The G20 ten years on: old lessons and new challenges

 

Mr Kevin Rudd’s vision on the future of the G20 project, which he helped launch in 2008 as the Prime Minister of Australia, must have resonated as a warning to those leaders across the world tempted to withdraw from the international consensus reached 10 years ago in Washington.

Mr Rudd, who is pursuing a PhD at Oxford on Xi Jinping’s worldview, recalls with clarity the agitated days leading to the first G20 meeting featuring the heads of states of the largest economies of the world. As the first signs of a potential new Great Depression emerged, global leaders, under the initiative of Bush, resolved to gather in a new forum that was welcomed as more inclusive and legitimate than the existing G8 in responding to the challenges ahead. Their mission, he explains, was to sustain the weakened global financial lines to prevent the banking crisis from turning into a new decade-long stagnation, as the one that had reduced US GDP by one quarter in the 1930s. Learning from that lesson, the coordinated effort devised in the first G20 meetings acted on three main policy areas: monetary stimulus, fiscal expansion and a new regulatory reform program around private financial institutions, implemented jointly with the Financial Stability Board to give new confidence to trembling markets.

G20
The first G20 featuring heads of state and government was held in Washington in November 2008.

Mr Rudd cannot conceal his sense of pride when he describes the jump in all macroeconomic indicators that mitigated the collapse following the action of the G20. However, he does not hide that the recovery process is not complete in all countries, mentioning Southern Europe as an example. Similarly, he does not ignore the need for an honest internal assessment of the G20 conduct and achievement, as we approach the 2018 Buenos Aires Summit marking the 10th anniversary of the organisation.

The first lesson to be learnt is that global cooperation to sustain financial markets and defending global aggregate demand did work in 2008, thanks to the contribution and commitment of each and every one at the Summit, and therefore can work in the future. The second legacy, he claims, is the success of adequate regulation of private financial institutions through the increase in capital requirement ratios, the identification of systemically important institutions and the introduction of stress-tests by the IMF. He confesses, however, that much less successful was the initiative to reform the remuneration schemes of CEOs which tried to link them to the stability, rather than profits, of their financial institutions.

Much of the risk to the legacy of that G20 effort now comes from the US, Mr Rudd admits.

Indeed, there is considerable pressure in Republican circles to repeal the Dodd-Frank Act, the piece of US legislation embodying the principles of the financial regulation agreed at the G20 in 2008. Such an inconsiderate initiative, Mr Rudd fears, would not only endanger the stability of the US financial sector but also trigger a “race to the regulatory bottom” among all major economies, nullifying the original G20 efforts, as already observed by Stanley Fischer, former Vice Chairman of the Fed and past WES speaker.

Furthermore, the Trump administration is seemingly ignoring some of the wisdom derived from 1929, including the complete failure of protectionist measures in sustaining domestic industrial base. If repeated, this mistake would have a deleterious effect on sustained growth and confidence around the world, warns Mr Rudd.

A final reflection is devoted to the current state of financial safety nets around the world and our ability to face a new sovereign debt crisis, as those occurred frequently in the last decades. His conclusion is that, even collectively, we are not equipped to face a major balance of payment crisis in a major economy. His suggestion, from an inside perspective, is to use next year’s IMF General Review of Quotas to increase the quota assigned to China, reflecting its new position in the global economy and thus expanding the Fund’s ability to react to future distress. Again, much of the responsibility will lie on American shoulders.

Giovanni Pierdomenico

Readers Insights:

A clear and honest confession that engaged everyone in the room. – Mark, PAIS, 1st year

Mr Rudd shared with us a powerful vision on the future of global relations and how world powers need to act to ensure long-term stability. – John, Mathematics, 1st year

 

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