The Jakarta Post (original link)
Berly Martawardaya , JAKARTA | Wed, 04/08/2009 11:07 AM | Opinion
UK Prime Minister, Gordon Brown, called the G20 Summit in London a Global New Deal and solution to the current financial crisis. The twenty participant countries make up 85 percent of global gross national product, 80 percent of world trade and two-thirds of the world population.
The G20 Summit needs to be complemented and praised for the role it has played. It used to be the order of the day that the mainly white rich nations’ club of the G8 decided what was good for the world.
The G20 was inaugurated in 1999 and has had annual meetings since then, but only since the financial crisis unfolded in 2008 has it became a major forum to find global solutions. Enlarging the committee to save the world has increased the sense of global ownership, so we can take together the hard steps that need to be taken.
It is no longer the task of the developing countries to implement the pre-cooked solution prepared by smarter and richer countries. Now we are in it from the start, hammering out solutions together.
The other break with the past is in the character of solutions offered. No country was foolhardy enough to propose raising interest rates, cutting spending or eliminating subsidies for the poor as often previously required by the IMF and imposed on countries in crisis through IMF structural adjustment programs (SAPs).
Instead the summit offered a refreshing break from the previous Washington Consensus with its market fundamentalism. The communiqué of the meeting is filled with references to ease monetary policies and promote fiscal stimulus. The world is truly Keynesian now.
But to be judged successful, the summit needs to have accomplished three things.
First, to do no harm. The Hippocratic principle was executed seamlessly. It’s not as easy as it sounds; there were many contentious issues between US and Europe as well as between West and the Rest. Playing them down also has consequences.
Credible assurances of commitment to free trade and against protectionism were badly needed. Stock markets in Europe rose by one percent on average, while in Asia we had 4-5 percent increases in the Nikkei and Hang Seng indexes.
Second, it needed to agree on policies to minimize the economic downturn, accelerate recovery and support long-term growth. Obama called for fiscal stimulus of at least two percent of each country’s GDP. While Angela Merkel was exceedingly worried about Germany’s history of hyperinflation, inclining her not to accept this proposal, the final language stated that collectively G20 countries agreed to spend US$1.1 trillion dollars to boost the world economy.
The basic principles of Keynesian economics are very simple. Put money in the hands of people that are more likely to spend it the soonest. The more luxurious the goods and services purchased, usually, the lower the impact for the whole economy. The increase in demand will utilize the idle capacity, end the waiting game and get the economy moving again. That’s why the commonly recommended policies are tax-cuts, subsidies and direct cash transfers to the poor. Government have to run deficits as they are the only economic agents taking a long term view and having credibility.
In the global context, stimulus means putting money in the hands of low-income countries. The G20 agreed to spend $100 billion to assist international development banks in lending to poor countries. Additional resources of $6 billion from agreed IMF gold sales will also be made available for lending especially for the poorest countries.
Among the loans that banks freeze in the name of caution after a crisis unfolds are trade credits. Producers from developing countries commonly use trade credit facilities and Letter of Credit (L/Cs) from developed country banks due to lack of domestic financing. With the negative impact of the credit crunch, developing countries then cannot export their products anymore, due to lack of trade finance.
The G20 committed $250billion of support for trade finance over the next two years through export credit and investment agencies, as well as through multilateral development banks. This is a very welcome relief that gets right to the root of the problem.
Third, the summit also needed to strengthen institutional arrangements to prevent that a similar crisis should occur again.
While stopping short of erecting a wall between the consulting, auditing and banking industries on similar lines to those before the repeal of the 1933 Glass-Steagall act in 1999, the summit made very clear pronouncements in the direction of transparency. The shadowy banking world of the hedge fund is about to come into the light of day and to be regulated, while list of countries that protect tax havens will also be announced shortly.
International accounting standards will be set and credit rating agencies will be regulated in order to remove conflicts of interest. A newly established Financial Stability Board (FSB) will supervise and provide early warning systems to enable steps to be taken before a problem grows into a full-scale crisis.
But the IMF still presents a dilemma. Countries need to have sufficient capital to fend off speculative attacks, but association with the IMF was even more politically toxic than exposure to sub-prime mortgage losses for past victims of the 1998 Asian banking crisis. Furthermore, the current composition of voting weight within the IMF is still over-representing the G8 countries.
Thus, the costlier but preferred path is to pool reserves and set up regional agreements to help each other through such unfortunate events. The G8 countries seem oblivious that simply increasing IMF capital will do little to ease these concerns.
The leaders of the G20 put on a great show, let see if they can walk the talk.
The writer is a lecturer at FEUI and PhD candidate in Economics at the University of Siena-Italy and a member of the NU Professional Circle.
