Bretton Woods Project, March 17, 2009
A close look at the communiqué of the G20 finance ministers shows that they ignored some of the most important issues, namely environmental and developmental concerns, and the need for fundamental change in the organisation of finance. Instead, they agreed on only minor changes without providing critical details.
The G20 finance ministers and central bank governors met in Horsham, UK, on Saturday, March 14. Their communiqué touches upon a whole variety of problems, from restoring growth and enhancing regulation to reforming the international financial institutions, but the reported agreements are neither original nor complete.
The communiqué was accompanied by a progress report on the immediate actions agreed at the G20 summit in Washington last year. Four emerging market economies Brazil, Russia, India and China (BRIC) also issued a joint statement this weekend, which is largely in line with the G20 communiqué.
Representation of emerging market economies and developing countries
The G20 announced the expansion of membership of the Financial Stability Forum (FSF), now including all G20 countries and Spain in the future; as well as membership expansion of several standard setting bodies including the Basel Committee on Banking Supervision (BCBS), the International Accounting Standards Board (IASB), and the International Organisation of Securities Commissions (IOSCO) (See Update 63 for details on these institutions). Although a step in the right direction, a majority of countries affected by the developed standards are still not represented in these bodies nor are any reforms under way to strengthen the transparency and accountability of the institutions.
Reforms of IMF governance were also limited. The next IMF quota review was rescheduled from 2013 to 2011, and the completion of World Bank governance reforms by the spring meetings 2010 was reaffirmed. Stating that the heads of the IFIs should be appointed through “open, merit based selection processes” is also nothing new, and not as promising as it might sound. The last IMF managing director, also appointed in a process labelled open and merit based”, turned out to be a European. The BRIC economies went further in the demand for “open merit-based processes, irrespective of nationality or regional considerations”.
Governance is increasingly important, since the IMF will play a greater role in global economic coordination through macroeconomic surveillance, including of fiscal stimulus packages, and an IMF/FSF early warning exercise in the future. The BRIC states emphasised that “even-handed surveillance across all members, especially in respect to advanced economies” is needed. Last year during the Washington summit, the G20 countries committed to undertake financial sector assessments with the IMF, a commitment which was repeated in the March progress report.
Restoring growth – only in industrialised countries?
The G20 governments restated their commitment to restore growth by continued liquidity support, bank recapitalisation, and strengthening banks’ balance sheets under a common framework comprised of twelve principles. These principles include conditionality for bail outs covering management compensation schemes and how the money is used; and stressing those financial institutions should still be run according to business principles. Furthermore, the framework refers to the need for international cooperation, transparency of banks and governments while pursuing bail outs, and a need to protect the interests of taxpayers.
To help emerging market economies and developing countries restore their growth, the G20 governments “recognised the urgent need” to mobilise IMF and World Bank capital “to finance countercyclical spending, bank recapitalisation (…) and social support”. However, this stands in stark contrast to the conditionality the IMF attached to its loans for crisis hit countries so far, which included cuts in government spending and rises in interest rates (See Update 64). Furthermore, recognising the need is not enough. The G20 and BRIC communiqués do not state any particular amount of money governments are willing to contribute. Instead, they refer only to the IMF’s New Arrangements to Borrow, bilateral contributions, and quota reviews, leaving it for the G20 summit on 2 April to announce contributions.
Little new on the regulatory front
Regarding regulation, G20 governments agreed to full regulatory oversight of credit rating agencies used for regulatory purposes, and better standards for accounting, and derivatives markets; things already agreed on in Washington. As shown in the progress report, the usual standard setters (IASB, Financial Accountants Standard Board, BCBS, IOSCO, and the FSF) are working on their respective principles and standards, have launched consultation processes, and in some cases published new standards already. Regarding hedge fund regulation, the G20 will rely on input from industry bodies, talking only about registration and risk disclosure.
Apart from harmonised regulatory standards, the progress report claims that supervisory colleges have already been established for most of the systemically important financial firms. However, neither information on the structure and number of colleges nor the FSF protocols for their establishment and organisation have been made public.
Regarding the problem of tax havens, the communiqué solely states that the respective bodies will identify “non-cooperative jurisdictions” and a “tool box of effective counter measures”. Thus, they did not commit themselves to any actions and ignored the fact that black lists like the OECD one have not worked in the past, since they do not have sanctions attached to them.
What is missing?
A lot of urgent and important aspects are still missing. The communiqué does not recognise that this is a systemic crisis, nor is there any sign of a fundamental change in the financial architecture. The reform steps do not take into account any of the most pressing concerns regarding the environment, inequality, and justice. Ending poverty and putting in place safety nets for people in crisis hit countries is only seen as a matter of more IMF and World Bank lending. This ignores the facts that the loans may accelerate the debt spiral, include conditionality, and do not tackle the roots of the problem.