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By Aldo Caliari
Director of Rethinking Bretton Woods Project
Obama was so jubilant over the G2O summit after achieving a common-ground agreement with France and Germany, among others, (Reuters photos)
On Apr. 2, 2009, the Group of 20 countries (G20) met in London where the summit continued the process announced in Washington in Nov. 2008 when George Bush, the former US president, summoned the same group of leaders to a meeting to discuss coordinated response to the global financial crisis.
"This is the day the world came together to fight recession," said Mr. Gordon Brown, the UK prime minister in his closing speech.
In stark contrast to his words, the declaration emerged from the summit — "G20 Declaration" — rather stands as evidence that the world is increasingly finding it harder to achieve common ground on the most critical matters that need international cooperation during these difficult times.
In spite of assertions by participating officials — previous to the summit — that this was not a pledging conference, it sort of looked like one.
Funding IMF and Other Institutions
The most outstanding agreement was the summit declaration's commitment of $ 1,100 billion, with $ 750 billion of which for the International Monetary Fund (IMF), and $ 100 billion for all multilateral development banks.
It has become a habit of summits that old funding promises are lumped together with new ones to boost the numbers of the "deliverable", and so feed the perception of success of the meeting.
But, it took analysts just a few hours to conclude that most the G20's promises were old.
There were reasons to even doubt a good portion of the new ones could not be traced back to specific pledges by any certain government.
Out of the "additional" $750 billion that leaders agreed to pump into the IMF, one third is still to come from sources that may include the issuance of bonds by the IMF, but that remains fairly unspecified in the G2O's statement.
How are these billions going to come from IMF-issued bonds? And, how would that affect international capital markets at a time when industrialized countries with a triple-A rating are finding it hard to find buyers for their own?
How can both this and the pledge to raise more money via bonds for multilateral development banks be honored together?
Another third of the IMF pledged funding would be generated by issuing Special Drawing Rights — a basket currency that the IMF can issue and members can use as foreign exchange reserves.
Finally, one third represents actual committed funding bilaterally pledged by G20 for the IMF.
Even, some of these $ 250 billion — that can be considered "cash-in-hand" funding, are not new — as the committed funding includes $ 100 billion pledged by Japan and $ 75 billion pledged by European countries earlier this year.
The rest is new, but its sources are hard to account for — with yet to be confirmed rumors that China and Saudi Arabia would pay for it.
An increase in $ 250 billion would still be of historic proportions by the standards of the existing arrangements to borrow.
Cosmetic Changes?
Both the New (NAB) and General Arrangements to Borrow (GAB) represent a commitment by several member countries to lend, altogether, up to a total amount of around $ 50 billion to the IMF.
Yet, the G20 seems to have been faster to award this increase in resources than to ask hard questions about the suitability of such funding to a largely discredited IMF.
Less than two years ago, the IMF had so little trust from its developing members that it was on the brink of bankruptcy, because of the conditions attached to IMF funds.
In addition, paradigmatic of this are the conditions that — in the eyes of all analysts — worsened the contraction of East Asian economies, and had devastating consequences for social and development prospects during the East Asian crisis.
Little faith would be warranted, then, on the IMF’s ability to help crisis countries with the newly received funding.
The current shape of IMF would not be such a huge problem if it had built-in mechanisms to reform and innovate, adapting to changing conditions and demands.
The distrust on the capacity of the institution to reform itself reached new depths in April 2008.
After nearly seven years, IMF still keeps its anachronistic governance system under review. And, with overrepresented rich country members dragging their feet, only a meager 2 point increase in the percentage of IMF's voting switched from developed to developing countries.
Part of the deal at that time was that every periodic review of members' quotas — one review every five years — would automatically realign quotas, and hence voting power, of members.
The G20 declaration moves to the next review in 2011.
But, since the April 2008 decision fails to substantially reconsider elements of the quota formula that systematically under-represents developing countries, reviews are not expected to make substantial difference to the longstanding IMF's "democratic deficit".
Marginalizing Developing Countries
In addition, the G20 declaration agreed that "heads and senior leadership" of the international financial institutions will be appointed through open, transparent, and merit-based selection processes.
