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CONFERENCE  

International  Cooperation  in  Times  of  Global  Crisis:  Views  from  G20  Countries  

2nd  joint  Bruegel-­‐CEPII-­‐ICRIER  conference,  New  Delhi,  16-­‐17  September  2010  

Summary  of  the  debates  

 

The  conference  brought  together  40  experts  from  15  of  the  G20  countries  for  a  two-­‐day  discussion  on   the   G20   agenda.   The   general   tone   of   the   meeting   was   quite   different   from   that   of   the   first  conference  last  year  where  the  focus  was  on  G20-­‐wide  responses,  be  it  on  the  revamping  of  financial  regulation   and   how   to   make   it   robust   in   any   kind   of   country,   on   the   global   stimulus   and   its  effectiveness,  or  on  global  imbalances.  This  year,  the  agenda  was  less  exclusively  forward-­‐looking  as  participants   provided   first   assessments   of   achievements   this   far.   There  was   also   less   emphasis   on  global,  uniform  solutions.   The  group   took   stock  of   the   reforms  already  decided   (including   the  very  recent  agreement  reached  by  the  Basel  Committee).  The  discussions  then  focused  on  the  distribution  between   global   and   regional/local   solutions,   concerning   especially   financial   regulation   and  surveillance,  macroeconomic  rebalancing,  monetary  policies  and  financial  safety  nets.    

In  his  introductory  remarks,  Montek  Singh  Ahluwalia  (Deputy  Chairman  of  the  Planning  Commission,  India)  highlighted  the  contrast  between  the  G7,  which  in  his  view  has  very  much  behaved  like  a  G2  focusing  on  US-­‐Japan  relations,  and  the  truly  global  character  of  the  G20,  which  needs  to  be  praised  for  the  initial  response  to  the  crisis.  However  he  also  pointed  out  that  the  length  of  the  communiqué  and  the  veiled  language  used  in  it  to  avoid  offending  any  participant  were  signs  of  early  irrelevance.  In  his   view   there   is  not   yet  a  mechanism   for  global   rebalancing  and  a   clear  message  about   it.   This  mechanism  must  be  accompanied  by  exchange  rate  changes,  but  there  is  also  a  need  to  be  specific  about  the  required  reforms  and  responsibilities  of  individual  countries.  

To   help   the   G20   be   forward-­‐looking   and   focus   on   the   really   important   issues,   Montek   Ahluwalia  would  see  value  in  inputs  from  independent  experts.  Credible  think  tanks  should  appoint  a  group  to  make  suggestions  to  the  G20  leaders  as  well  as  to  evaluate  their  actions.          

The   session   on   financial   regulation   focused   on   the   relationship   between   global   rules   and   local  implementation.  It  was  pointed  out  that  having  the  same  global  rules  but  leaving  implementation  at  the  discretion  of  local  regulators  is  the  best  avenue  for  regulatory  arbitrage.  The  importance  of  host  regulation  and  surveillance  was  emphasized.  This  especially  applies  to  macro-­‐prudential   regulation,  

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since  business  cycles  or  housing  bubbles  are  often  local  rather  than  global.  Additionally,  cross-­‐border  bank  activities  in  some  (smaller)  countries  may  appear  minor  to  home  regulators  but  major  to  host  ones,  asking  for  micro-­‐surveillance  at  the  host  level.  

It  was   also   suggested   that   it  would   be   a  mistake   to   put   too  much   emphasis   on   “big”   banks,   since  systemic  risk  essentially  could  arise  from  “small”  financial   institutions  holding  the  class  of  risks  they  are   not   designed   to   hold.   Hence,   it   is   of   high   importance   to   categorize   risks   –   credit,   liquidity,  counterparty,  market  risks  -­‐  and  define  what  kind  of  financial  institutions  should  be  allowed  to  carry  those  different  kinds  of  risks.  

About   the   recently-­‐found  agreement  on  capital   adequacy   ratios   (Basel   III),   the  general   view  of   the  participants   was   that   the   impact   of   higher   capital   ratios   on   growth   is   in   fact   ambiguous   and   that  higher   competition   and   efficiency   in   the   financial   sector  will   be   key   to   reduce   financing   costs   and  therefore   enhance   investment   and   growth   in   the   “real”   economy.   Additionally,   the   participants  pointed  out  the  importance  of  local  implementation  of  the  new  rules.  

