As most people are aware, President Bush hosted a meeting of the G20 this past weekend to deal with the current financial crisis. According to France’s president, Bush was hesitant to call the meeting (perhaps because he is sensitive to his lame duck status). With the crisis deepening (today’s headlines confirm that the Euro Zone and Japan are both in recession), he was finally persuaded. The summit of world leaders was aimed at establishing policies and courses of action that would prevent the crisis from deepening further and provide a roadmap to recovery. The G20 is a group that represents wealthy countries and major emerging economies. In previous posts, I’ve pointed out that the emerging markets are likely to play a critical (if not leading) role in any economic recovery [see, for example, Trust and Credit in Emerging Markets and Trade Financing]. President Bush apparently believes the same since he called a meeting of the G20 instead of the G8. He also made an even bolder political statement by his seating chart at a formal dinner he hosted last Friday night [“As Leaders Wrestle With Economy, Developing Nations Get Ringside Seats,” by Sheryl Gay Stolberg, New York Times, 15 November 2008]. Stolberg reports:
“There, in the State Dining Room beneath a massive portrait of Abraham Lincoln, to Mr. Bush’s right was President Luiz Inácio Lula da Silva of Brazil, who has complained loudly that developing nations like his were being “infected with problems” not of their making. To Mr. Bush’s left sat a leader with a fat checkbook and the power that comes with it, President Hu Jintao of China. It was a startling illustration of the way the financial crisis, which originated on Wall Street and has spread around the globe, has remade the international economic world order. By insisting that developing nations be included in the summit meeting, President Bush gave fresh clout to their leaders, each of whom arrived in Washington with his or her own agenda.”
Unfortunately, the summit was long on rhetoric and short on details. Nevertheless, there is a sense that the summit was the opening shot of a revolution that could result in a new global financial order — the long-anticipated retooling of Bretton Woods institutions established following the Second World War. The leaders of the G20 nations issued an 11-page statement that spoke of broad principles. When it came to details, however, it left them “to be worked out by lower-level aides before another summit meeting in April.” [“World Leaders Agree to Seek Major Reform,” by Glenn Kessler and Anthony Faiola, Washington Post, 16 November 2008].
“Under the plans outlined by the leaders, countries such as China, Brazil and India would gain greater roles and responsibilities as part of a restructuring of the international financial system, while European leaders won a commitment to new regulations and controls on banks, rating agencies and exotic financial securities. The leaders also agreed that a dramatic failure of market oversight in ‘some advanced countries’ was among the root causes of the financial crisis, an implicit rebuke of the United States.”
Leaders were keenly aware, of course, that in April the United States will have a new president and different team with whom to deal. President Nicholas Sarkozy trumpeted that Europe achieved everything it desired from the summit.
“The leaders agreed to set up a new regulatory body, ‘a college of supervisors,’ to examine the books of major financial institutions that operate across national borders, so regulators could begin to have a more complete picture of banks’ operations. They demanded greater scrutiny of hedge funds and the completion of a clearinghouse system to help standardize and limit risk on some of the opaque and exotic financial derivatives that helped bring down Wall Street’s investment banks. Leaders also agreed to submit their countries’ financial systems to regular, vigorous reviews by the International Monetary Fund — assessments that some countries, including the United States, had long resisted. And they urged new constraints on the pay schemes at financial firms that ‘reward excessive short-term returns or risk-taking.’
It would seem that developing countries also achieved part of their agenda; namely, a greater role in international dealings.
“During the talks, developing countries demanded a greater role in elite financial institutions, and the conference’s communique called for the immediate expansion of the Financial Stability Forum to a ‘broader membership of emerging economies.’ The Swiss-based organization brings together finance ministry officials and central bankers, but while it includes Singapore and Hong Kong, China is not yet a member. In what one diplomat said was a contentious debate, Brazil and China demanded that they should be represented on the FSF. The communique also said that, over time, the IMF and other global institutions ‘must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy.'”
