In retrospect, last weekend’s meeting of world leaders to deal with the global economic crisis was fated to succeed. While such gatherings usually produce stale rhetoric and mere exhortations to take substantive action, this meeting produced an 11-page document with enough content to qualify as a genuine action plan. The prospect of a global financial meltdown that threatened to rival the Great Depression is a powerful motivator.
The global crisis is only starting and financial losses worldwide are already thought to exceed $900 billion. As the slowdown hits the real economy, jobs will be shed; unemployment rolls are swelling by the millions and that number will steadily grow. Government action is required, but it is not enough: Concerted multilateral action is the only guarantee of success.
The speed and scale of the crisis have focused the minds of politicians worldwide. The real question was whether that would be enough to overcome the inevitable grandstanding that occurs whenever world leaders convene, or the divisions between free market advocates like U.S. President George W. Bush and those who demand more regulation, a group that is championed by French President Nicholas Sarkozy. The fact that Mr. Bush is a lame duck and his successor, Mr. Barack Obama, will not be taking office until Jan. 20 also dampened expectations for last weekend’s meeting, hosted in Washington by Mr. Bush.
In fact, the politicians delivered. Granted, they did not agree to the massive economic boost that some observers wanted, but that kind of action was always a very long-shot. They did agree on the need for a stimulus but left the particulars to national governments. Rather than pointing fingers, they agreed that a failure of policy makers, regulators and supervisors “in some advanced countries” failed to address financial risks, keep pace with financial innovation or appreciate the systemic effects of domestic shortcomings. In short, they admitted that the market did not work. So, they announced they “are determined to enhance our cooperation and work together to restore global growth and achieve needed reforms in the world’s financial systems.”
Those reforms will include a new regulatory body, “a college of supervisors,” to keep an eye on the financial books of financial institutions that operate internationally; closer watch on hedge funds; and completion of a clearinghouse to help understand and control risk on the new financial instruments that proved so devastating when their real worth was revealed.
The financial systems of individual countries — including even that of the United States — will be subject to regular and rigorous review by the International Monetary Fund. “Compensation practices as they relate to incentives for risk taking and innovation” — executive pay — will be scrutinized. That last item — a favorite of the pro-regulation group — was balanced by agreement to withhold all protectionist measures for one year. In all, over two dozen specific action items were detailed.
Each of those measures, along with the other “common principles for reform,” is just a guideline. The details of those proposals, which will be implemented in an integrated and consistent manner across nations, will be filled in over the next four and a half months before the next such meeting.
A lot can go wrong in that interregnum. Real life — and politics — can intervene. But there is another factor that is likely to nudge this process toward success: the push that it will provide for the birth of a new international economic order.
It is noteworthy that the Group of 20, and not the G7, met in Washington. Of course, the fact that the group represents 85 percent of global wealth is one reason to make it the appropriate forum. But the inclusion of nations like China, Brazil, India, and Russia was a nod to new economic realities. The convening of the larger group is acknowledgment that traditional international mechanisms no longer get the job done. The world now looks to Beijing, Tokyo and Riyadh to shore up international financial institutions and provide much-needed liquidity to battered central banks. But bringing these new nations to the table also signals that existing international institutions need to be updated to reflect this new order. Developing nations demanded seats in the Financial Stability Forum, an organization that brings together key finance ministry and central bank officials; the final declaration endorsed that call.
With power comes responsibility. Japan set an example with the announcement by Prime Minister Taro Aso that Tokyo would give the World Bank $2 billion to help launch a $3 billion global fund to recapitalize financial institutions in developing nations hurt by the financial crisis. Japan will also lend the IMF up to $100 billion to aid emerging economies hit by the global downturn.
Mr. Aso explained his initiative by pointing to the high expectations placed on Japan to respond. Equally important is the need to be seen by voters at home to be responding forcefully to a crisis of historic proportions. For once, just showing up was not an option.
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