In a move uncharacteristic of his largely unilateral approach to international affairs, President George W. Bush this past weekend convened an emergency summit of the heads of the Group of 20 countries. Many are calling the event Bretton Woods II; nonetheless the talks will only live up to this billing—the original Bretton Wood talks in 1944 lasted 22 days following two years of preparation—if they mark the beginning of a process whereby the leaders of developed and developing nations alike come together to deal with the global financial crisis, the world’s rapidly deteriorating economic fundamentals, and the impact on the poorest and most vulnerable in every country.
The Group of 20 meeting is just the start of a process rather than a one-off event, and as such it was encouraging that the leaders at the summit rose above excessive finger-pointing and managed to reach consensus on a plan for better financial market transparency, accountability, and regulation to avoid future global credit crises. Specifically, the post-summit communiqué highlighted the need for a uniform global accounting standard, greater transparency in derivative markets, and a review of executive compensation, all in an effort to better manage systemic risks.
The talks also mark the beginning of a much-needed process to overhaul, update, and expand the original Bretton Woods system of monetary management that was instituted after World War II. The communiqué proposes taking a closer look at the structure of the International Monetary Fund and World Bank to give emerging country members of the G20 a more prominent role, and to boost these institutions’ available resources.
At the summit in Washington, emerging nations were also invited to join the Financial Stability Forum, where senior representatives of national financial authorities, international financial institutions and regulatory and supervisory groupings, committees of center bank experts, and the European Central Bank gather to discuss global financial issues. Finally, there was consensus on the importance of reinvigorating free trade and a call to conclude the Doha round of multilateral trade negotiations before Christmas, with leaders agreeing to a year-long moratorium on protectionist measures.
These are all positive steps given the current global economic situation, but they do not go nearly far enough to stave off a perhaps deep global economic downturn. The meeting took place against the backdrop of plummeting forecasts for global growth and skeptics of laissez-faire capitalism taking to the streets around the world. The International Monetary Fund’s world economic growth projections are now at 3.7 percent for 2008 and just 2.2 percent for 2009, roughly half of what was predicted in January. Every Group of 7 country aside from Canada is expected to contract next year, and all four of the so-called BRIC countries—Brazil, Russia, India, and China—are expected to see growth fall by between 1 and 3 percentage points.
Dramatic falls in the stock market in developed countries have been well documented, but emerging markets have taken even steeper tumbles. Between January and late October, stock markets fell in all but one G20 country (South Africa), with an average drop of 45 percent. Leading the way down were stock market indexes in Russia, which fell by 76 percent, China (67 percent), and India (58 percent).
This cascading financial crisis, which originated with subprime mortgages in the United States and then combined with volatile food, energy, and raw material across the globe, highlights the dire need for a concerted and well-coordinated international effort to stabilize the effects of contagion, stimulate domestic demand to reignite economies, and set the countries of the world on a path of recovery and ultimately growth.
The focus of this past weekend’s summit, however, was squarely on the stabilization of the financial system and not on an economic stimulus package for citizens and businesses affected by the contraction in global credit. The communiqué did say the G20 would “recognize the importance of monetary policy support, as deemed appropriate to domestic conditions [and use] fiscal measures to stimulate domestic demand to rapid effect, as appropriate, while maintaining a policy framework conducive to fiscal sustainability.”
But as the crisis makes its way from bank balance sheets to the real economy through credit, trade, and currency transactions, Main Streets around the world are hurting as much as the Wall Streets of high finance in New York and London, Tokyo and Hong Kong, Sao Paulo and Shanghai. And the poorest and most vulnerable in every country around the world are direly affected.
That’s why economic stimulus measures are needed now to provide a key route out of the economic downturn. China set the ball rolling last week with its $568 billion announcement to fund domestic housing, infrastructure, social measures, and tax breaks. The United States must follow suit this week during the current “lame duck” session of Congress. The Center for American Progress advocates a plan of at least $300 billion to help affected families and businesses.
Other countries that have accumulated large domestic and foreign exchange reserves should be encouraged to use them to stimulate demand as well to create jobs, and new cash must be found to bolster the IMF’s inadequate funds to ensure that its lending window remains open to prevent countries from defaulting on their loans. Finally, as Kofi Annan’s U.N. Millenium Campaign calls for, the Group of 8 nations should provide $300 billion for the poorest countries to make up for the effect of the financial meltdown.
These criticisms aside, the recognition that the Group of 8 no longer suffices as the decision-making body for the global economy and financial markets is a welcome step. The G20, which produces approximately 85 percent of world output, is a more appropriate forum. This summit was a landmark step in acknowledging the role of emerging markets in a new global order.
Nonetheless, some of the countries and regions that will be hardest hit by the global slowdown were not present. There is a strong case for future meetings to include ambassadors from underrepresented regions, including the African Union, the Organization of American States, and the Association of South East Asian Nations.
This shifting global balance calls on the United States to recast itself as a team player in the new global landscape. The next meeting at the end of April next year will take place under the watch of President Barack Obama, who will have a key role in moving this agenda forward in collaboration with a growing number of powerful world players. But to justify its presupposed grandiose title of Bretton Woods II, the discussion must move beyond financial markets and address the real challenges that also confront the poorest and most vulnerable in every region of the world.