Summit shows times have changed

The G20 summit in Washington was a striking event first of all for who was there.

Global economic meetings used to mean the G7 and then the G8.

It was a rich-country affair with Russia invited in during in the 1990s - but that was to tackle international political issues, not for the sake of a contribution to the economic discussions.

How times have changed. A global economic problem needed a presence from developing country leaders.

G20 was already up and running as a forum for finance ministers with the big developing economies as members - China, India, Russia, Brazil, Saudi Arabia and others.

And so they came to Washington, as countries hit by the developed world's financial crisis and, in some cases, as countries that might be able to help fix it.

Co-ordinated response

The communique issued after the summit is not on its own going to change the world.

The political machinery of the global economy is not going to be turned upside down, although those big developing countries at the summit are beginning to get a tentative grip on the levers.
Nevertheless, there are elements in what was agreed that might lead to something significant.

On the short-term aim of limiting the fallout from the financial crisis, there was a call for co-operation in economic policy, and for countries to use the government finances to stimulate growth.

It is still up to each country to decide what to do, but the communique provides some cover if they face criticism at home - and there are risks associated with tax cuts and spending boosts for countries whose government finances are already strained.

There is without doubt going to be an economic downturn - a recession in many countries and period of slower economic growth for most, perhaps all others.

A co-ordinated response is likely to be more effective in limiting its severity and duration.

There has already been co-ordination between central banks. If this summit means more co-operation, it might help.

Complex technical issues

The longer-term problem is reducing the risks of a re-run of the events that gave us the current crisis. Changes to financial regulation will be at the heart of that
They are less urgent, so the summit commissioned some more work on it from the G20's finance ministers, with a deadline of the end of March 2009.

It is worth taking some time on these complex technical issues. And in any event a delay will mean that anything agreed will have the stamp of approval of the US President-elect, Barack Obama.

There are a number of striking areas the finance ministers are being let loose on.

One is executive pay and how it links to incentives to take risks.

And here is one to set the pulse racing: "mitigating against pro-cyclicality in regulatory policy". That might actually turn out to be quite important.

The idea is to have banking regulation that does not exacerbate the cycle of boom and bust - indeed the aim is to moderate it.

'Dynamic provisioning'

Spain's system has attracted a lot of interest.

In effect, it requires banks to build up a financial cushion in the good years which can help them absorb losses in the bad times when increasing numbers of borrowers fail to repay.

The basic principle is not exactly financial rocket science, although the name it has - dynamic provisioning - makes sound as though it is.

So it might just be that the summit does lead to some significant action.

It has certainly changed the cast of characters we are going to have to look to in the future to address the world's economic problems.

 

Source:BBC