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04/14/2010

The G-20 Agenda for Regulatory Reform


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Meeting behind impressive security barricades in a revitalized Pittsburgh, Pennsylvania, representatives of the G-20 (Group of 20) nations announced agreements in principal on a number of fronts, including financial services regulation, stimulus efforts, global trade, reallocation of IMF (International Monetary Fund) shares, and rebalancing national economies. The group affirmed its new standing as the global economic forum of record, formally eclipsing the G-7 (Group of 7) and the G-8 (Group of 8).

Whether the G-20 can translate its broad agreement on a dizzying array of issues into concrete action at the international and national levels remains to be seen. Those details need to be worked out through further negotiations at meetings of ministers and standard-setting bodies, which will then pass on agreements to national legislative and regulatory bodies for final action. Whatever happens, the G-20 has staked out its turf and opened the door for more involvement by developing nations that had previously been on the fringes of international agreements.

“Essentially, since the Second World War the coordination of issues at the global level, as weak and inadequate as it has been, has been carried out by the United States and a handful of other countries, essentially Europe and Japan, with Russia as a recent addition,” says Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace in Washington, DC. “Now the G-20 incorporates China, India, Brazil, and others that are absolutely central and critical to every one of the issues facing the global economy. I believe their exclusion has been a major reason why we have failed to move forward on critical issues. Now there’s a chance we’ll move forward. There’s no guarantee, but a chance.”

The G-20’s member nations represent more than half of the world’s GDP (gross domestic product) and include some of the fastest-growing countries. “It’s a watershed event, the G-20 essentially replacing the G-8 as the main premier international economic forum,” remarks Charles P. Ries, a senior fellow at the Rand Corporation and the US ambassador to Greece from 2004 to 2007. Whether the G-20 ultimately succeeds partly depends on whether the developing nations that are now on the international stage can step up to the plate and engage in the critical issues that these international forums wrestle with, Ries adds.

PRESSING ISSUES REQUIRE ACTION

While the G-20’s summary communiqué trumpeted the meeting’s achievements, some observers felt it was light on specifics and failed to address crucial issues. “Considering what has taken place over the last year in the global economy, to end the meeting with such a ho-hum communiqué with so few details and timelines, was disappointing,” says Craig F. Thomas, senior economist with PNC Financial Services in Pittsburgh, Pennsylvania. “They didn’t say a darned word about the economy. The global economy, how’s it doing? How are the banks doing that governments are managing? Is there more liquidity in the debt markets and the financial markets? How are international capital flows?”

Specific action needs to follow over the next few years before the meeting can be pronounced a success. Table 1 outlines the most important financial and regulatory agreements. Within those stated goals, some underlying issues need to be addressed:

  • Worldwide accounting standards convergence. The news cycle virtually ignored the G-20’s renewed commitment to complete convergence in accounting standards by June 2011—less than two years away. While the group did not explicitly propose worldwide adoption of IFRS (International Financial Reporting Standards), that is the implication, because it hardly seems likely that the rest of the world will drop IFRS in favor of GAAP (US Generally Accepted Accounting Principles). The US has yet to adopt IFRS, but because Mary L. Schapiro, chair of the SEC (Securities and Exchange Commission), has promised to revisit the issue soon, the IFRS road map that was published in late 2008 may be back in business. (For more information on the SEC’s push for the adoption of IFRS, see “SEC in a Quandry over Its Push for IFRS.”) If so, companies who have been asleep at the switch will need to get on task quickly, because that road map proposed allowing companies to file financial statements using IFRS in 2011. Large accelerated filers would be required to transition to IFRS in 2014 with three years of IFRS-compatible financial statements.
  • Sustainable economic growth. World leaders pledged to take concrete steps to realign global growth patterns to achieve sustainable growth going forward, which means in practice that the US will need to save more and China will need to spend more. It is an open question whether any international agreement can force the changes necessary to make this a reality, states Dadush. To gauge whether this goal is being achieved “you will be able to look at the numbers in a few years as well as examine whether government policy has moved in the appropriate direction,” he continues. “Will the Chinese government allow their currency to appreciate? Will they take other steps to ensure that profits are distributed, that there is less discrimination against households in income patterns? In the US, what will happen to the fiscal deficit? Will there be a tax increase? Will US households save more either because they’ve become more prudent, because they have learned a lesson from the crisis, or because the government has created new incentives and new taxes that induce them to be more cautious?”
  • IMF and World Bank voting allocations. This will be the litmus test to determine whether the developing world has really gained a seat at the table. The G-20 promised swift action on reallocating voting rights away from traditional powers to developing powers. Until that actually happens, economically powerful countries such as China, Brazil, and India will not have any more say in the IMF and World Bank than they do today. “It’s been agreed that the developing world is going to have a bigger say in the IMF, but what has not yet been stated is exactly how that voting power is going to be distributed and to which countries,” notes Fariborz Ghadar, the William Schryer Chair of Global Management, Policies, and Planning at Pennsylvania State University.
  • Economic stimulus. While the communiqué promised a gradual unwinding of fiscal stimulus, it offered no timetable on exactly when the stimulus would be withdrawn and how that would happen. Remove the stimulus too early, and you risk the world falling back into recession. Wait too long, and you court inflation, with all of its implications. “The issue of taking all that stimulated money out of the system is an issue that is important to us in the US because it has implications on inflation, but it is also very important to the Chinese because it has implications as to the value of the dollar,” maintains Ghadar.

CHALLENGES CONFRONT WORLD LEADERS

The G-20 faces major challenges not only in managing the global economy but also in translating its broad agreements into specific actions at the national level, especially in an environment of high unemployment and weak economic growth. If there is too much compromise between opposing viewpoints, the agreements that result will be so watered down that they do not mean much or will be unlikely to translate into concrete policy at the national level. Financial system regulation is just such a hot-button issue, given the differences between the US and Europe over executive compensation and bank capital levels.

“I think a major challenge facing the G-20 is in collectively sorting out what we learned from the crisis about our financial system and our system of regulation,” says Chester Spatt, the Pamela R. and Kenneth B. Dunn Professor of Finance at Carnegie Mellon University. “How can countries get together to implement an appropriate set of modifications for our regulatory system? It’s not only a matter of coordination across countries, but an issue of decision making within national jurisdictions.”

Ries sees mission creep as a big danger facing the G-20. Not only are large gatherings of world leaders subject to capture by whatever is going on in the news cycle—the preoccupation with Iran’s nuclear ambitions at the Pittsburgh Summit, for example—but whenever world leaders gather, anyone with an issue tries to insert it into the agenda. “If the advantage of the institution is that it forces leaders to become current on economy and financial issues, any other issues detract from that,” he adds. “If you see mission creep into other issues, you lose that focus, which is what happened to the G-8.”

At a panel discussion at Carnegie Mellon University during the G-20, Kiron Skinner, an associate professor of international relations and political science, said that the clamor of countries outside the G-20 to participate in the group risks diluting its mission further. “There are calls to change it from the G-20 to the G-33, or even the G-192 to include all the countries in the United Nations, which I think would be a disaster.” It is hard enough for the leaders and ministers at the G-20 to work through opposing viewpoints to forge a consensus; enlarging it even further creates the risk of inaction.

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