On   trade,   there   was   a   consensus   that   the   Doha   round   should   be   concluded   as   soon   as   possible,  although   the  participants   seemed   to  disagree   somewhat  on  how   the  G20   should  be   involved.  One  idea  could  be  to  use  the  G20  as  a  venue  for  forging  political  compromises  across  different  topics  that  could  include  global  rebalancing  and  climate  change.    

One   of   presenters   indicated   that   there   has   been   some   evidence   of   increased   protection   since   the  start  of   the  crisis,  especially   concerning  national   subsidies  and  public  procurement.   Still,   its   impact  has   not   been   overwhelming   and   the   bulk   of   the   trade   collapse   in   2009   owes   nothing   to  protectionism.  But   the  G20   should   stay  vigilant  due   to  potential   incentives   to  protectionism   in   the  future,   depending   on   differentiated   speeds   of   recovery   across   the   world   and   the   way   global  rebalancing  takes  place.  To  fight  protectionism,  it  is  not  enough  to  rely  on  tough  rules:  the  losers  of  protectionism  should  be  empowered  at  the  local  level.  

The  general  view  on  global  imbalances  was  that  imbalances  are  likely  to  last  and  possibly  grow  again,  at  least  in  the  next  3-­‐4  years.  Scaled  by  national  GDPs,  these  imbalances  will  be  more  limited  than  in  the   decade   before   the   crisis,   but   due   to   its   growing   share   in   the  world   economy,   and   despite   its  determination  to  boost  domestic  demand,  China  will  likely  display  a  rising  surplus  as  a  percentage  of  world  GDP.  There  was  also  a  consensus  on  the  fact  that  little  could  be  achieved  on  global  rebalancing  through  coordinating  only  part  of   the  national  policies:   the  key   issue   is   to  align  national  objectives  with   global   ones.   In   this   respect   the   nominal   exchange   rate   cannot   be   seen   as   an   independent  instrument,   though   exchange   rate   changes   are   part   of   the   response.   In   fact,   the   G20   could   act  perhaps   more   effectively   through   reforming   the   international   monetary   system   and   enhancing  financial   safety   nets,   with   the   objective   of   reducing   the   incentives   for   emerging   economies   to  accumulate  dollar-­‐denominated  reserves.  

In  his  keynote  speech,  Tommaso  Padoa-­‐Schioppa  (President,  Notre  Europe)  argued  that  failing  to  fix  the   international   monetary   system   would   lead   to   a   failure   of   the   global-­‐rebalancing   project.  According  to  him,  macroeconomic  coordination  has  never  worked  and  will  not  work  this  time  either.  In  his  view,  the  flaw  in  the  system  lies  in  the  lack  of  an  “N+1”  currency:  having  only  N  currencies  for  N  countries   or   zones  means   that   there   are  only  N-­‐1   independent   exchange   rates.  Gold  provided   the  

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missing   currency   before   1971.   Hence,   we   should   think   about   adding   an   extra   “currency”   to   the  system,  through  the  SDR  or  something  else.  The  problem  will  not  be  fixed  by  generalized  floating.  

The  international  monetary  system  was  further  discussed  in  a  roundtable  where  the  resilience  of  the  IMS   during   the   crisis   was   underlined.   However   the   participants   seemed   to   think   that   the   present  “system”  will  be  increasingly  inadequate  for  the  emerging  polycentric  world.  To  change  the  system,  it  was  argued  that  the  development  of  capital  markets  in  Asia  (especially  bond  markets)  would  be  key,  as  well  as   the   removal  of  emerging  countries’   incentives   to  accumulate   foreign  exchange   reserves.  On  this  latter  point,  it  was  argued  that  the  development  of  financial  safety  nets  might  not  be  enough  to  fix  the  problem  since  reserves  are  also  accumulated  as  a  shield  against  domestic  policy  shocks  and,  thus,  surveillance  of  domestic  policies  will  also  be  key.  

