Financial Balance of Terror and the G20
The Group of 20 (G20) continued its focus on the global economic crisis at its second meeting in Pittsburgh in 2009. At the Summit, the G20 leaders reviewed the progress made since the Washington and London Summits and discussed further actions to be taken to assure a sound and sustainable recovery from the recent global financial and economic crisis. The leaders agreed on coordinated actions to revive the global economy, reform the financial sector, create early warning systems, restructure the big international financial institutions, improve accountability and help the developing countries.
The only way to find the limits of the possible is by going beyond them to the impossible.
- Wright Brothers
The Group of Twenty (G20) Finance Ministers and Central Bank Governors was established in 1999. The main objective of the formation was to tackle the ill health of the global economies; to bring together the developed and emerging economies to discuss key issues related to the global economies. The inaugural meeting of the G20 took place in Berlin, on December 15 and 16, 1999. It was hosted by the German and Canadian Finance Ministers. G20 is an informal forum that promotes open and constructive discussion between developed and emerging economies on key issues related to global economic stability. G20 helps to support growth and development across the globe by contributing to strengthen the international financial architecture and providing opportunities for dialogue on national policies, international cooperation and international financial institutions.
The G20 was formed as a response both to the financial crises of the late 1990s and to a growing recognition that key emerging economies were not possibly included in the core of global economic discussion and governance.
The G20 comprises of the Finance Ministers and Central Bank Governors of the following 19 countries ![]()
And the 20th member of the G20 is the European Union, which is represented by the rotating Council presidency and the European Central Bank. In addition to these members, to ensure that global economic fora and institutions work together, the following members also participate in the G20 meetings on an ex-officio basis:
- International Monetary Fund (IMF),
- World Bank,
- International Monetary and Financial Committee,
- Development Committee of the IMF and World Bank.
Thus, the G20 brings together a platform for developed and emerging economies across the globe to combat the tough times. According to sources, together, member countries represent around 90% of the global gross national product, 80% of world trade (including EU intra-trade) , as well as two-thirds of the world's population (Refer Exhibit 1).
The G20 has no permanent team of its own, unlike other international institutions, such as the Organization for Economic Cooperation and Development (OECD), IMF or World Bank. The G20 chair revolves between the members, and is selected from different regional grouping of countries each year. In 2009, the G20 chair was held by the UK, and in 2010, it will be South Korea (Refer Table 1). The chair is part of a revolving 3-member management. This is referred to as the three member management-Troika of past, present and future chairs. The role of the Troika is to ensure continuity in the G20's work and management across host years.
Economic Crisis 2008 and the Stimulus Packages
The year 2008-09 has been a testing time for the global financial markets against the backdrop of one of the worst global financial crisis witnessed so far. It was almost a year ago when the collapse of Lehman Brothers triggered a chain reaction of financial, economic, and psychological crises. Markets across the globe reacted in a `harsh' manner to the global misbalance that entangled the entire globe. Rescue measures were undertaken globally, recognizing that the refurbishment of the financial markets was the need of the hour. Corrective steps with regard to the monetary policies were taken immediately as the first line of defense. However, the conventional measures to manage the crisis appear to have reached their limits. Furthermore, the collapse of financial systems across the economies rendered most of the monetary programs inadequate. Thereafter, corrective fiscal policies became crucial to initiate economic resurgence across the globe.
G20 Economic Stimulus Packages
In the wake of the financial crisis and a step towards balancing the financial terror, almost all the G20 countries have announced fiscal stimulus packages. The objective of the packages was to avert the reemergence of the panic that gripped millions of investors. The total size of the stimulus for G20 economies stood about $1644 bn. However, for 2009, the figure stood at $692 bn, which is about 1.4% of their combined GDP and a little over 1.1% of global GDP. According to an economist at Illinois University, "without the government's massive stimulus package, the US economy could have spiraled into an epic collapse, rivaling the Great Depression."
For the year 2009, the cumulative stimulus packages of four major economies- the US, China, Germany and Japan - account for about $480 bn of the overall stimulus spending in 2009. The cumulative stimulus package share of US, China, Germany and Japan stood at around 70% of the overall stimulus for 2009 with their respective shares accounting to 39%, 13%, 8% and 10%. The total size of the stimulus, as a percentage of GDP (2008), for the above four economies comes out to 5.9%, 4.8%, 3.4% and 2.2% respectively. Also, the total size of the stimulus plan for Saudi Arabia's economy stood at 9.4% of its GDP (2008).
