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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.