This is supposed to end the traditional practice whereby the IMF and World Bank have been respectively commanded by European countries, as well as the United States.
The realities of the European and US overwhelming voting power, and the early support they gave to a specific candidate discouraged other candidacies.
Developing countries' choice was narrowed to support the candidate that was set to win the vote. Either, they become sure enemies of the would-be leadership.
The G20 declaration has more groundbreaking global governance language, as it calls for the expansion of the membership of the Financial Stability Forum (FSF).
Now, it will be called Financial Stability Board, and will include all G20 members plus Spain and the European Union.
The Basel Committee on Banking Supervision is now to include seven more members out of the G20 membership.
Developing countries should certainly take advantage of this opportunity to have a voice in such bodies.
Nonetheless, it is important to keep in mind that a granting of a seat does not automatically translate into a granting of influence.
Moreover, there is a risk that the unrepresentative, self-selected group of countries which will make up these bodies could simply win new energy and legitimacy from the newcomers, without really ceding any power.
The agreement to change the name of the FSF, in turn, means no change in its nature, nor a progression in the level of cooperation undertaken via such a body.
It continues to be a merely advisory body that will have some responsibility — alongside the IMF — for providing "early warning of macroeconomic and financial risks and the actions needed to address them."
The G20 leaders agreed to extend regulation and oversight to include all systemically important financial institutions.
This language is as problematic as it is to draw a line between institutions that are "systemically important" and those that are not.
Large differences continue to exist among G20 countries on the strength of needed regulations.
Rather than bridging them, this commitment is up to each country to implement.
In this regard, the mere qualification of an institution as systemically important could equate to a "too big to fail" official seal carrying moral hazard implications.
On the other hand, those not characterized as systemically important might immediately become the new unregulated instrument of choice for excessive risk-taking.
In interconnected financial markets, institutions that do not represent a collective or an individual thread, may lead to an unpleasant surprise.
The Same Basel II
There is no surprise with regards to banking supervision, as the Basel II Accord was largely endorsed as the main tool for carrying it.
This means that the basic approach embedded in Basel, based on banks' internal risk measurement systems, continues to prevail.
While several analysts have blamed excessive trust on the "rationality" of banks' incentives to pursue the best management of their assets as the cause of the crisis, the G20 approach leaves that piece at the center of the system.
The G20 offered continued support to the ongoing establishment of "colleges of supervisors" to monitor some cross-border financial institutions.
This seems to be as far as they were willing to go in strengthening cooperation on banking supervision.
There was nothing new, because these colleges were already invited by the G20 Washington Summit in Nov. 2008.
Furthermore, little is added to Washington’s declaration in the area of credit-rating agencies.
The International Organization of Securities Commissions, author of the code of conduct for credit-rating agencies, is asked to "coordinate" compliance with such a code by national jurisdictions.
Yet, the organization is not really handed any particular power to press compliance, which remains squarely in the hands of national authorities.
The G20 London's declaration included statements of goodwill towards the preservation of open trade.
Yet, in the light of the repeated reports of protectionist measures being taken by most of G20 members since Nov. 2008 — when a similar declaration was issued — little credence can be given to G20 London's declaration.
The same can be stated about the reference to the need to conclude the Doha Development Round.
However, trade has plummeted at a breathtaking pace since the beginning of 2009.
What is most striking, then, is the focus on the maintenance of open markets.
The crisis clearly shows that without addressing the financial problems, the promise of an open-trade system, even if fulfilled, is empty and even counterproductive.
Along this vein, the summit skirted the most pressing questions about the international monetary system: can international trade continue to prosper depending on the domestic currency of one country?
Or, will the attempt to restart demand within the same monetary framework lead to perpetuating global imbalances?
The silence of the G20 on these subjects might lead one to think that their consensus is "yes".
But, a few days earlier the People's Bank of China's governor let G20's thoughts to the contrary be publicly known.
There may be other high-level officials within and outside the G20 that have a different answer.
It is clear that the world economy, and especially the growing ranks of those unemployed as the crisis takes its toll, will continue to anxiously demand an answer.
Aldo Caliari is the director of Rethinking Bretton Woods Project, the Center of Concern. He works as consultant to international organizations, foundations, media and civil society groups and networks.
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