For the year 2010, the four economies of US, China, Germany and Japan account for over 84% of planned stimulus spending in 2010, wherein the respective share stand at 60%, 12%, 7.8% and 4% respectively. The detailed analysis of the same is given in Table 2. ![]()
The Pittsburgh Summit 2009
UK, which held the presidency of the Group of 20 major developed and developing countries (G20) in 2009, hosted the second ever G20 leaders' Summit in London in April 2009, following the first leaders' summit in Washington, DC (November 2008). G20 leaders met for the third time in Pittsburg, Pennsylvania on September 24 and 25, 2009 to assess the progress of the relief measures introduced by the economies to combat the crisis. The meeting was chaired by President Barack Obama, wherein the leaders reviewed the performance and the progress made since the Washington and London Summits. At the meeting, the leaders also discussed further action plans to assure a sound and sustainable recovery path from the current wave of the global financial and economic catastrophe. At the earlier summits, held at Washington and London, the focus was majorly on the deterrence of the economic disaster. However, at Pittsburgh, the focal point was to take corrective steps towards the economic resurgence and to build a strong, sustainable and balanced economic growth model so as to prevent such debacles from recurring.
The Pittsburgh Summit - Key Accomplishments
The Pittsburgh G20 Summit marked a critical transition from crisis to recovery. In Pittsburgh, President Obama forged an agreement with G20 Leaders to continue to implement aggressive policies to restore economic growth and create jobs; enact a new framework for strong, sustainable and balanced growth and to reform financial regulation and supervision to avoid a return to the risky practices that led to the crisis - policies that will be supported and implemented by a redesigned global economic architecture. ![]()
One of the first major proclamations of the meeting was that the group would now be a new permanent council for international economic cooperation. It is only the growing relevance of emerging economies that the G20 nations would supplant the G-8 as the guardian of the world economy. This means that the much larger G20 meeting will essentially replace the G-8, which will continue to meet on major security issues but will carry reduced influence. This decision will help to include major developing nations - such as China, India, Brazil, and Indonesia - which were originally not included in the G-8. The key accomplishments of the Pittsburgh Summit are as follows:
- Strengthen recovery.
- Launch framework for strong, sustainable and balanced growth.
- Advance tough new financial market regulations.
- Phase out insufficient fossil fuel subsidies and increase energy market transparency.
- Modernize the infrastructure of global economic cooperation.
- Support the world's most vulnerable citizens.
- Deliver on previous commitments.
Apart from the reformation of the global architecture to meet the requirements of the 21st century; G20 also discussed the issue of climate change- the issue that probably requires the utmost attention in today's scenario.
Leaders at the G20 summit vowed to grant the emerging countries a greater say at the IMF and the World Bank, recognizing their growing influence. Policy makers approved to increase the clout at the IMF for China and other underrepresented emerging markets through a transfer of at least 5% of the so called quotas that determine voting shares and access to IMF loans, from countries with disproportionate influence. It was also decided to boost emerging nations' share at the World Bank by at least 3 percentage points. According to the policy statement, "The distribution of quotas should reflect the relative weights of its members in the world economy, which have changed substantially in view of the strong growth in dynamic emerging markets and developing countries."
Policy makers also agreed to overhaul the oil derivatives markets. This reflected the international recognition of the disruptions that these trades could cause. G20, at its Pittsburgh summit, agreed to adopt changes to oil futures markets that have been suggested by an international securities oversight committee.
Leaders at G20 pledged to avoid protectionism. Policy makers agreed to re-double their efforts to reach a new agreement at the earliest to cut tariffs and subsidies in the World Trade Organization as part of the so-called Doha Round. With minimum impact of fiscal policies on trade and investments, policy makers agreed to combat the turmoil by supporting the financial markets across the economies. Leaders agreed that continuing revival of world trade and investments is essential to restore global growth.
Furthermore, G20 has crafted a plan to force banks to tie bonuses to their long-term performance and to increase their capital base. G20, in its policy statement, affirmed that excessive compensation in the financial sector has reflected and encouraged excessive risk-taking. Therefore, reforming compensation policies and practices is an essential element to increase financial stability.
Conclusion
G20 is playing a vital role in rebuilding the global economies so that they can combat the situation. In a broader sense, G20 is the primary source of help for the global economies in times of such debacles. The role of G20, in such scenarios, is one of utmost important. The path which has been guided by these policy gurus is yet to yield results. However, it is believed, that fiscal expansion that is being undertaken now will go a long way in reversing the impact of the economic slowdown although some tentative signs of stabilization have begun to emerge. The decisions and proclamations that have been taken at the summit to restore the global economies to their full health would definitely require some more time to resolve the key issues. However, the significance of such organizations lies in the fact that the financial balance of terror requires cooperation at the global level to combat situations like the one we are facing now.