Who “won” in the London G-20 Summit?
The Summit of the G-20 heads of states had just come to a conclusion in London last Thursday, April 2, having reached agreement on a joint communiqué. The U.K. Prime Minister, Gordon Brown started his major media briefing announcing that the Washington Consensus has been declared dead, and suggesting the dawn of a new consensus era—akin to a London Consensus.
Without belittling some concrete achievements at this London Summit, beyond expectations in fact, there is always a significant dose of political rhetoric, such as in this case declaring the Washington Consensus dead, and the advent of a new paradigm.
In actuality, the most tangible result of the London Summit is the empowerment of the IMF as a global financial supervisor, stabilizer, and aid provider, through a revamped mandate and a vastly larger resource base. There is a tinge of irony in this, since historically the IMF and the U.S. Treasury Department were inextricably linked to the Washington Consensus.
A counter-argument to this apparent paradox would point to the expected shift in internal governance and in the menu of prescriptions (if there are any left…) at the IMF. This line of thinking would argue that such changes would be expected to distance the future “revamped” IMF from the main “Washington Consensus” mantra of combining prudent fiscal and monetary policies with liberalized markets.
Yet there is little doubt that in the coming years one can expect a move toward broadened voice and representation by governments of powerful emerging economies within the IMF, so to redress the current over-representation of (mostly) Europe. The head of the IMF will be selected according to merit and not nationality. Its ability to assess and warn prior to a large scale financial crisis would need to dramatically improve. Such efficiency and governance reforms are likely to result in some changes in how the IMF operates. An inkling of this is already in the offing through the recommendations of the Trevor Manuel Commission.
But other than abandoning orthodox dogma and embracing more pragmatism, it would be a mistake to expect a dramatic substantive shift in terms of what works for an economy, and what does not—particularly once the global economy steadies. After all, the IMF will still reflect the collective (economy-) weighted will of its shareholders. Rather than a mirror of a G-1, G-2 or G-7, its mantra may move closer to some weighted average of the G-20.
The End of Ideology
On economic matters, the world at large, proxied by the G-20, does not currently have a real counter-ideology to the Washington Consensus. Rather, the process leading to the two recent G-20 Summits, and a close reading of the agreements just reached in London, suggests the end of ideology in the global economy arena, and the advent of pragmatism instead. Notwithstanding political expedient grandstanding, the end of ideology is taking place in the economic policy-making approaches within the main individual countries in the G-20 as well as in the G-20, collectively.
Take the fiscal and monetary policies in the U.S. and the U.K. For the short term, they have vastly deviated from the strictly conservative neoclassical and monetarist mantra, and are squarely in a very Keynesian corner of the spectrum. Not too far are Japan and China. All four differ from Germany and France, who have taken a more conservative fiscal stance, although even they have engaged in a non-trivial fiscal expansion. Virtually without exception around large countries, Keynesian fiscal expansion is under implementation in different degrees.
Yet once the global economy is clearly in a recovery path, expect the mantra to turn quickly to fiscal and monetary conservatism. This will most notably be evident in the U.S. in the medium term, given the country’s onerous debt burden and the recognition that its historical dis-savings and lax past fiscal policies contributed to the crisis. No other country is likely to take issue with such a medium-term conservative turn in U.S. economic policy-making.
The risk is in the reverse: that some countries may go too far in mimicking the U.S. in its medium-term conservatism. This is a risk because the global macro-economic structural imbalances that were a determinant of the crisis still loom large and remain unaddressed globally. The U.S. and the U.K. need to move away from their status as a large financial deficit country, while the large financial surplus countries (such as Germany and China) need to move toward overall financial balance (at the national level, including the current account). So the fiscal and monetary policies of countries such as Germany and China should not be as tight. Addressing such structural imbalance challenges will require political leadership and global coordination. It is not a matter of ideology.
On trade policy, commitments to conduct global trade devoid of protectionism were already made during the Washington G-20 Summit last November. Those commitments were consistent with the old Washington Consensus. Yet the promises were not honored, even if the protectionist “damage” over the past few months was not large. In London last week, while proclaiming the death of the Washington Consensus, the G-20 leaders restated their commitments to shy away from protectionism and extolled freer global trade. In practice, we may expect to see some creeping (but not fatal) low-grade protectionism, and continuing delays in concluding the Doha Round.
On financial regulation, as compared with the U.S. and the U.K., Europe has been pressing for more of a mandate to be given to global regulatory institutions, and also for more regulatory intervention at the country level. But in spite of the expansion in representation in the Financial Stability Forum, and its renaming as the Financial Stability Board, and in spite of the renewed mandate of the IMF, these are not becoming global regulatory institutions, and there are no others in the offing.
Further, the U.S., through the recently unveiled Geithner regulatory reform blueprint, has sent a clear message of financial regulation reform convergence to Europe (and beyond). There is consensus that the laissez-faire era of financial sector regulation is over. As an interesting aside, in the economic development field it was accepted wisdom long ago that the systemic characteristics of the financial sector set it apart from the enterprise sector, and thus justified some regulation.
The pending questions and debates on financial regulation are more in terms of crucial details, mostly devoid of ideology: how best to attain an improved regulatory system with proper disclosure, oversight and supervision? What is the proper balance between transparency and disclosure-related measures, on the one hand, and regulatory control by fiat, on the other? How to regulate across financial institutions, products and jurisdictions in a manner that avoids perverse incentives and a race to the bottom?
In terms of the pending bank clean-up and restructuring, the G-20 London communiqué is rather circumspect. But the evidence is already clearly pointing to a major new role for government intervention and ownership, albeit temporary. Paradoxically, this major deviation from the Washington Consensus model, at least in the short term, is taking place in a particularly pronounced fashion in the Anglo-Saxon countries and preceded the London Summit.
It was particularly telling that the most contentious issue at the G-20 Summit last Thursday in London had nothing to do with any overarching ideological mantra (or with one of the top priorities, for that matter): the closing down of tax havens and publishing a list of offending jurisdictions. This issue almost derailed the overall G-20 accord. At the last instance, it was “solved” by somehow ensuring that no jurisdiction linked to any G-20 member stayed on the list of offenders (Jersey and the Isle of Man have not been in the latest list, while Hong Kong and Macao were dropped on Thursday evening…).
Toward a New York Consensus?
The expectation is that the G-20 will meet again in the fall for a summit in New York. By then there may be further consensus on some of the pending issues, such as regulatory reform and the approach to clean-up the banks, although countries will tailor their actions to their needs. Given the track record of some aid donors, the pledges to help the poorest and most afflicted countries will need monitoring, and actual progress on trade policy will also require close scrutiny and, where needed, recourse.
At the same time, two large issues that have remained unaddressed will need particular attention. Neither is ideologically laden, rather they are both politically sensitive. First, tackling the challenge of macro-economic structural imbalances alluded to above. And second, beginning to put in place at the national level, priority governance reform measures that mitigate future prospects of regulatory (and state) capture and corruption. Such capture and legal corruption played an important role in leading to the financial crisis, and instituting proper safeguards, transparency reforms and incentives against such capture will be important to restore trust and attain institutional resilience. And for this there are also useful lessons that can be drawn from well governed countries outside the G-20.
It would be fitting that the very site of much of the capture and legal corruption that took place prior to the crisis becomes the venue for a “New York Consensus.”