Results from the G20
The newspapers have spoken of little else and the TV broadcasts switched seamlessly from one mode to the next: prescription, speculation, rumour, announcement and into analysis all in 48 hours.
I share the general feeling of most commentators that the results are a positive step. I have no way to estimate how much difference they will make to the elusive feeling of confidence which the world economy desperately wants. But let’s look at the individual elements and see if they should give people good reasons to improve their expectations of the future.
First, new funding:
- $500 billion in new cash for the IMF. Upside: this should reduce fear of contagion and help provide safety for people thinking of investing in, or trading with, businesses in emerging countries. Downside: Someone has to put up the money - but the cash is repayable, and as I understand it, the IMF generally doesn't get many defaults. Indeed this has its own upside, as it gives all members of the G20 a way to signal their commitment to engineering a recovery - by making a contribution to this fund. China might even get a better return by putting in $100 billion than it makes on its US Treasuries.
- $250 billion in additional Special Drawing Rights at the IMF. Upside: This essentially increases world money supply which should help to combat deflation; and it gives more flexibility for countries running trade deficits (and by corollary, those running surpluses) not to have to close the gap suddenly. Intriguingly enough, $21 billion of SDRs have been waiting since 1997 for approval by the US so that various new IMF members will have access to them. I assume the US won't hold up the $250 billion of new ones for quite so long. Downside: the new SDRs will be allocated to IMF members in proportion to their shareholding, so most of them will go to countries that do not need to use them.
- $250 billion for trade finance. Upside: world trade needs all the support it can get, and anything that makes it easier or less risky sends a powerful signal. Downside: this isn't really $250 billion but only $50 billion, which should finance $250 billion of trade over two years, because trade loans are short-term and the cash can be recycled several times a year. So we can't apply a multiplier effect to the $250 billion, because that's already been factored in.
- $100 billion in development finance. Upside: supports the poorer economies which most need the help. Also provides an improved sense of equity in the world, which I feel will provide confidence in the sustainability of future economic growth. Downside: will not do much to boost the major engines of world output, the rich economies.
Second, regulatory changes:
- Naming and shaming of tax havens. How did this get such prominence? One of two disappointing parts of the package - it seems to have been put in by France to win political points, and must have been a distraction from real work. Still, the upside is that the transparency this will bring will improve tax revenues (especially in poorer countries) without damaging demand much, and increase economic efficiency by providing fewer incentives to hide money in unproductive places. Downside: Not especially germane.
- Guidelines on executive salaries. Again this is a bit of a distraction. But the upside is that it should help the public to feel some sense of justice in the world financial and economic system. It's odd that in this crisis the moral argument has been conflated with a sense of economic confidence, and I feel that a solution to one would boost the other. Downside: playing with fire. Do we want governments - mandated by an ad hoc international conference - putting limits on private salaries? Fortunately the language has been left loose and I don't imagine any strong regulations will be implemented by countries that wouldn't have done so anyway.
- Financial regulation. Upside: This could be the biggest-impact decision. Unlike the question of salaries, it is likely that financial regulation will be strongly coordinated internationally. This may enhance economic efficiency in the same way as the tax haven controls, but there will be lots of arguments about detail. Bringing shadow banking and hedge funds into the orbit of conventional regulation will have a positive impact. Downside: this is intended to prevent the next crisis and it's not clear whether it can help fix this one. I would hope that some form of behavioural regulation might be able to help boost immediate investment or demand, but that's not yet part of the proposal. And nobody's yet designed a regulatory system that has no loopholes. Whenever any two parties can engage freely in commercial agreements, there are ways to effectively create debt and leverage.
There are lots of details to explore over the coming weeks and a followup meeting in Japan before the end of the year. Perhaps by that one we'll have more good news.
Two final thoughts.
There's a danger that the wait for details of government action will now dominate the economic mindset, and the possible incipient recovery might be on ice for a few more months. But decisive actions, if taken quickly, should boost it.
Positively, and of great long-term significance, the integration of 80% of the world economy into a group that is willing to make real decisions. We can hope that they will bring the same momentum to complete the Doha trade negotiations - if the G20 countries agree on the importance of opening markets to bring about recovery, they should be able to bring the rest of the world with them. Leadership from Barack Obama and commitment from the rest of the G20 heads of government could start to forge a new world in the next eight years.