than the old Group of Seven or Group of Eight that struck the deal shows that the old balance of power has perhaps irrevocably shifted, with more countries such as India and China being more involved in global policymaking. That is welcome.
Second, by agreeing to pump $500 billion into the International Monetary Fund (IMF), the G-20 has bought insurance against another round of financial instability. Small and dollar-starved economies will indirectly have more resources to fight financial panic and runs on their currency. This is a live and present danger right now in large swathes of the former Communist bloc in East Europe.
But the rest is going to be a more arduous task. Take protectionism. Every sensible political leader and serious economist knows that the worst thing that can happen right now is for countries to insidiously close their borders to protect local industries and jobs. That was the great mistake of the 1930s, when shrinking global change converted a recession into a depression.
There has been no shortage of statements on the need to maintain open borders. But the World Bank said in March that 17 of the 20 developed and developing nations that pledged to avoid protectionism when they met in Washington in November have since put in place measures to restrict trade with other nations.
The other big issue is global financial regulation. A large part of the current mess can be traced to the lack of proper regulation of banks and several important financial markets. The G-20 has promised a new Financial Stability Board that will work with IMF to track signs of financial instability; seek to regulate “systemically important financial institutions, instruments and markets” including, for the first time, hedge funds; to implement new principles on pay and compensation; to keep a watch on credit rating agencies; and to take action against tax havens.
These are tough tasks and will require a revival of the Doha Round of trade talks, on the one hand, and a deep structural reform of global finance, on the other.
The point is not to belittle the obvious progress made at the G-20 meeting, but to ask whether these actions will necessarily be a “turning point” for world recession, as US President Barack Obama has said.
Too much damage has already been done—and 2009 already seems to be a lost cause. The good news is not that there has been a revival of global growth, but that matters have not turned worse over the past few weeks. In other words, we are still bang in the middle of a terrible recession/slowdown though it now seems likely that this Great Recession will not lead to a Great Depression.
And the credit for that goes to the unprecedented and quick response from central banks and governments in many countries. Interest rates are down to almost zero in many important economies. The combined fiscal stimulus announced in the past couple of quarters is perhaps close to $5 trillion.
The sheer rapidity of the downturn in the last three months of 2008 as well as the frequent reminders of the policy mistakes made in the 1930s helped in a perverse way. But a true revival in global growth will require huge changes in the way financial institutions are managed and regulated; the growth of new multilateral institutions and the reform of existing ones such as IMF; and major macroeconomic adjustments in the form of higher savings by American households, further deleveraging of balance sheets and a greater focus on domestic demand in China.
What the G-20 achieved is an important first step rather than a decisive victory of what still remains the worst global recession in a hundred years.
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