Robert Hutchings, a diplomat in residence at Princeton University’s Woodrow Wilson School and former chairman of the U.S. National Intelligence Council, wrote an op-ed piece in the Washington Post in which he called for even bolder action [“A Global Grand Bargain,” 17 November 2008. He writes:
“The world is on the cusp of the most profound shift in global power and influence in a century. Managing this quiet revolution calls for nothing short of a new international system, with a radical revision of existing institutions and patterns of doing business. It is a time for thinking big.”
Hutchings believes that primarily addressing short-term challenges is also short-sighted.
“The G-20 summit was a long-overdue initiative, but it did not go far enough. The summit made modest progress in addressing the immediate crisis, but it hardly touched the harder challenges of institutional reform. The ‘action plan’ announced on Saturday was mostly and predictably a vague set of broad goals. The summit failed for two principal reasons. First, the mechanisms do not exist, at the IMF or elsewhere, to regulate governmental financial institutions, much less non- or quasi-governmental institutions such as China’s sovereign wealth funds. Second, leaders of influential countries such as China and India made clear their disinterest in participating in global institutions that are dominated by the Western powers. Why should China and India pay attention to an IMF in which their combined voting weight is just over 5 percent and which is always led by a European (with the World Bank always led by an American)? The immediate challenge of creating a ‘Bretton Woods II’ might begin with the Europeans and Americans voluntarily relinquishing their cozy agreement to reserve the top IMF and World Bank jobs for themselves and proposing a revision of the voting weights at both institutions to give the rising economic powers a greater stake and role (and to oblige them to pay higher dues as well). This would clear the way for a strengthening of IMF roles in gathering and disseminating financial information, developing enforceable standards and codes for banks and sovereign wealth funds, and enhancing surveillance of financial systems — internationally and in individual countries — in conjunction with central banks. To give this new system more political clout, the G-20 itself should be given a stronger mandate and role to complement this enhanced IMF.”
As readers of this blog know, I’m a supporter of global standards. I’ve built the Enterra Solutions® Development-in-a-Box™ concept around the idea that international standards and best practices are the best way for emerging market countries to join the global economy and build trust where none has previously existed. Hutchings says that even this, however, does not go far enough. He writes:
“This does not go far enough, though. It is not just the global financial mechanisms but also the institutions governing trade, energy, the environment, development assistance and security that need to be overhauled. … How to begin? As Dwight Eisenhower advised, if a problem cannot be solved, enlarge it. Tackling these problems piecemeal or in isolation won’t do it. The solution lies in a ‘global grand bargain’ — a set of loosely linked trade-offs whereby the United States and Europe give a bit on the Doha trade round and induce Brazil and India to follow suit, China takes economically difficult steps to reduce carbon emissions because it sees progress in other areas, and Russia sees its international role strengthened and therefore undertakes to act as a reliable energy provider and promoter of nuclear nonproliferation. Early breakthroughs may be possible in some areas, such as a deal on climate change that brings in China and India and creation of a global fund to begin weaning us from fossil fuels. But this new system is not the work of a few months. It is not a single negotiated settlement, a single treaty or a single institution but, rather, a flexible set of reciprocal concessions among a dozen or so key countries that would evolve step by step. Just as the post-World War II order took the better part of a decade to put in place, so too will the new order evolve over the course of years.”
Hutchings believes the timing is right for a global grand bargain because conditions call for it, a change in the American presidency is imminent, and global power is shifting eastward. He concludes:
“It is precisely in the area of creating a new international order that the [Obama] administration should show boldness and imagination. The time to act is at the beginning, when the president’s power and support is at its high point. Obama should articulate a vision that can cut through entrenched positions, internationally as well as domestically, and allow him to take initiatives that would come to fruition later in his term.”
Although it may appear that world leaders merely punted the search for solutions to pressing challenges into next year, they understand that any solution must involve the United States and trying to negotiate while the U.S. in is the midst of major political transition simply won’t work. With emerging market countries now realizing that their influence and voice in international affairs is increasing, they too can take the next few months to figure out how they can become part of the solution rather than a part of the problem. They have long complained about sitting on sidelines not being heard — perhaps it’s time to hear what they have to say. If they simply want to redress old grievances, they will have lost a precious opportunity to demonstrate real leadership at time when leadership is desperately needed.