Only history will judge whether last week’s meeting of the Group of 20 nations did in fact provide a floor to the worst economic crisis since the Great Depression. Equally uncertain is whether the conclave marked the emergence of a new economic order, as British Prime Minister Gordon Brown declared upon its conclusion.
Mr. Brown certainly deserves credit for forging a remarkable consensus that could steer the world out of this recession. Success, however, depends on national governments making good on their pledges: Empty words will guarantee that this meeting fails and the economy continues its plunge.
Expectations surrounding this meeting were high. U.S. President George W. Bush first called a G20 meeting to deal with the crisis last November, but that get-together merely provided rhetorical support for joint efforts, most notably a pledge — often honored in the breach — to avoid protectionism. The presidential transition in the United States and a desire to get a better grip on economic dynamics meant that real action would be put off until the London meeting. Recognizing the importance of this conference for the world and his career, Mr. Brown pressed to reconcile divergent positions among G20 nations that threatened to derail an effective response.
He succeeded. The meeting yielded agreement on three sets of concerns. The first is the need for a significant increase in assistance for developing economies. Previously, industrialized nations had agreed to provide the International Monetary Fund (IMF) with $250 billion in funds that can be used by developing nations hard hit by the crisis; last week, G20 governments tripled that amount to $750 billion. They also agreed to increase the amount of special drawing rights (SDRs), the IMF currency available to member governments, by another $250 billion. Finally, the leaders agreed to provide $250 billion in credits that will be used to finance international trade, which is projected to decrease for the first time in 30 years.
In total, the G20 agreed to provide $1.1 trillion. This is a remarkable sum — nearly 20 percent of the total global stimulus that has been pledged by all nations — and a further reminder of the need for the IMF, an institution that was only recently criticized as outdated and irrelevant.
Equally important, the funds were made available with considerably looser conditions. Traditionally, such funds can only be used for debt payment, recapitalization of banks or balance-of-payments support. They can also be used for goals such as stimulus spending, infrastructure investment, trade finance and social support.
The second set of concerns focuses on global financial regulation. The G20 agreed to create a Financial Stability Board that will monitor the financial system for signs of risks. While this new board does not have the cross-border authority some governments sought, attendees agreed to closely coordinate regulation of “systemically important” financial institutions. This will bring hedge funds under scrutiny for the first time and will also include credit rating agencies.
An important step concerns agreement to crack down on tax havens. Asserting that “the era of banking secrecy is over,” the declaration pledges the group will “take action against noncooperative jurisdictions, including tax havens.” This was a particularly contentious issue: China was reportedly opposed to this provision — because of Macau’s status — and U.S. President Barack Obama’s intervention is said to have produced agreement.
The final component of the declaration is agreement to avoid protectionism and to publicly identify nations that transgress. This is one expression of a larger and more important idea that is found throughout the document: Solving this crisis requires a concerted and coordinated effort. Just as no country can be ignored, neither can any government consider its own actions in isolation from others’. Protectionism is a slippery slope that invariably invites like-minded gestures or retaliation.
The G20 consensus also acknowledges that there are is no “one size fits all” solution. Every nation must tailor its response to its particular circumstances. Given the diversity of problems that nations face, flexibility makes sense. But there is no mistaking the need for all governments to respond to this crisis: There is no standing aside and letting others bear the burden. Thus, while some European nations have been reluctant to add fiscal stimulus, they are not obliged to do so. But if current measures do not get the economy to turn the corner, the leaders “commit today to taking whatever action is necessary to secure that outcome.”
Mr. Brown’s declaration that last week’s meeting signals the end of “the Washington Consensus,” which has guided international economic decision-making since the end of World War II, may be premature. A new architecture has not yet emerged, but trends are changing the way the global economy is run. It is significant that it is the G20 — not the G7 or the IMF — that is seen as the key decision-making body. Economic power has dispersed and new governments must have seats at the table. Ultimately, the viability of any institutional order depends on its capacity to solve problems. The G20 has made a start.
In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.