In pitching for a more inclusive structure of global economic governance, the G20 may have set its sights on the future management of the world economy. But the single most important decision taken by the group of leading economies on Friday was to press ahead with the stimulus measures currently being implemented till recovery was certain.
Speaking to reporters here shortly after the end of the group's summit, Prime Minister Manmohan Singh said it was good that the G20 had agreed that there would be no premature withdrawal of the “trillion dollar” stimulus flowing from its last two summits. Since the global economy had clearly not bottomed out, it was too early to talk of an “exit” from this approach in the short-run. Instead, the communique said a transparent and credible process for withdrawing the “extraordinary” fiscal, monetary and financial sector support should be developed for implementation “when recovery becomes fully secured”.
In terms of strengthening the international financial regulatory system, the G20 agreed to a number of measures that would ensure there was no return “to the excessive risk taking prevalent in some countries before the crisis”. These include calling on banks to retain a greater proportion of current profits to build capital, imposing tougher regulations on over-the-counter derivatives and reforming compensation practices in the financial sector to support stability.
Excessive pay and bonues in the sector have encouraged excessive risk taking, the G20 said, pitching for a supervisory structure in which firms with “risky” salary and bonus policies could be forced to
implement corrective measures like higher capital requirements in order to offset additional risks. In particular, firms that failed or required public assistance should be forced to modify their compensation structures, the G20 noted in a nod to the controversy in Europe and the U.S. over multi-million dollar bonues being paid from public funds to executives of bailed out banks.
In another first, the G20 has tasked the IMF with preparing a report by next year on how to get the financial sector to “make a fair and substantial contribution towards paying for any burdens associated with government interventions to repair the banking system”. This suggestion, mooted by Germany, is meant to cover proposals like the ‘Tobin tax’ on speculative capital flows.
The battle to recapitalize the World Bank and other regional development banks --- a key priority for India --- was only partially won with the G20 agreeing to find the necessary resources based on a review of the capital needs of these banks to be completed in the first half of 2010.
The G20 also discussed the important issue of climate change and called for a successful outcome in the forthcoming UN Framework Convention on Climate Change negotiations in Copenhagen. But Prime Minister Singh said that this call was more in the way of a “pious wish” since it was not at all clear that the developed countries were willing to implement the emission cuts earlier UN conventions required of them.
Though the Prime Minister did not draw attention to it, the final communiqué also includes a commitment by the G20 for the phasing out of “inefficient fossil fuel subsidies” over the medium term, with the interests of poor consumers in the developing world addressed by targeted cash transfers (as Indonesia has been attempting to implement) rather than price distorting subsidies that may lead to excessive consumption. Moreover, “relevant institutions” like the International Energy Agency, the World Bank and OECD have been asked to “provide an analysis of the scope of energy subsidies” and suggest how these could be eliminated, a process that may see India being put in the dock.
That India has a problem with this approach was made clear by the Prime Minister’s Special Envoy on Climate Change, Shyam Saran. On September 24, he told reporters here that he was not convinced about the utility of introducing such a subsidy phase-out at the G20. At stake was the interest of India’s poorest consumers, who benefit from affordable kerosene for their cooking and even lighting needs, andfarmers who use subsidised diesel.Though India subsidized fossil fuel consumption, post-subsidy prices in relation to the purchasing power of the average citizen were among the highest in the world, he had said. But other Indian officials made light of the G20 formulation, saying the government itself was keen to limit subsidies and move towards cash transfers.
In his remarks to reporters, Prime Minister Singh also highlighted the renewed commitment of the G20 to fight protectionism. The group agreed that this could be realized by working for “an ambitious and balanced conclusion” to the Doha round of trade talks by 2010.