Leaders of the Group of Twenty (G-20) will be meeting in Toronto in about two weeks to review the progress the global economy made since this group of countries started making concerted efforts to rescue it. The Toronto summit, the fourth since the leaders met in Washington in late 2008, would address three vexatious issues: reform of the global financial system, the future of the stimulus programmes put in place by the major economies in the wake of the downturn, and global trade and growth.
One of the most critical issues on the global agenda is financial reform. Over the past three decades, the financial sector has brought much grief to the global economy by engaging in imprudent activities. Following the Latin American debt crisis in the 1980s that indicted many of the leading global banks for living beyond their means, policymakers found a solution to the problems in the financial world by putting the banks under surveillance. However, less than two decades after the Basel Committee on Banking Supervision (BCBS), organized by the Switzerland-based Bank for International Settlements, first put forth the “capital adequacy” norms for the banking industry based on an assessment of credit risk, the surveillance system seems to have come unstuck.
This has brought forth two significant responses from the G-20. The first is the task assigned to the Financial Stability Board (FSB) of the G-20 for implementing the recommendations of the 2009 Pittsburgh Summit that had called for “strengthening the International Financial Regulatory System”. The second, which complements FSB’s efforts, is the initiative taken by BCBS to fine-tune the surveillance mechanism—staying aware of the frailties that the financial system has displayed in the past.
It seems clear that FSB and BCBS are in the process of introducing fundamental changes in the regulatory oversight of the banking system and other financial institutions. BCBS has already given this indication by presenting its proposals to “strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector”. The proposals, better known as Basel III (after two earlier rounds of such regulations), are based on the prognosis that the ills of the banking sectors in several countries stemmed from the fact that they had built-up excessive on- and off-balance sheet leverage, which was also accompanied by a gradual erosion of the level and quality of the capital base.
However, support for Basel III—the norms were to be finalized before the end of 2010—is wearing thin, evidenced from the G-20 finance ministers’ meeting in Busan, South Korea, held last weekend. Leaders participating in the Toronto summit would, therefore, have to strongly endorse this step.
Such reform measures have become even more critical, given that the G-20 decision at Busan to vote against continuing stimulus programmes has added an element of uncertainty to the global economy. Thus, while India and China argued against the early withdrawal of stimulus, the message emanating from Busan was that fiscal consolidation was of utmost importance. In many ways, this message endorsed the view the International Monetary Fund (IMF) expressed that “a key concern is that room for policy manoeuvres in many advanced economies has either been exhausted or become much more limited”.
It appears that this decision is coming much too soon, since weak consumer sentiments in several advanced countries have raised question marks over the sustainability of the recovery. Even in the US, where personal consumption expenditure was a driver of growth in the January-March quarter of 2010, the prospect of increasing unemployment in the ensuing months—echoed most recently by Ben Bernanke, chairman of the US Federal Reserve—could affect consumption.
The area where the Toronto summit could make a real impact is in reforming global trade, something already under way in the Doha Round of negotiations. The most important lesson that the global community has learnt since 2008, in the aftermath of the worst financial crisis since the Great Depression, is that the existence of a rules-based multilateral trading system is a sound insurance against beggar-thy-neighbour tendencies.
At the present juncture, however, the Doha Round seems to lack the political impetus necessary to bring the negotiations to an early conclusion. That’s why G-20 leaders need to re-endorse the point that they had made in Pittsburgh , where they had sought “an ambitious and balanced conclusion of the Doha Development Round in 2010 consistent with the mandate” that was agreed to in 2001.
Moving forward, it is vitally important that the initiatives taken by the G-20 complement the efforts of other multilateral institutions (IMF, the World Trade Organization) that are addressing issues of global governance. In the past, most of these institutions have benefited from initiatives taken by a select group of influential countries to set the global economic agenda. The G-20 now offers a wider platform, which includes India, to do so—at a time that is critical.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.
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