Tomorrow, leaders of the top industrialized countries and the key emerging economies that make up the G20 will meet in Washington for a Global Economic Summit. This meeting is a critical first step towards international coordination in addressing the current financial crisis. The agenda will include topics ranging from the rewriting of specific financial regulations to the restructuring of global institutions such as the G8 and the IMF. Although expectations are low for any major agreement at this meeting, it must at least set the agenda for further high-level economic conferences expected once the new U.S. administration is in place.
What should be the top priorities for world leaders meeting in Washington this weekend? Should the major international financial institutions be restructured and if so, how? To what extent should financial markets be regulated at the international level, and what should be the role of the United States and Europe? What will be required for this series of meetings to address the current crisis effectively and help us avoid such turmoil in the future?
In an effort to answer some of these questions, we asked members of the Atlantic Council’s Business and Economic Advisory Group (BEAG) for their opinions and ideas for areas of work for this and future summits.
G7/G8: Reality Check
Because globalization has brought massive changes to the structure of the world economy, many of our experts look for changes in the structure of the G8. Timothy Adams, managing director of the Lindsey Group, observed, “International institutions need to look like the global economy and change over time to look like the global economy as it changes.” “The G7 is too small; it doesn’t have the right players,” adds Alan Larson, Senior International Policy Advisor for Covington & Burling. Jeffrey Frankel, professor at the Kennedy School of Government at Harvard explains, “The G8 has been increasingly handicapped in recent years by virtue of its obsolete membership. How can they discuss global current account imbalances or the need for exchange rate adjustments without China and Saudi Arabia at the table?”
“One of the striking features of the November 2008 G20 Summit is that it includes countries with ‘emerging market economies’, whose previous relationship with the G8 was relegated to “observant guests”. This new dialogue — and the importance placed on countries like Brazil, South Africa, India and China — is long overdue,” writes Paula Stern, chair of the Stern Group. According to Andre Sapir, senior fellow at Bruegel, there should be an “increased ‘G’ where there are a fair number of important industrial countries and a fair number of important emerging countries….If I had to venture a number, I would put 14.” Sapir continues, “Does one need four European countries [in the G7]? I would much prefer that we had only one representative for the entire EU or at the very most, one would have two, one would be for the euro-area, one would be for the UK.”
New Role for the IMF
Our experts also had views on how the IMF might be improved to avoid future crises. “One does need to go back to some of the original role of the IMF which is a systemic one and of surveillance; surveillance not just for the countries themselves, but surveillance with an eye of preserving the stability of the [financial] system,” explains Sapir. “When one is calling for a new Bretton Woods it means [having] an institution like the IMF that is playing a role, not just as fireman, but looking at the system itself. That obviously means that some of the systemic countries (the G7 countries and also India and China) have to be willing to be subjected to that surveillance.” Larson reiterates this point, “I think that there is an important role for international institutions like the IMF to strengthen their surveillance of national economic policies.”
The IMF could provide a set of “basic principles” for the proper functioning of international financial markets, recommends Erika Mann, Member of the European Parliament. “Lacking financial leverage with rich members, the IMF should concentrate on being an honest broker,” writes Nancy Birdsall, founding president of the Center for Global Development, “providing fully transparent, independent assessments and publishing them regularly and with vigor.” Sapir proposes that, “[The IMF] can and should be this ruthless truth-teller…it should adopt this global perspective to talk to countries in an open and frank manner publically. It should address countries’ policies to point out what is the truth, what are the consequences and the dangers of their behavior and policies for the system….It is, in a sense, a moral authority, not an authority that is wielding any batons.” This expanded role will give the IMF greater ability to give early warning before a crisis becomes acute. Additionally, as its role expands, “The [IMF will] have to turn to newly-wealthy countries like China to help finance new facilities and programs,” notes Frankel.
“Globally, there is liquidity in the system, a considerable amount of that liquidity is concentrated in the BRIC countries as well as the GCC,” observes Brian Henderson, senior vice president at Merrill Lynch. “With the proper mechanisms in restoring trust in the system, the ability to tap into this liquidity will be much improved”
Moving toward Regulatory Coordination
The summits can provide for greater international cooperation as national governments begin the work of evaluating and rewriting regulations. “More attention needs to be placed on averting the mistakes of the Great Depression which was compounded by ‘beggar-thy-neighbor’ protectionist policies,” warns Stern. According to Larson, the summit “should set out an agenda of areas that national governments are encouraged to address as they work to review and strengthen their own domestic regulations….This ‘Agenda for Action’ should address bank leverage, insurance arrangements, and “the mortgage sector, where there needs to be a much more serious approach on the part of originators to make sure there is a serious credit review process before mortgages are originated.”