Berly Martawardaya , JAKARTA | Wed, 04/08/2009 11:07 AM | Opinion
UK Prime Minister, Gordon Brown, called the G20 Summit in London a Global New Deal and solution to the current financial crisis. The twenty participant countries make up 85 percent of global gross national product, 80 percent of world trade and two-thirds of the world population.
The G20 Summit needs to be complemented and praised for the role it has played. It used to be the order of the day that the mainly white rich nations’ club of the G8 decided what was good for the world.
The G20 was inaugurated in 1999 and has had annual meetings since then, but only since the financial crisis unfolded in 2008 has it became a major forum to find global solutions. Enlarging the committee to save the world has increased the sense of global ownership, so we can take together the hard steps that need to be taken.
It is no longer the task of the developing countries to implement the pre-cooked solution prepared by smarter and richer countries. Now we are in it from the start, hammering out solutions together.
The other break with the past is in the character of solutions offered. No country was foolhardy enough to propose raising interest rates, cutting spending or eliminating subsidies for the poor as often previously required by the IMF and imposed on countries in crisis through IMF structural adjustment programs (SAPs).
Instead the summit offered a refreshing break from the previous Washington Consensus with its market fundamentalism. The communiqué of the meeting is filled with references to ease monetary policies and promote fiscal stimulus. The world is truly Keynesian now.
But to be judged successful, the summit needs to have accomplished three things.
First, to do no harm. The Hippocratic principle was executed seamlessly. It’s not as easy as it sounds; there were many contentious issues between US and Europe as well as between West and the Rest. Playing them down also has consequences.
Credible assurances of commitment to free trade and against protectionism were badly needed. Stock markets in Europe rose by one percent on average, while in Asia we had 4-5 percent increases in the Nikkei and Hang Seng indexes.
Second, it needed to agree on policies to minimize the economic downturn, accelerate recovery and support long-term growth. Obama called for fiscal stimulus of at least two percent of each country’s GDP. While Angela Merkel was exceedingly worried about Germany’s history of hyperinflation, inclining her not to accept this proposal, the final language stated that collectively G20 countries agreed to spend US$1.1 trillion dollars to boost the world economy.
The basic principles of Keynesian economics are very simple. Put money in the hands of people that are more likely to spend it the soonest. The more luxurious the goods and services purchased, usually, the lower the impact for the whole economy. The increase in demand will utilize the idle capacity, end the waiting game and get the economy moving again. That’s why the commonly recommended policies are tax-cuts, subsidies and direct cash transfers to the poor. Government have to run deficits as they are the only economic agents taking a long term view and having credibility.
In the global context, stimulus means putting money in the hands of low-income countries. The G20 agreed to spend $100 billion to assist international development banks in lending to poor countries. Additional resources of $6 billion from agreed IMF gold sales will also be made available for lending especially for the poorest countries.
Among the loans that banks freeze in the name of caution after a crisis unfolds are trade credits. Producers from developing countries commonly use trade credit facilities and Letter of Credit (L/Cs) from developed country banks due to lack of domestic financing. With the negative impact of the credit crunch, developing countries then cannot export their products anymore, due to lack of trade finance.
The G20 committed $250billion of support for trade finance over the next two years through export credit and investment agencies, as well as through multilateral development banks. This is a very welcome relief that gets right to the root of the problem.
Third, the summit also needed to strengthen institutional arrangements to prevent that a similar crisis should occur again.
While stopping short of erecting a wall between the consulting, auditing and banking industries on similar lines to those before the repeal of the 1933 Glass-Steagall act in 1999, the summit made very clear pronouncements in the direction of transparency. The shadowy banking world of the hedge fund is about to come into the light of day and to be regulated, while list of countries that protect tax havens will also be announced shortly.
International accounting standards will be set and credit rating agencies will be regulated in order to remove conflicts of interest. A newly established Financial Stability Board (FSB) will supervise and provide early warning systems to enable steps to be taken before a problem grows into a full-scale crisis.
But the IMF still presents a dilemma. Countries need to have sufficient capital to fend off speculative attacks, but association with the IMF was even more politically toxic than exposure to sub-prime mortgage losses for past victims of the 1998 Asian banking crisis. Furthermore, the current composition of voting weight within the IMF is still over-representing the G8 countries.
Thus, the costlier but preferred path is to pool reserves and set up regional agreements to help each other through such unfortunate events. The G8 countries seem oblivious that simply increasing IMF capital will do little to ease these concerns.
The leaders of the G20 put on a great show, let see if they can walk the talk.
The writer is a lecturer at FEUI and PhD candidate in Economics at the University of Siena-Italy and a member of the NU Professional Circle.
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