What, if anything, was achieved at the G20 summit in London in April 2009?

Background to G20

The G20 was initiated in 1999 in the aftermath of the Asian financial crisis and subsequent crises in Brazil and Russia. It
was then planned as an informal body bringing together ministers of finance and heads of central banks, principally to
ensure that similar crises would not recur. Member countries include Argentina, Australia, Brazil, Canada, China, France,
Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the UK and the
US. The twentieth member is the European Union, represented by the rotating presidency, and the European Central
Bank. The managing director of the International Monetary Fund and the president of the World Bank, plus the chairs of
the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also
participate.

The grouping is not entirely representative: Europe and Latin America are over-represented and Africa and the Islamic
world under-represented. But its members contain two-thirds of the world’s population and generate around 90 per cent of
global gross product and 80 per cent of world trade (including trade within the EU). From a legal viewpoint, the G20 is an
unorthodox organisation. It doesn't have any constitutional powers and is entirely based on the status of the people that
turn up. As a result, any outcomes will be entirely reliant on member countries carrying them out.

The London Summit, April 2009

The summit was held in the midst of the global financial crisis and the priorities for discussion were as follows:-

1. Anti-protectionist measures

2. Regulatory reform

3. Crackdown on tax havens

4. Reform of the IMF

5. Greater role for emerging economies

6. New global stimulus

Prior to the summit, in March 2009, Alistair Darling stated: ‘There was a great deal of consensus on the urgency and the
steps that to be taken.’ However, Willem Buiter, an LSE scholar, warned ‘expect nothing, hope for the best and prepare for
the worst.’

Looking at the priorities in turn:-

1. Anti-protectionist measures

Anti-protectionist pledges were made in order to avoid the mistakes of the 1930s which led to the Great Depression.
These were seen as a crucial driver of economic growth, however some protectionist practices had been implemented
since the beginning of the crisis which raised questions about the adoption of a free trade policy. Prior to the summit, at
the end of March 2009, pledges were also made to refrain from currency devaluations. (FT Guide to G20)

However, in April 2009, the World Bank found that 17 of the G20 had implemented 47 measures since the last G20
summit with the aim of restricting trade at the expense of other countries’ (Financial Times). India and Russia introduced
capital controls to defend the rupee and the ruble and India kept a cap on foreign investment inflow in order to defend its
currency.

By July 2009, governments around the world continued to erect trade barriers in spite of pledges at G20 summit to resist
protectionism. In September 2009, the Centre for Economic Policy Research identified 121 blatantly discriminatory
measures put in place by G20 nations since the London Summit and another 134 that are already in the pipeline’ (FT
website)
2. Regulatory Reform

G20 leaders pledged to crack down on tax havens, extend regulation of the financial system to large hedge funds, set
tougher pay rules in the financial services and oversee credit ratings agencies. They also pledged to ‘regulatory oversight
and registration to credit rating agencies to ensure they meet the international code of good practice, particularly to
prevent unacceptable conflicts of interest.’

According to Mr. Sarkozy, further financial regulation would mean that there would now “be an international norm which
will define the capital base of banks” and this would also mean the reintegration of off-balance sheet items in the
calculations of capital requirements which would be formulated by supervisors.“

The summit also established the Financial Stability Board, an international body given the task of drawing up practical
measures for identifying problems in the financial system and overseeing actions to address them through better
information exchange and international cooperation. The new FSB will include all G20 countries, Spain and the European
Commission.

In the UK context, the Turner Review was published just prior to the summit in March 2009 and the key measures
included capital adequacy; accounting and liquidity; deposit insurance; credit rating agencies; remuneration, FSA
supervisory changes; utility banking versus investment banking; global/ European regulatory frameworks.

In September 2009, at the Pittsburg summit, there was agreement on bankers’ pay in terms of bonuses, dividends, etc.
which would make them consistent with the redefined sound capital base. In the same month, momentum was also
building for a currency transaction tax (Tobin tax), which won the backing of Angela Merkel, Nicolas Sarkozy and Adair
Turner, the head of the UK Financial Services Authority.

By November 2009 the issue of banks bonuses was becoming controversial and UK and USA bankers and corporate
bodies were looking for incentives to avoid regulation desired by France.

In December 2009, the former French Finance Minster, Michel Barnier, was appointed as the European Union's new
finance chief. He is keen to clamp down on City of London excesses as a direct rebuke to the British government's
handling of the economic crisis but is facing opposition from the British Treasury.

