Restoring Economic Diplomacy

In his campaign, President Barack Obama promised to revive American diplomacy to ease political tensions and security threats around the world. But the global economic and financial turmoil requires that the President restore economic diplomacy as well. Just as Americans are looking for new leadership, the world is looking to the new president for direction in renewing the global economy, stabilizing the financial crisis and redesigning the international regulatory regime that failed to prevent the current turmoil.

When the leaders of the G-20 countries assembled in Washington in November, after the election, Mr. Obama understandably declined to attend. Now another summit meeting, in April, could turn out to be his debut on the international economic stage.

The new president's first priority must be to ensure that the search for solutions to the crisis does not deteriorate into acrimony and efforts to assign blame for the global meltdown. Squabbling over the causes of the crisis will only undermine confidence. There is, in any case, plenty of blame to go around.

More positively, President Obama must encourage all the economic powers to adopt fiscal stimulus programs based on tax cuts and additional government spending. These efforts should amount to at least 2 percent of their national economies. Some countries have already started to pave the way. China, which now accounts for more than a third of all global growth, has demonstrated admirable leadership by announcing a major expansion program. The Obama administration itself has indicated places for a similarly ambitious initiative. Europe and Japan are lagging, however, and need to join the program.

The Obama administration should also take seriously the G-20's pledge to disavow the imposition of any new trade barriers. This will not be easy for a new president who during his campaign expressed skepticism about past trade deals. But he should keep in mind that it was a wave of protectionist trade measures, triggered by the infamous Smoot-Hawley tariff in the United States and quickly emulated by most Europeans, which contributed mightily to the Great Depression.

The President also needs to ensure that the world's leaders pledge at least $500 billion to augment the resources of the International Monetary Fund (IMF) so it can meet the needs of developing countries hammered by the crisis. Japan has offered $200 billion and China, with reserves nearing $2 trillion, could provide at least as much. The rich oil exporters, represented by Saudi Arabia at the G-20, could do so as well.

The final component of reform should flow from the G-20 of working groups to address systemic issues that helped bring on the crisis. Most importantly, they must figure out how to repair a broken system of financial regulation in the United States and numerous other countries. Among the other reforms should be a newly strengthened IMF, which has suffered from a lack of political legitimacy because of the gross under-representation within its leadership of rapidly emerging powers in Asia and elsewhere.

President Obama has a full agenda simply in dealing with domestic economic issues. But the true test of his leadership may come from his ability to forge economic partnerships on a global scale to respond to the truly global nature of the current economic and financial crisis.