BUSINESS AGENDA:THE MOOD was decidedly more upbeat when the third G20 summit in less than a year opened here late yesterday. Estimates circulating ahead of next month's International Monetary Fund's annual meeting say growth in the G20 countries will hit 3.2 per cent in 2010, after a contraction of 1.1 per cent this year. There is light at the end of the tunnel, writes LARA MARLOWE,in Pittsburgh

There was surprise when President Barack Obama chose Pittsburgh to host the summit. “What, was downtown Baltimore booked?” quipped Derek Thompson of the Atlantic.

Pittsburgh has overcome its reputation as the polluted, rust-belt capital of the steel industry. Since the 1980s, when industrial collapse led to the exodus of half its population, Pittsburgh has transformed itself into an ecologically friendly city where education and healthcare are the mainstays of the economy.

The David L. Lawrence Convention centre, where the summit is convening, is the first US convention centre to have been officially certified as “green”.

If Pittsburgh is an allegory for economic recovery, the G20 is also the shape of things to come; it symbolises the inclusion of developing countries in international decision-making. Can the UN Security Council be far behind?

The G20 was created in 1999 in the wake of financial crises in Asia, Brazil and Russia. It was at the outset an informal gathering of finance ministers and central bankers from Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the UK, the US and the EU (represented by the holder of its rotating council presidency).

Nothing indicated that nine years later the group would be entrusted with formulating the world’s response to global economic crisis.

It was the French president, Nicolas Sarkozy who, in September 2008, first demanded an international summit to prevent the total collapse of the financial system. Sarkozy pestered the reluctant George W. Bush to schedule the first G20 summit in Washington last November. That was forgotten this week, when US newspapers credited Bush with the idea.

At the November 2008 summit, G20 leaders decided not to allow any more significant financial institutions to fail. The following April, at the “trillion-dollar summit” in London, they agreed to quadruple the IMF’s lending facilities. The US and Britain advocated national stimulus packages totalling hundreds of billions of euros and dollars. The stimulus surge was resisted by France and Germany, but the “Anglo-Saxons” prevailed.

The G20 in Pittsburgh is the first international summit hosted by President Barack Obama. In a statement earlier this month, he said the purpose of the meeting was to “review the progress we have made, assess what more needs to be done and discuss what we can do together to lay the groundwork for balanced and sustainable economic growth”.

To this end, the US has drawn up a draft framework for sustainable and balanced growth, which it hopes to see the summit endorse. The underlying idea is that the imbalance between China’s massive exports and low domestic consumption, US consumer-driven indebtedness, and rigid European labour structures combined with insufficient investment threw the international system out of kilter.

The cure, Washington says, is for China to export less and consume more, for Americans to save money and for Europeans to promote flexibility and investment. China may be reluctant to endorse a framework agreement that appears to fault it for helping to create the crisis.

The second goal of the summit is to regulate bankers’ pay and bonuses, which are widely perceived to have been a cause of the crisis. Obama set the tone in his weekly radio address on September 19th, saying: “We cannot allow the thirst for reckless schemes that produce quick profits and fat executive bonuses to override the security of our entire financial system and leave taxpayers on the hook for cleaning up the mess.”

US Treasury secretary Tim Geithner has spoken of the need to avoid “people being paid for taking too much risk”. Yet Washington has resisted proposals by Sarkozy and German chancellor Angela Merkel to set specific limits on pay or bonuses. US banks are again paying multi-million dollar bonuses after reimbursing the government bailouts they received at the height of the crisis. One has to wonder how effective a recommendation to disconnect remuneration from risk-taking, or to link it to capital ratios, would be.

Raising capitalisation ratios is a third goal of the G20 summit, endorsed by the US. “A principal lesson of the recent crisis is that stronger, higher capital requirements for banking firms are absolutely essential,” the US treasury reported this month. If banks were forced to hold more capital, the rationale goes, they would be constrained from excessive risk-taking.

This too is a bone of contention between the US and Europe. Different regulations and accounting practices mean US banks, including Bank of America, Citigroup and JPMorgan Chase, had higher capitalisation than their European counterparts before the crisis and would enjoy a competitive advantage if a requirement is agreed.

Again, no figure will be set at Pittsburgh; Geithner says the G20 should set a target next year for implementation in 2012.

To a large extent, the goals of Pittsburgh – rebalancing the international economy; recapitalising banks and limits on pay and bonuses – will be blurred, waffled and hyped. The perception that the G20 has taken control of the crisis is as important as the substance of their decisions. Witness the fragile recovery that has taken hold since the April summit.

The Financial Times’s Lex column notes that only one of five pledges the G20 made in London in April has been kept: the promise to promote trade – and there are allegations of protectionism. Just last week, Obama slapped a 35 per cent import duty on Chinese tyres.

Other April pledges have not been fulfilled: confidence, growth and jobs have not yet been restored. Banks are still not lending and financial regulation has not yet been enacted. These “left-overs” are still issues today in Pittsburgh.

The Financial Stability Board, the international advisory committee created by the G20, will play an important role in defining policy on compensation and capital ratios. For the devilishly tricky questions of assessing balance in international economies and how to wind down stimulus before inflation sets in, the G20 looks to the IMF.

The US sees the framework for sustainable and balanced growth not as a regulatory measure, but as a series of meetings where peers would discuss each other’s policies and performance, basing judgment on the IMF’s work.

Likewise, the G20 does not want to spook markets with talk of withdrawing government support for the markets, so they will rely on the IMF to find the appropriate exit strategy from stimulus-based recovery.

At Pittsburgh, the US is proposing that the stake of developing countries in the IMF be increased from 43 per cent to 50 per cent. This could be to the detriment of smaller European countries, which will see their economic power diminished.

The crisis has dramatically and irrevocably transformed the way economic policy is elaborated, banishing the G8 club of rich, developed countries plus Russia to the scrapheap of history and empowering the emerging countries.

The G20 is “a major improvement over the G8”, Nobel laureate Joseph Stiglitz told the Wall Street Journal, because “there is no way to address the problems of the world and leave out major players like China and India.”