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Global Issue 15

Global Insight G20 A summit past its peak? G20, having missed its key targets on financial reform, can only succeed by transforming itself Prabhu Guptara The G20 was convened to address the challenges of global financial instability, but is now clutching at straws. In a mark of its confusion and lack of direction, it has asked a sociobiologist, Rebecca D. Costa, to be the opening speaker for its upcoming conclave. The only thing good about the choice is that Costa is a woman. Her book, The Watchman’s Rattle: Thinking Our Way Out Of Extinction, expounds a dodgy but currently fashionable theory – complexity – which offers very little that is new. Complexity theory has been around since the 1950s, and has been applied to financial markets since 1995. Costa hasn’t produced anything startlingly original, but has written something that has merely become popular. The G20’s chasing of such a chimera leaves the impression that it has no idea of what really needs to be done to address its actual tasks. The original task for which it was convened – at the suggestion of Paul Martin, then the Canadian Prime Minister – was consultation and co-operation on matters pertaining to the international financial system, whose wrinkles were already becoming fault lines by the late 1990s. Formally inaugurated only in 1999, meetings of G20 Finance Ministers and Central Bank Governors were low-profile. Its studies, reviews and discussions of policy issues pertaining to the promotion of international financial stability were so ineffective that they neither prevented – nor even foresaw – the Great Recession (GR), which began in 2007-08. This incompetence was ignored in the wake of the financial crisis as global hopes for mitigating the recession shifted from the Finance Minsters to a meeting of G20 Heads of State. This propelled the G20 summit to its current prominence. That meeting, in November 2008, was euphoric because it produced agreement regarding some means of addressing one key issue behind the Great Recession – reform of the financial sector. These proposed reforms, however weak, were at least to be pursued according to a timetable monitored by the new Financial Stability Board (FSB), set up to monitor – and suggest improvements to – the international financial system. But it has not happened. Naturally, the FSB’s reports put the best face it can on the ‘progress’ made since 2008. Yet, in reality, even the weak reforms envisaged by that summit have not been completed nearly five years later. Some progress has been made on creating frameworks and structures, but the most major issues – such as bringing the shadow financial system to heel – remain, at best, a dream. Indeed, the FSB meeting on 24 June acknowledged that “parts of the system remain in a state of incomplete repair” and that “volatility in interest rates, asset prices and capital flows has increased”. It therefore asked market participants and supervisory authorities to “incorporate, in their stress tests, scenarios that involve considerably elevated interest rate risk, widening credit spreads, falls in asset prices and material volatility in foreign exchange markets and capital flows.” The spectre of competitive currency devaluations has also dogged the global economy since 2007. The latest instance is Japan’s Abenomics. However, it is extremely unlikely that anyone at the St Petersburg summit will want to take Japanese Premier Shinzo Abe to task, as every other major country – including America and China – has been playing this game for several decades. Moreover, Abe has made it clear that if Japan is attacked for its policies, it will return the favour by turning the spotlight on China’s record. The whole milieu for the forthcoming summit is also complicated by confusion and unrest in Brazil, Turkey and the Middle East. No one wants to rock the boat too much, lest we move from currency wars to trade wars and – at worst – to actual wars. As should be evident to everyone, nothing remotely like global stability has been achieved. In fact, we are in a worse situation in some ways. Though acute near-term risks have been resisted, credit is still not flowing, particularly to small and medium-sized companies. The corporate sector in most countries has been unable to reduce its debt, which poses a continuing threat to these economies, and to financial stability as a whole. Monetary easing, the principal remedy applied to the financial crisis so far, has encouraged exactly the excessive risk-taking, leverage and asset bubbles that created the conditions for the Great Recession in the first place. What has been the G20’s response? Instead of intensifying its work in order to achieve global financial stability, it has, astonishingly, chosen to reduce the frequency of its meetings from twice a year to just once a year. More staggeringly, the G20 has tried to 28 l www.global -br ief ing.org thi rd quar ter 2013 global


Global Issue 15
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