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In less than three weeks, the G-20 leaders will meet in Pittsburgh for the third time in 10 months to discuss the global economic and financial crisis, prospects for recovery, and reforms of the global economic and financial system to limit the virulence of future crises. What do the leaders need to say to turn their third meeting into a success?
The G-20 leaders need to firmly establish the G-20 as the global steering group on global economic and financial issues, as was called for by the Brazilian, Russian, Indian, and Chinese (BRIC) finance ministers and central bank governors in London this past weekend. The G-20 leaders need to convey more than the outcome of a debate about compensation policies of one small segment of the economy, commercial banks. They must address three big topics in their communiqué, which should be mercifully brief and to the point: the future of the global economy, reform of the international financial system, and the responsibilities for the system as a whole.
On the global economy, the leaders should address a linked group of issues: the economic aspects of the crisis and the timetable for allowing those policies to unwind, achieving a more balanced global expansion going forward than this decade so far, and a thoroughgoing reform of the International Monetary Fund (IMF). Success on the first two requires a high degree of cooperation, and only a strong IMF supported and respected by its members can provide the required day-to-day leadership to carry them out.
On each of these related issues, the G-20 leaders should lay down quantitative benchmarks for allowing stimulus measures to unwind, for growth patterns in the future—including the limiting of global imbalances, and for the objectives for the IMF quota and governance reforms already promised by January 2011. On the last aspect, for example, they should agree to a doubling of IMF quotas, a reallocation of voting power so that the traditional advanced countries have only half the votes compared to about 60 percent at present, which would be roughly comparable with what the BRIC communiqué endorsed, and a reduction in executive board seats from 24 to 20.
Second, on the important issues of financial repair and regulatory reform, the leaders should agree on criteria for unwinding their extraordinary support for the financial sectors, and establish the objective to eliminate the role of governments in the financial institutions they have supported. They should also renew their commitment to comprehensive financial reform, which appears to be lagging in many jurisdictions as politicians focus on politically popular minutia such as curbing executive compensation.
Of course, compensation reform is important not only politically but in terms of signals and incentives. It is also related to other structural, supervisory, and accounting issues. However, compensation is the tail—not the dog—of financial reform. Moreover, the compensation issue is one for the G-7 countries, not the G-20 countries. This was evident from the lack of mention of the topic in the BRIC communiqué. There is no surer way to turn off the representatives of the other countries and to weaken the G-20's role than to focus on marginal issues of micromanagement.
The essential ingredients of reform require: establishment of the structure of the global financial system; institutionalization of that structure; and definition of the roles of governments, market practitioners, and markets in the supervision and regulation of the system. That important work appears to have been lost in the lead up to the recent meeting in London of the G-20 finance ministers and central bank governors. However, encouraging progress on capital reform came out of Basel on September 7 that overshadowed the theater in London on September 4–5.
Third, the G-20 leaders in Pittsburgh should lay out a vision for the roles and responsibilities of their countries for the institutions of international cooperation. This starts with the World Bank and the other multilateral development banks. Each is asking for more resources, but in most cases their missions and governance structures are outdated, leaving them ill-equipped to deal with the delivery of such important global public goods as fighting trade and financial protectionism, climate change, food security, health, and poverty. They compete more with each other (and the IMF) than they cooperate on coordinated delivery systems.
After three meetings in 10 months, as well as the plethora of deliverables at their meeting in London in April, the G-20 leaders in Pittsburgh need to convey their seriousness about focusing in the future on the big picture and guiding the global economy and financial system as a whole. This should be their priority.
