The system has its problems but it is clear that the G20 leaders are not about to jettison capitalism. Moderate opinion will be relieved
THE PLEASED faces of world political leaders at the end of the Group of 20 Summit on Global Economic Stability in London this week tell us quite a lot about the likely shape of world economic policy in the coming years.
After all, this great financial and economic crisis has the potential to be a decisive turning point in world history.
My reading of the communiqué, and of the highly-favourable media spin which has surrounded the summit, is that the change of policy direction will be limited – a change in emphasis rather than in direction.
Despite the grave failures of financial firms and their regulators, the soaring unemployment, collapses in the value of savings and in day-to-day living standards for many, and the apparent inability of the free-market capitalist system to self-correct promptly for these errors, it is now clear that there is to be no fundamental abandonment of this system by these leaders.
Diplomacy has achieved a veneer of greater unity among the group than really exists, but the diplomatic triumph would not have been possible had the differences of opinion been more deep-seated.
So it is to be a question of restructuring and reform of the world economy rather than revolution or repression.
Anti-capitalist demonstrators, active in London ahead of the summit, will be disappointed. More moderate opinion will be relieved. In times such as this fear of the unknown is a big dampener on spending and investment plans. Reducing the policy risks is part of the medicine needed to cure the recessionary disease.
After the initial euphoria, some observers have been looking this particular gift horse in the mouth and finding it wanting. They complain about a lack of specificity. The promise to give more money to the IMF and other bodies for onlending to cash-strapped developing countries is not accompanied by a table spelling out who’s going to provide what.
Bearing in mind the glacial progress of the G8 toward reaching the level of aid to Africa they promised in Edinburgh (remember the Live-8 concerts) in 2005, it’s right to be concerned about the vagueness of financial promises made at summits.
Certainly it would have been better if the summit could have done more. An agreement on co-ordinated government spending action to first cushion and then reverse the fall in economic activity worldwide would have been particularly useful for us in Ireland, who do not have the fiscal headroom to contribute here. Knowing, from their experience of hyperinflation in decades gone by, how a government spending spree can get out of hand with disastrous consequences, the German authorities were the most vocal in arguing against spending more than is already envisaged. Most economists disagree.
At the same time it would be easy to underestimate the shift in emphasis that is under way at the level of detail, notably in the way developing countries are becoming increasingly central and in the balance of financial regulation towards limiting the autonomy of private financial firms and correcting the distorted incentives that caused the crisis.
It would have been easy for the advanced economies, vortex of the financial crisis, to ignore the severe spillovers on to the developing world. This has not happened, surely thanks to the presence at the G20 negotiating table of leaders from China, India, Brazil, Indonesia, Argentina, Mexico, South Africa and other developing countries (though not the smallest and poorest of them).
Impressive statesmen like Manmohan Singh of India and Lula of Brazil will certainly not punch below weight even in this gathering. No wonder that this time, despite the vagueness about the full financial package, when it comes to the immediate financial challenges of the poorer countries affected by the crisis, specific sources of funds have been announced together with concrete steps to deploy these funds rapidly.
Before the meeting there was much discussion about financial regulation and the death of the Anglo-Saxon model. Would the summit so constrain finance as to slow global economic recovery? Non-specialists will search the six-page document on financial regulation in vain for any funeral announcement. But the coded language of this document conceals a sizeable shift: insiders who for years had warned that insouciant rating agencies were granting AAA ratings too freely, that banks were being allowed too much leverage (especially in boom times), and that unregulated derivatives markets could be weapons of mass destruction, will find enough ammunition here to push through overdue reforms. The Basle-based Financial Stability Board, now to have members from all of the G20 countries, clearly emerges as the new standard-setter. But it is composed of consummate insiders. The pendulum of regulation is clearly swinging back, but under the control of specialists and hence unlikely to go too far.
The decisions of the London summit do not add up to a solution for the crisis, but it has shown how much common ground there is between these political leaders in terms of their official vision of the world economy. This vision continues to see inclusive market-based trade at the heart of international economic relation. But each of them operates in a national political environment. It remains to be seen whether they can resist the populist pressures for protectionism.
After all, 17 of the 20 countries have, under local pressure, introduced protectionist measures since the last G20 meeting (which also declared against protectionism). A bounceback in world trade is badly needed in Ireland to slow and reverse the economic decline. On protectionism above all, we need the G20 to deliver on its stated intentions.
Patrick Honohan is professor of economics in Trinity College, Dublin. His specialist area is international banking