The Pittsburgh Summit of leaders from the G20 countries had raised high expectations. Initial reactions from India and abroad after its conclusion on September 26 suggest that many of those expectations have been met.

As far as economic decision making is concerned, the most noteworthy outcome of the summit was to push the G20 into the world’s centre stage.

As a statement from the U.S. put it, “The group’s leaders reached a historic agreement to put the G20 at the centre of their efforts to work together to build a durable recovery.” Although the decision to give primacy to the G20 has been taken in the context of the crisis and the recovery therefrom, it will very likely become a permanent arrangement.

IMF quota recast

That view gains credence in the context of certain other important reform measures proposed and accepted at the G20 summit. The IMF’s quota system that determines voting rights of members will be recast in such a way that China, India and a few other developing countries will have a greater say in the working of global institutions. The quotas — the developed countries have a disproportionately large share and hence corner the voting — will be rebalanced so as to give the developing countries an almost 50 per cent share. At present these countries have a 43 per cent share and at the G20 summit it was agreed to effect a 5 per cent shift in IMF quotas.

Peer reviews

Another important proposal accepted at the summit also will make global governance more inclusive. There will be peer review of the economic performance of all member countries including the developed ones under the aegis of the IMF. The peer review will enable other countries to scrutinise economic policies of any country, spot loopholes and thereby help in forestalling a crisis. Developing countries including India are already subject to such reviews.

The new proposal thus introduces a much needed democratic element in the global governance structure. It also acknowledges in no uncertain terms the propensity of the financial markets in the developed world to export their self-created problems to the rest of the world. It would be up to the IMF to step up its surveillance and spot potentially destructive policies being followed anywhere.

Tougher financial norms

A similar justification exists for the agreement on the new standards for the financial sector.One of the defining features of the U.S. financial sector, where the crisis had its origin, is the high executive compensation structure that encouraged “excessive risk” taking by bankers. The G20 countries agreed to back new global standards — developed by the Financial Stability Board — for these remuneration packages, especially in the distribution of bank bonuses.

Deferred bonuses

The new rules also require banks to build up their capital, if necessary, by limiting dividend payouts. A substantial portion of senior bankers’ bonuses will be in the form of deferred compensation and the proportion can go above 60 per cent for top bankers. The idea is to link present emoluments to future performance. There will be provisions to “claw back” the bonus payments, if the institution falters.

The G20 also pledged to support an ambitious time table for financial regulatory reforms, including tougher capital requirements and new liquidity rules to be agreed by the end of next year and brought in place by end 2012. It was decided to implement the Basle II prudential norms for banks by 2011 and move towards convergence in financial reporting standards.

Gain for Asia

Will the G20 be able to address global governance issues any better than the G8? The group accounts for 85 per cent of global income and is obviously more representative of the global economy. There is more than a symbolic gain for India and a few other developing countries. It makes sense to include in the elite list, countries such as China which have a critical role in the recovery.

China, India and a few others fared much better than the developed countries, posting positive rates of GDP growth when much of the rest of the world was reporting declines. These Asian countries are leading the economic recovery. G20 has five Asian members — China, India, Japan, South Korea and Indonesia — and Australia. The G8 had just one, Japan.

World leaders have been effusive in their praise for the new arrangement. British Prime Minister Gordon Brown has described the newly empowered G20 as offering “more chance of delivering results than anything since the Second World War.” The U.S. government has said that dramatic changes in the world economy have not always been reflected in the global architecture of economic co-operation. So the time for the G20 has come.

On the other side, there is a misgiving that the G20 may prove unwieldy, an accusation often levelled against the much smaller G8. Countries as diverse as Argentina, Turkey, the Netherlands and Spain (the last two having observer status) do not contribute to homogeneity. Real work, according to observers, may still be conducted through sub-committees.

The G20 can claim to represent the global economy. But, as the U.N. Secretary General Ban Ki-Moon pointed out in an interview to the Financial Times, 85 per cent of the world’s countries were not represented at the meeting (at Pittsburgh).