In addition, Ronald Freeman, member of the Troika Dialogue board, advocates that “two players in this drama might have their roles substantially rewritten. These are non-executive bank board directors and debt rating agencies… Both depend for their compensation on those they are meant to be overseeing. Neither is clearly trained for the responsibilities they bear. Neither has adequate, continuing access to the information necessary for them to carry out the responsibility for which the broad market holds then accountable. Certification, training, perhaps even an insurer’s liability should perhaps attach to the exercise of their responsibility.”
Our experts argued that as the US and Europe address the regulatory issue, they should do so cooperatively, “we can all build better national regulatory structures and we can do it in a way in which they interlink with one another,” suggests Adams. “[We should] look at how to do a ‘bottoms-up’ approach, with each nation working together to rewrite regulations at a national level that is as consistent as possible with each other as we solve common problems.” Mann clarifies, “I think what one should ask for, or urge the international community to agree to do, or Europe and the US maybe first, is to continue harmonizing regulation…to ensure greater prosperity, to make sure that certain principles are established, certainly between Europe and the US and hopefully on an international level in the financial sector.”
Some advise caution, however, in the design of new regulation. “It’s important that [legislators rewrite regulations] thoughtfully and that they address all the issues that there are,” says Larson, “but that they not overreact or make the problem worse by some of the measures that they introduce.” Freeman counsels, “The temptation now to over-react and over-regulate may also produce a cure worse than the targeted ills. I wouldn’t proceed with any broad scale restructuring until I was sure beyond a reasonable doubt that I had identified the root causes of the current turmoil.” Adams also cautions that new regulations should be written with a “measured, methodical, humble approach while thinking how they might be beneficial and how they might go awry through unintended consequences.” Also, we must not forget, says Mann, “what can be done on the national level and the regional level immediately, with cooperation,” to respond to the crisis.
A New Basel Agreement?
“The most probable, substantive outcome from the talk of the need for a bold new multilateral initiative is that there could be a ‘Basel III’ to replace the ‘Basel II’ agreement. It would make capital requirements on banks counter-cyclical…replace the option of self-regulation of banks…[and set] international guidelines for guaranteeing deposits,” say Frankel. “A new framework to replace the Basel rules…[would] focus more on incentives, and less on rules,” advises Wolfgang Munchau, Director of Eurointelligence Advisors, “a bad mix of overregulation and deregulation in the banking system produced wrong incentives and moral hazard.”
Addressing Global Imbalances
Our experts also saw a need to address the issue of excessive capital flows from developing to developed countries which contributed, according to Munchau, to “global imbalances, leading to excessive and unsustainable huge current accounts deficits in the US and some emerging economies (Ukraine, Baltics, Turkey, etc) and equally huge surpluses in China.” Adams underscores this point, “A lot of emerging economies exported their savings to the US and industrialized countries…emerging markets don’t have the institutional framework to protect and intermediate capital and keep it in their own countries…the IMF and World Bank [should] help various emerging and developing countries…[improve] their institutions and infrastructure so that capital could stay in these countries and be put to use in what would prove to be highly productive projects.”
Birdsall notes that the global imbalance may have also indirectly contributed to “U.S. regulatory failures [which] were induced by the low interest rates that were in turn made possible by China’s savings glut.”
The November 15 Summit will not bring an end to the financial crisis, but, as Adams articulated so well, “it’s an important time and place for political leaders to reaffirm their support for and their belief in the Bretton Woods institutions and the values and ideals which lead to the creation of those institutions.” The summit should “say that we still believe in Western-style capitalism, we believe in the flow of goods and capital and investment, and that we want to fight against protectionist entities which will become more pronounced as global growth slows.”
The Atlantic Council’s Business and Economics Advisory Group (BEAG) is comprised of leading U.S. and European experts in government, business and academia. Chaired by Stuart Eizenstat and Caio Koch-Weser, the group examines key topics with the aim of identifying specific avenues for transatlantic cooperation in the business and economic-policy community. The BEAG brings together a broad range of experience and expertise with a commitment to deepening and strengthening the transatlantic relationship. The statements here are the views of individual members and do not necessarily represent a group consensus.
James O’Connor is assistant director of the Atlantic Council’s Global Business Program.