Contention over the second G-20 economic summit (2)

The communiqué, as had been predicted, largely papered over this rift by using uncontroversial language and vague expressions that created the impression of G-20 unanimity on the remedies required to cure the severely ill world economy. The attempts by the UK, the host country, to broker a grand bargain between the EU and the US to close the transatlantic rift largely failed after both France and Germany, as the leading EU countries, stood their ground in opposing what they considered to be excessive and potentially highly inflationary fiscal stimuli through open-ended deficit government spending advocated by the US. The question now is whether such a bargain can still be reached either before or at the April 2 summit.

Both sections of the communiqué were vague, but the first section dealing with the fiscal (and other) stimuli was much vaguer than the second section dealing with financial regulation. As the best example of the communiqué's vagueness, here is the first paragraph of the first section: "We have taken decisive, coordinated and comprehensive action to boost demand and jobs, and are prepared to take whatever action is necessary until growth is restored. We commit to fight all forms of protectionism and maintain open trade and investment."

The outcome seemed to favor the EU, which has been emphasizing financial regulation over fiscal stimulus, emphasized by the US, in their contention over the summit agenda. But the lack of any specific ideas and measures to combat rising protectionism, manifested by increasing import barriers, production and export subsidies, antidumping cases -- which was documented by a World Bank report last week -- is to the credit of neither the EU nor the US, both of which have been yielding to protectionist demands under domestic political pressures. According to the World Bank report ("Trade Protection: Incipient but Worrisome Trends," by Richard Newfarmer and Elisa Gamberoni), 17 of the G-20, but not Turkey, have implemented 47 measures restricting international trade, despite the anti-protectionist pledge they had signed at the first G-20 summit.

There seemed to be genuine agreement on two specific issues, both under "Strengthening the Financial System." The first was the restoration of lending by financial institutions, nationally and internationally, as reflected by the annex titled "Restoring Lending: A Framework for Financial Repair and Recovery." This annex offered a set of 12 principles applicable to ad hoc government interventions that have been made thus far, such as bank bailouts, to cope with the global financial crisis. It remains to be seen to what extent these principles will underlie the Obama administration's new plan, expected to be announced early this week, to enable the US financial system to cleanse itself of toxic assets.

The other specific and pressing issue on which there seemed to be genuine agreement, according to the eighth paragraph of the communiqué's second section, was the reform of the governance structures of the International Monetary Fund (IMF) and the World Bank, in order to increase their legitimacy and effectiveness by giving more representation and voice to emerging market economies (EMEs) and other developing countries. The finance ministers and central bank governors, in order to help EMEs and other developing economies hit hard by the reversal in international capital flows, also agreed to increase the financial resources of the IMF and the World Bank, according to the fifth paragraph of the communiqué's first section, but left it vague as to how those resources should be increased and by how much.

In an attempt to raise their profile, eclipsed by those of the EU and the US in the heated debate over the summit agenda, four of the G-20's major EMEs -- Brazil, China, Russia, and India (BRIC) -- assuming the leadership mantle of developing countries, issued their own joint statement, in which they stressed the issues for BRIC that require G-20 action. Among them, the need to increase net capital inflows to developing countries and to reform the outdated governance structures of the IMF and the World Bank to enhance those countries' voice and representation were dominant. Both issues were ones on which the G-20 finance ministers and central bank governors seemed to agree, as noted earlier.

Some commentators view the outcome of the March 13-14 ministerial meeting as the emergence of the G-20's twin-track strategy of immediate economic stimulus and urgent financial system repair, with medium and long-term issues, such as regulation of the financial system and reform of the international financial institutions, sensibly put on the backburner in order of priority. Unfortunately, this twin-track strategy omits the fight against the immediate danger of rising protectionism, which also requires the G-20's urgent, intelligent collective action.