3. Crackdowns on Tax Havens

Tax havens have agreed to become more transparent. Those who do not agree will be named and shamed. The OECD
listed four categories based on the actions they have taken to comply with the internationally agreed tax standard:

1. Those that have substantially implemented the standard, including most advanced countries such as
Britain, the US, France, Germany and China
2. Tax havens that have committed to – but not yet fully implemented – the standard. These include
Andorra, Monaco, Gibraltar and Lichtenstein
3. Financial centres that have committed to – but not yet fully implemented – the standard. These include
Switzerland, Singapore, Chile and three EU countries – Belgium, Luxembourg and Austria
4. Those that have not committed to the standard, incl. Costa Rica, Malaysia, the Philippines and Uruguay.

4. Reform of the IMF

A pledge was made to boost current insufficient funds of $250bn to $750bn to support poorer and the hardest hit
countries. This would consist of $500bn for the IMF to ensure against a global disaster, $250bn for trade finance and
$100bn of additional lending by the multilateral development banks. This contribution was to be spread among countries
with Europe’s share at $100bn but there was some disagreement over this, particularly between the UK and the USA, and
Alistair Darling thought $175bn would have been more appropriate. Additional funds would also be raised by the sale of
IMF gold for concessional finance for the poorest countries. In total, this amounted to a $1,100bn programme of support
“to restore credit, growth and jobs in the world economy”. However, much of this, like the $250bn for trade finance, is old
money.

In September 2009 the IMF reported a shortfall of $75bn of pledged extra $500bn which may be seen to justify Alistair
Darling’s original view.

Willem Buiter from the LSE noted that the IMF realistically needs $2.25 trillion to deal with the problem.
5. Greater role for emerging economies

Buiter commented that the group needs to change the voting system to give representation and voice to other countries.
He proposed that the European nations should be replaced by a single European Executive Board and that US voting
power should be reduced in order to eliminate its veto.

In the event, G20 pledged to shift at least 5 per cent of the shares in the IMF to emerging economies from over-
represented nations and transfer at least 3 per cent vote share in the World Bank.

6. New Global Stimulus

The summit reached substantive consensus, despite disagreements, notably between the US and UK on the one hand,
and the continental European countries on the other, over the scale of stimulus packages and the nature and severity of
financial re-regulation.

While the outlook is brighter for the rich and emerging economies that make up the G20, the same cannot be said of large
swathes of Africa, Asia and Latin America. Poor countries hit by falling trade, investment and remittances show little or no
sign of recovery. Crucially, their governments cannot borrow to stimulate their economies in the way Brown, Obama and
other G20 leaders have done. Development was not on the agenda at the summit.

Oxfam analysis shows that government budgets in Sub-Saharan Africa will be $70bn (£43bn) worse off this year as a
result of the crisis. That's $70bn less to spend on schools, medicines and helping their economies back to health. Poor
countries need decisive action. The G20 has delivered less than half of the £30bn it promised for poor countries at the
London summit (according to European Network on Debt and Development). (September 2009)

The global economy is beginning a sluggish recovery from its worst recession since the war. The IMF states that world
growth will return to 3.1 per cent in 2010, after a contraction of 1.1 per cent this year, although this is better than the 1.4
per cent drop suggested in July. It projects a resurgence in Asia, most notably in China and India, fuelled by policy
stimulus and a turn in the global manufacturing cycle. China and India are predicted to grow by 9 and 6.4 per cent
respectively next year.

In contrast, growth in the West will be sluggish. America will rebound to expand by 1.5 per cent next year, again as the
result of unprecedented official action. However, there seems little chance of a rapid return to US economic leadership as
growth is likely to fall below 2% for a considerable time. Germany, France and Japan are officially out of recession but
growth remains slow and is mainly due to stimulating domestic demand, for example, car subsidies in Germany.

September 2009 - The process of recovery and repair remains incomplete. In many countries, unemployment remains
unacceptably high and the conditions for a recovery of private demand are not yet fully in place. Moreover, beyond the
immediate need to restore economies to health lies a host of longer-term challenges.

October 2009 - Echoing concerns at the G20 summit in Pittsburgh that government and central bank economic support
must only be withdrawn when the recovery is secured and the IMF in effect gives a green light to large budget deficits,
continued low interest rates and more quantitative easing. "The policy stance in the advanced economies should continue
to support demand until the recovery gains a much stronger foothold”.

November 2009 – USA and UK stock markets have achieved some stability and have grown throughout the year.

The G20 emphasised that the fiscal expansion already planned over the next two years was equivalent to $5,000bn, or a
4 per cent boost to overall output.'

Finally

The G20 has now become central to global policymaking and may prove a more important legacy of this crisis than any
specific agreement it reaches.