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The gloomy newspaper reports about last weekend’s G20 summit in
Washington, especially those that came out in the local press, hid
the historic character of the event. The stock markets’ response
to the so-called failure of the summit sidelined the importance of
the decisions made by the political leaders of the globe’s richest
and most dynamic countries. These decisions are the prelude to the
birth of a new international economic order.
It is not true that no major decision could be
made because the incoming president of the United States, Mr. Barack
Hussein Obama, was not present. President Bush had equipped himself
with the mantle of Mr. Obama’s future authority, his team had had
extensive consultations with the Obama economic team before the
summit.
It is not true that the summit failed to achieve
the most important thing expected from it, the decision to create a
powerful global, supranational financial regulatory body (as
proposed by France’s Nicolas Zarkosy). The promise of creating a
body that will carefully monitor how national finance ministers do
the tough job of rigorously policing their countries’ financial
systems and institutions has been made. All the things that are
necessary for a new, more stable and crisis-proof international
economic order were enumerated and would be ready to be fleshed out
in the next summit that will be held in April.
Important first step
President Bush correctly described last
weekend’s summit as an “important first step” but one that was
“not going to solve the world’s problems” as yet because there
was still more work to be done. But Jose Manuel Barrosa, president
of then European Commissioin, was right too that the summiteers were
“at a turning point”—on the threshold of a new world economic
order to replace the road map created in Bretton Woods three
generations ago.
The summit had all the world’s most developed
countries as well as the so-called emerging economies—China,
India, Brazil, even Indonesia. Apostles of state intervention as
well as steadfast ideologues for free markets held their fire at
each other to save the world economy.
They all delivered the outlines of the global
response that must be given to a global crisis.
They declared themselves to be against
protectionism, which would impoverish everyone except those that
have wealth but would also stunt them. The rich countries agreed
because they fully understood that if all countries don’t work
together all of them would die on their own islands.
They all made the commitment to take firm action
to reduce external imbalances, especially large countries with huge
current account surpluses.
They resolved to “enhance our cooperation and
work together to restore global growth and achieve needed reforms in
the world’s financial systems.”
New regulatory body
A new regulatory body will be created to watch
the books and doings of institutions that operate globally and to
police hedge funds. Also, there will be created a clearinghouse that
will make innovative financial instruments transparent and prevent
the destruction that derivatives caused in the present meltdown.
The International Monetary Fund will now
have more powers to regularly and rigorously review the financial
systems of countries, including even the United States.
The pay for top financial executives, bonuses
for creative finance operators who invent new forms of risk taking
will be checked. Their inventions will be placed under zealous
scrutiny.
More than two dozen specific regulatory and good
governance measures were outlined in detail.
These reforms will be improved upon and turned
into binding regulations during the five months between now and the
April summit.
That it is a larger Group of 20, instead of the
original roster of Seven Rich Industrialized countries, plus the
foremost emerging economies that held the summit meeting in
Washington indicates that indeed a new world order is about to be
born.
The fact the world is in serious trouble now
shows that the old older no longer works. It is now Beijing, Tokyo
and Riyadh that the Old World of Europe and the New World of America
must look up to help add liquid cash to their thirsty and frail
banks.
Financial Stability Forum
These countries—and others—must be given
seats in the rarified air of the Financial Stability Forum, the
organization that the general public has not heard much about. It is
where the Old Rich countries’ finance ministers and central bank
governors congregate to decide on the global financial order. As a
sign of the G20 summit’s determination to make reforms, the final
declaration precisely made a call to expand membership in the FSF.
As usual, Japan was a model of internationalism
and solidarity. It announced that it was giving 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 also pledged to give the International Monetary Fund a
credit line of up to $100 billion for the rescue of emerging
economies severely struck by the global financial decline.
Unfortunately, China and Saudi Arabia did not
respond to urgings for them to make substantial contributions like
Japan.
Who knows, they might deliver—next April.
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