No consensus on ending global imbalances

By Shahid Javed Burki
Monday, Oct 05, 2009

THE choice of Pittsburgh by the administration of President Barack Obama for the meeting of G20 seemed strange in the light of the city’s reputation as the capital of the “rust belt” – once the industrial heartland of America dominated by steel mills and other capital intensive industries. Those factories were long gone; only American Steel remained.
But slowly and helped by a unique working relationship among the members of big business, academia and the health industry, Pittsburgh rediscovered itself. It was this resurrected city that the American president wished to showcase not only to the world but also to the citizens of his own country.

Pittsburgh had shown how a city that was once so dependent on the industries in which America was no longer competitive could provide large-scale employment to the displaced workers in new sectors of the economy. According to The Economist, “today, its main industries, health care and education are thriving.

Pittsburgh’s heath services business has almost tripled in size since 1979 creating more than 100,000 jobs. More than 70,000 work in research and development in the metro area’s 35 universities (Jonas Salk produced the polio vaccine at the University of Pittsburgh in 1955) and 100 corporate research centres, such as that of Bayer US, a pharmaceutical company…Pittsburgh’s unemployment rate, at 7.8 in July, was lower than the national rate of 9.4 per cent.” And, the city was also a good example of how the new “green technologies” could be put to the use of a large city. “The building hosting the G20 is the world’s first and largest LEED certified (meaning green) convention centre and sits on the city’s former red-light district.” The Pittsburgh meeting will go down in history not so much for the decisions taken to improve the functioning of the global financial system. These will have a lasting effect on the way the world manages its financial institutions. The meeting’s historical significance lies in the fact that it has become the primary forum for discussing global economic issues.

President Obama proposed that G20 should replace G8 as the primary policymaking body for international economic affairs. “Dramatic changes in the world economy have not always been reflected in the global architecture,” said the White House on the eve of the meeting. “This all started to change today with the historic agreement to put the G20 at the centre of efforts to work together to build a durable recovery.” Britain’s Gordon Brown went even further describing G20 as offering “more chance of delivering results than anything since the Second World War”. The move highlighted the growing importance of Asia and parts of Latin America in the global economy.

The United States and many European countries were now aware of the fact that the global economy was emerging from the “Great Recession” because of the aggressive measures adopted by some of the large Asian economies, in particular China.

The G20 consisting of 19 countries, including the seven developed nations that made up the G7 (Canada, France, Germany, Italy, Japan, UK, USA), plus the European Union, was created at a G7 meeting of finance ministers to help the global community deal with the aftermath of the Asian financial crisis of 1996-97. The dozen countries that were added to G7 included Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey.

Pakistan was one of the largest developing countries to be left out of the group. The first meeting of the group was held in September 1999. The idea was to devise ways for not having such a crisis repeat itself. From that point on the finance minister met annually. At the November 2007 meeting in Cape Town, there was agreement that central banks should pump liquidity into markets in response to the start of the global financial crisis.

In November 2008, the lame-duck President George W. Bush called the first G20 summit of heads of state in Washington to coordinate the global response to the crisis. By that time it had been recognised that China would have to play a critical role in preventing the global economy from spinning out of control and going into a depression.

The second summit was held in London in April 2009. It was the first large heads of state meeting held after Barack Obama was sworn in as the US president. Among the deci sions taken at London was the agreement to provide the IMF with $500 billion additional resources. Pakistan is one of the beneficiaries of that move.

The G20 heads of state met for the third time in Pittsburgh since the beginning of what economists have begun to call the “Great Recession”. This time President Barack Obama was in the chair. Though differences persisted among the participants, a broad consensus was reached in the discussions on the measures to be adopted in order to put the global financial system on the right track The firmest area of agreement was for higher capital reserve requirements at banks and other financial institutions. This would mean that the institutions will have less latitude to leverage their investments with large amounts of borrowed money. Agreement was also reached on the more contentious issue of regulating compensation for the executives working in financial institutions.The French, always critical of the Anglo-Saxon approach to the management of the financial sector, had argued for specific caps on bonuses but did not pursue the matter at Pittsburgh.

The most difficult area of discussion involved the issue of global imbalances that were central to the bubble and burst cycles of last several years.The biggest of these was between the trade deficits of the United States and the surpluses of China. The group did not reach any consensus on how to reduce these imbalances but there was agreement to monitor each other through a “peer review process” managed by the International Monetary Fund. Some of the more difficult areas were left out of the communiqué issued after the Pittsburg meeting. These included climate change.

Would the G20 evolve into a more effective forum for global decisions? While some of the large G7 countries are optimistic, some of the smaller ones such as Canada have indicated that they will continue to focus on the G8. The Canadians have decided to invite the G20 finance ministers when they host the next G8 meeting. Some experts believe that it would have been better to reconstitute the G8 by replacing, for instance, Canada and Italy by China and India. But inter-governmental cooperation always adds; it never subtracts. It appears to me that while G2 – the United States and China – will emerge the focus of global economic cooperation, G8 and G20 will at best play supporting roles.