Several  arguments  were  developed  to  justify  the  building  up  of  financial  safety  nets  at  regional  level.  The  bottom   line   is   that   regional   partners   are  more   integrated  and   share   long-­‐term  objectives   that  may  be  endangered  by  one  of  them  incurring  a  crisis.  Additionally,  surveillance  may  be  easier  at  the  regional   level  where   information  flows  more  smoothly.  Finally,  regional  arrangements  were  viewed  as   an   interesting   substitute   to   IMF   credit   lines   (which   provide   stigma   effects)   or   Federal   Reserve  swap  arrangements  (which  may  be  discriminatory).  However  there  was  no  consensus  on  the  need  for  regional  arrangements.  It  was  argued  that  regional  schemes  may  prove  too  small  in  times  of  regional  crisis,  and  that  there  was  no  empirical  support  to  the  idea  that  surveillance  could  be  more  efficient  at  the  regional  than  at  the  multilateral  level.  One  participant  from  Russia  claimed  that  regional  schemes  are  more  prone  to  political  rents  and  that  the  fear  of  stigmas  could  also  provide  good  incentives  to  national  governments.  

In  his  keynote  speech,  Changyong  Rhee  (Secretary-­‐general  of  the  Korean  G20  presidency)  mentioned  the   difficulty   in   finding   a   way   between   optimists,   who   do   not   see   any   reason   to   delay   the  implementation   of   rebalancing   policies,   and   pessimists,   who   are   concerned   by   the   implication   of  such  policies  on  the  strength  of  the  global  recovery.  Additionally,   the  necessity  to  provide  country-­‐specific   recommendations   (after   the   regional   recommendations   issued  at   the  Toronto  summit)  will  make  it  difficult  to  reach  an  agreement  on  the  framework  for  growth  at  the  Seoul  meeting  of  Head  of  states,  in  November  2010.  He  also  expressed  some  concern  on  the  ability  of  the  G20  to  continue  to  work  in  normal  times.  Instead  of  a  permanent  G20  secretariat,  which  may  add  some  bureaucracy,  he  suggested   the  staff  of  previous  and   future  chairs   to  be   involved   in  each  presidency.  He  mentioned  that  non-­‐G7  members  of  the  G20,  like  Korea,  lack  the  long  memory  that  may  unable  G7  countries  to  quickly  discard  specific  proposals  that  were  desperately  discussed  in  the  history  of  the  G7.  

The  final  roundtable  discussed  in  depth  what  the  G20  should  be  involved  in.  It  was  suggested  that,  although   it  was   not  G20’s   task   to   conclude   the  Doha   round,   the  G20   could   be   key   in   shaping   the  global   trade  system  of   the  21st   century,  possibly   including  climate  change   in   the  discussions.  There  was   less   consensus  on  whether  and  how  global   imbalances   should  be   tackled  by   the  G20.  For  one  participant,   it   is   essentially   a   China-­‐US   issue.   For   others,   it   is   key   to   involve   third   countries,   for  instance  due  to  the  implications  of  these  discussions  for  exchange  rates,  or  because  South-­‐East  Asia  has  continuously  lacked  investment  since  the  Asian  crisis.  The  Chinese  participant  mentioned  that  G7  failed   to   rebalance   the   global   economy   just   because   it   focused   on  macroeconomic   policies   (fiscal  policy,  exchange  rates),  that  only  have  a  cyclical  effect,  not  on  structural  policies.  The  development  

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agenda  of  the  G20  was  also  discussed.  The  participants  agreed  that  the  G20  should  not  duplicate  the  efforts  of  existing  organizations.  However  there  would  be  scope  for  coordinating  public  aid  beyond  the  OECD  circle  of  donors,  work  on   lowering   the  cost  of  green   technology   transfers  and   tackle   the  growing  issue  of  international  labor  mobility.  On  the  whole,  it  was  not  clear  whether  the  participants  considered   that   the   G20   agenda   was   too   narrow   or   too   over-­‐burdened,   nor   whether   they   would  favor  the  proposal  of  a  permanent  secretariat.