G20 Pass the Baton to Emerging Economies

Peter Behr, CQ Global Researcher author, October 5, 2009

China, Brazil and others emerging economies will have an increasingly stronger role in shaping global investment and capital flows, trading rules and consumer cultures, according to the leaders of the world’s largest economies, who met in Pittsburgh recently to discuss how to reform the world's financial and economic systems.

“The baton is being passed,” said columnist Hamish McRae in Britain’s Independent, following the summit’s close. “If you wanted to pick a day when the developed world accepted that economic power was shifting to the emerging nations, last Friday is as good as any.” This larger, more diverse group of nations will confront not just economic policy disputes, but issues of climate change, nuclear non-proliferation, open trade and vast disparities between the world’s riches and poorest societies, commentators said.

The Pittsburgh meeting was designed to plan a path to help the world recover from the wrenching global recession and guard against future economic crises. “We have achieved a level of tangible, global economic cooperation that we’ve never seen before,” said President Barack Obama, after the meeting of the Group of 20 – the informal body consisting of the United States, Japan, Europe and the emerging developing economies of China, India and Brazil

The Sept. 25 summit communiqué [“Leaders’ Statement," Sept. 24-25, 2009, ] called for a crucial rebalancing of old and new-guard economic systems. It would require the United States to reduce debt and raise saving levels -- thus buying less from abroad -- and for China and other export-dominated countries to boost their domestic spending. [http://www.chinadaily.com.cn/bizchina/2009-09/26/content_8740101.htm] Imbalances of the past decade helped fuel the speculative housing bubble that led to the 2008 financial crash.

As experts predicted in the July CQ Global Researcher that I wrote, "Fixing Capitalism," the G20 leaders stopped far short of agreeing on how to make good on this commitment, but they assigned the International Monetary Fund to serve as an umpire to report on whether or not each of the countries was meeting its goals — a “naming and shaming” role. Britain’s Chancellor of the Exchequer Alistair Darling expressed the reality behind the agreement, saying, “This does not mean we are in a new world order where we have a G20 that tells everyone what to do. It is up to each country to decide what is best for them.”

The summit also produced a large list of financial regulatory goals to be phased in between 2010 and 2012 -- a tight schedule that will test the G20 leaders’ resolve. The reforms include higher capital reserves for banks, limits on executive compensation in financial firms, effective regulation of derivatives and other complex over-the-counter financial instruments and ways to close endangered financial firms that had become “too big to fail.”

“The G20 leaders will need to develop an enforcement mechanism to make this credible,” said professor Eswar Prasad of Cornell University. [Chris Giles, “Sniping mars spirit of co-operation,” The Financial Times, Sept. 25, 2009.

A strengthened international Financial Stability Board will be in charge of the executive bonus issue, even though it has divided France and other European countries (who favor tight restrictions) from the United States and Britain, where tight bonus restrictions are considered unworkable. Financial Stability Board.

For all its yet unfulfilled commitments, the G20 summit officially launched a new chapter for the global economy that recognizes the rising power of the developing world. The summit agreed to increase the voting rights of the emerging economies in the IMF – in recognition that China, Brazil and others of this group will play an increasingly stronger hand in shaping global investment and capital flows, trading rules and consumer cultures.

For more information, read the CQ Global Researcher report [subscription required] or purchase the CQ Global Researcher PDF on "Fixing Capitalism"