G20 LEADERS CALL FOR GLOBAL COOPERATION TO ADDRESS CRISIS
* Four G20 leaders call for coordinated action on fiscal and monetary policy at Annual Meeting 2009
* Prime Minister Brown warns of dangers of protectionism
Davos-Klosters, Switzerland - Global cooperation, not a retreat from globalization, is the best approach for solving the current economic crisis, and could set the pattern for dealing with other critical international challenges such as climate change, poverty and energy security, a panel of government leaders agreed at this year’s World Economic Forum Annual Meeting.
The leaders, representing the governments of four of the G20 countries, called for coordinated action on a number of fronts, including fiscal and monetary policy measures to stabilize the global financial system and revive economic growth, reform and recapitalization of the major multilateral lending institutions and a resumption of stalled free trade talks to combat a dangerous turn to protectionism. Above all, they stressed the ability of the public and private sectors to work together to solve these and other global problems.
“We need to recognize that these problems were created by humans and can be solved by humans,” declared British Prime Minister Gordon Brown. “Rather than losing faith and letting the protectionists take over, or returning to a failed laissez-faire model that says there is nothing we can do, we have to grapple with these problems and prove we can come together and solve them,” the prime minister added.
The panel provided a preview of some of the key issues likely to dominate the agenda at the upcoming April G20 summit, which brings together governments of the leading economic powers in both the developed and the developing worlds. At its last meeting in Washington DC in November, the group vowed to develop a coordinated programme to combat the economic crisis and lay the groundwork for needed reforms to the global financial system, including multilateral institutions such as the IMF and the World Bank. The goal for the summit is to develop a more specific roadmap for achieving these goals.
The immediate priority, Brown said, is to encourage a resumption of lending and reverse the tide of capital outflows from developing countries. This, he added, will require more than just government capital injections into banks and other financial institutions. Despite US$ 1 trillion in direct injections and US$ 12 trillion in credit guarantees worldwide, normal credit flows have not resumed, he noted, as banks continue to struggle with massive bad loans and other toxic assets on their balance sheets. Governments, he said, need to consider “radical options” for dealing with the problem, such as risk-sharing schemes that would insure banks and other investors against further losses on toxic assets. “We need international discussion on what is the best model,” he added. “But that appears to be the way forward.”
At the same time, however, Brown expressed his commitment to returning public stakes in financial institutions to the private market as soon as possible. “We recognize that laissez-faire doesn’t work, but we know from the seventies and eighties that government control doesn’t work either,” he said. Over the long run, he added, “I don’t believe in nationalization or in government owning shares in banks.”
President Felipe Calderón of Mexico offered a perspective from a country and a part of the world that has suffered repeated financial crises over the past 25 years. One key lesson, he said, is the need for urgency in crafting a policy response, recognizing that delay increases both the economic damage and the ultimate cost to taxpayers. Fortunately, he added, macroeconomic reforms put in place after Mexico’s last major crisis in 1995, have enabled the country to respond more quickly and more forcefully to this one with both monetary and fiscal policy. Prime Minister Han Seung-Soo of the Republic of Korea cited his own country’s experience during the 1997-1998 Asian crisis as a sign of how great the costs of a financial rescue can be, noting that his country spent the equivalent of 16% of its GDP to shore up Korean corporations and financial institutions during the crisis.
Strengthening multilateral institutions will also be a top priority for the G20 summit, the leaders suggested. Brown argued forcefully that the evolution of the global economy and capital markets since the IMF and World Bank were created in the 1940s makes it essential that they are able to offer lending support to countries before a financial collapse rather than afterwards: “We need a crisis prevention capability, not just crisis resolution.”
Reforms should include greater representation and influence for the developing countries, leaders agreed. “Many countries today feel they have no voice at all, that their views are never taken on board,” said South African Prime Minister Kgalema Motlanthe. However, developed countries need to put their own governance in order if they want to be offered a better seat at the international table, he suggested. “There is no way we can have transparency and accountability [at the multilateral institutions] if we don’t practice them in our own countries,” he said.
Leaders also expressed alarm at signs that the crisis might be generating a protectionist backlash in some countries, arguing that such measures would risk a repetition of the disastrous collapse in world trade during the 1930s. “We have to promote trade and investment at this juncture, otherwise we will all suffer,” Han warned. He expressed the hope that a Korean-US bilateral free trade agreement negotiated by the previous US administration would be ratified by Congress before the end of President Obama’s first term. Motlanthe, meanwhile, called for a speedy conclusion to the stalled Doha Round of multilateral trade talks.
As those comments suggest, leaders expressed high hopes for the new US president, with Calderón pointedly noting that the worsening of the crisis last year “coincided with a lack of leadership in the United States.” The upcoming G20 summit, he added, represents a critical opportunity to capitalize on the change in administrations. Asked by moderator Fareed Zakaria, Editor of Newsweek International, about the new president’s massive popularity in Africa, Motlanthe expressed hope that the United States would now be able to mobilize the entire world to deal with the economic crisis and other pressing global problems. “He seems to be more interested in using the carrot than the stick, which is a refreshing change,” Motlanthe said.