Tanim Ahmed*, NewAge, April 9, 2009
If the G20 communiqué is anything to go by, it is, as many have pointed out, another coat of fresh paint over the same kinds of policies that brought down the entire financial system. And if historical trends are anything to go by, without overarching and meaningful reforms, which the declaration does not call for, financial crises will keep recurring.
All the self-congratulatory statements following the G20 summit was probably indicative of the almost miraculous political success with 29 parties arriving at a surprise consensus. The evident exuberance was more due to the political success of the meeting than the economic significance of the summit. Accordingly, the final declaration was vaguely worded and had little substance.
Among them the participating countries constituted 90 per cent of global GNP, 80 per cent of world trade and two-thirds of the world’s population. An agreement among these countries could presumably turn around the global downturn. At least that was the implicit suggestion. But even before the summit had begun, it was evident that, with divergent interests and priorities, it would be rather difficult, if not downright impossible, to arrive at a consensual agreement. Even as they reached London, the French president, Nicolas Sarkozy, and the German chancellor, Angela Merkel, held a joint press conference calling for global financial regulation mechanism that was watered down considerably to suit others and at the same time secure their agreement.
The Chinese premier, Hu Jintao, had to be satisfied with the assurance that the convention of a US citizen heading the World Bank and a European heading the International Monetary Fund would be done away with within a couple of years. Furthermore, there were assurances that Macau and Hong Kong would not be named and shamed as tax havens. Apparently, similar assurances also went to Austria and Luxembourg. When the list is finally made public, it will be carefully vetted and these parties will not be on it. Neither will the Cayman Islands or Jersey, so as to make sure that the blacklist does not ruffle too many feathers. This was apparently one of the big outcomes of the summit — a supposed crackdown on tax havens and areas that are typically non-cooperative about financial dealings.
The British prime minister, Gordon Brown, as the host, and the American president, Barack Obama, on his first major meet, needed this meet to be a success for their individual political mileage. Neither of them could really afford a failure in London. So both intervened and gave the assurances and mediated where needed to bring about convergence among the parties. But perhaps the most compelling factor for an overall consensus was that none of the participants really wanted to look like they were the stumbling blocks to a global compact to turn around the financial downturn.
If times were not as bad and the crisis had not been so extensively spread, then the same agreement would have taken much longer or not taken place at all and might have had to be even further watered down than what it is. Despite the optimism expressed by world leaders after the summit in London, the communiqué leaves a lot for further interpretation and in cases open to imagination, especially as regards the actions countries agreed to take against irresponsible financial operations and the ‘non-cooperative’ jurisdictions as previously mentioned. Although there were indications that the leaders would come down heavily on hedge funds, tax havens and executive bonuses the communiqué stopped short of spelling out concrete measures. These were apparently left for later.
Also left for later was a substantial part of the additional funds for the international financial institutions that the summit agreed upon. Although this was one of the most concrete decisions to emerge out of the summit, only $250 billion of the $1.1 trillion has already been secured. Japan had pledged $100 billion in January followed by the European Union with another $100 billion in March. China agreed to shell out $40 billion, but that too reluctantly, pending overdue reforms of the multilateral lending agencies. It is expected that the United States will also chip in but there is yet to be any clear indications about where the rest will come from.
Essentially then, in terms of concrete commitments and additional funds over and above those already promised, the summit did not secure any significant commitments from the major economies as part of the global stimulus plan. Of this $1.1 trillion, less than five per cent has been categorically earmarked for almost 50 least developed countries that would be mobilised mainly by the International Monetary Fund and in part by the World Bank. There were once again no indication or mention that these funds going to countries in dire situations should not be pegged with what is generally accepted as draconian conditionalities. Nor were there any calls for further debt relief for the heavily indebted countries or those in serious trouble.
The lending agencies, it appears, would be free to attach whatever conditions they deem fit with these funds. This new injection of funds into the lending agencies, mainly the IMF, only strengthens the IMF’s role as a financial policeman around the world with increased roles to monitor policies of different countries and report on a quarterly basis. However, what would be done thereafter is still up in the air. Critics have already cried foul over the IMF resurfacing in a stronger central role because many blame this lending agency’s ineptitude and inefficiency for numerous financial disasters in the developing world.
It has also been pointed out that all the rhetoric about reforms is just that, rhetoric. There was a similar push for reforms of the financial regulations but those took seven years to be formulated—BASEL II—and even then were hardly implemented. In all likelihood, the reforms being talked about, especially in the G20, will have a similar fate. Not only is it that certain tax havens would be kept off the blacklist, for those that will be named and shamed it is very likely that they would be required to undertake few measures as reforms and continue with virtually unchanged practices. There is, however, some significance as regards reforms of the lending agencies but they might bear significance in the longer run as the reforms will not come about before another two years.
There was the expected call for global free trade and less protectionism although an overwhelming majority of the G20 group of countries, including the United States, have already incorporated protectionist clauses in their corresponding national stimulus packages. A stimulus package to jumpstart a country’s economy should rightly have some protectionist measures since there is no point generating jobs in one country using public funds of another. It would be a political suicide as well as economically imprudent. However, regardless of their protectionist measures, the rest of the world is still being fed the mantra of free trade and any deviations from the free trade regime would be seriously frowned upon. If the G20 communiqué is anything to go by, it is, as many have pointed out, another coat of fresh paint over the same kinds of policies that brought down the entire financial system. And if historical trends are anything to go by, without overarching and meaningful reforms, which the declaration does not call for, financial crises will keep recurring.
To end with a hypothetical exercise, the world could be rid of poverty for at least one year with a trillion dollars that the rich countries are putting up for the lending agencies. Each of the billion people living in poverty, measured by the World Bank’s standards of course, could be given $1,000, which would be significantly higher than Bangladesh’s average income per capita at $520. If the entire stimulus package of $5 trillion, that Gordon Brown came up with, were distributed to the poor, the world would have been rid of poverty for almost seven years! But surely such simple distribution would not lead to a sustainable source of income or employment and the poor would fall back into poverty after they have spent the money. These trillion-dollar funds or at least the several hundred billions being given to the lending agencies would then presumably be spent on such projects that lead to employment generation and effective poverty alleviation. That would indeed be welcome. But let’s not hold our breath.