The G-20 stressed that further progress is needed on reforming the financial system around the world (Image: G-20)
G-20 SUMMIT
Heads of the Group of Twenty (G-20) met June 26–27 in Toronto, Canada to assess the state of the recovery and decide on measures to keep it going, saying the social impact of the crisis was still widely felt. Their highest priority was to safeguard and strengthen the recovery from the global recession that remains uneven and fragile.
The G-20 leaders agreed to develop a comprehensive action plan to bolster growth and foster a strong and lasting recovery—to be finalized at the next summit in Seoul in November, an initiative IMF chief Dominique Strauss-Kahn said “holds out great promise.” The IMF has provided the G-20 with analysis on how to improve global growth and will continue to support what is known as the Mutual Assessment Process in the next phase.
Differentiated approaches
With the global recovery moving at different paces in different countries, leaders left room for governments to tailor their responses to their own circumstances. “Those countries with serious fiscal challenges need to accelerate the pace of consolidation. This should be combined with efforts to rebalance global demand to help ensure global growth continues on a sustainable path,” the communiqué stated.
Using studies by the IMF and the World Bank, leaders said that a more ambitious path of reforms could significantly boost growth around the world. Over a five-year period, the communiqué said:
• global output would be higher by almost $4 trillion;
• tens of millions more jobs would be created;
• even more people would be lifted out of poverty; and
• global imbalances would be significantly reduced.
The International Monetary Fund released in Toronto its assessment of scenarios for improving growth through the Mutual Assessment Process, designed to help enhance the synergy of country economic programs to achieve stronger growth worldwide. It is scheduled to make public its latest forecast of global growth in Hong Kong on July 8.
Strauss-Kahn noted that more robust growth is needed both to reduce unemployment and to lessen the burden of large public debts.
The G-20 Mutual Assessment Process is the mechanism through which the growth challenge can be addressed, the IMF said. The process points to three areas for action. First, fiscal consolidation in advanced countries is unavoidable. This means putting in place credible fiscal plans, mostly starting in 2011, since the recovery is still fragile. Second, economies with surpluses need to boost internal demand, for example by spending on social safety nets, improving infrastructure, and allowing exchange rate flexibility. And third, structural reforms, especially in the advanced economies—encompassing changes in goods and labor markets that will lift growth, and financial reform that will make it sustainable.
Efforts to curb public spending to cut back large fiscal deficits must be “carefully calibrated” so that they do not choke off the recovery, according to the G-20 communiqué. "It’s not a question of fiscal consolidation or growth, but fiscal consolidation and growth," said Strauss-Kahn.
At a press conference following the summit, he noted that the G-20 leaders “are increasingly using the diagnosis and the concepts promoted by the IMF, such as global rebalancing of demand. This is a welcome development, both in that it demonstrates the political will to coordinate more macroeconomic actions, and in the use of a shared vocabulary, concepts, and analyses that will facilitate the global dialogue on coordination."
Financial sector reform
Leaders noted that further progress is needed on financial sector repair and reform. They said the reform agenda rests on four pillars:
• A strong regulatory framework. When reforms are fully implemented, banks will be required to hold significantly more and higher quality capital.
• Effective supervision. Stronger rules must be complemented with more effective oversight and supervision. The G-20 tasked the Financial Stability Board, in consultation with the IMF, to make recommendations on how supervision could be improved and risks addressed early.
• Resolution of financial institutions in distress. “We are committed to design and implement a system where we have the powers and tools to restructure or resolve all types of financial institutions in crisis, without taxpayers ultimately bearing eh burden.”
• Transparent international assessment and peer review. The G-20 strengthened commitment to the IMF/World Bank Financial Sector Assessment Program.
Strauss-Kahn welcomed the emphasis on supervision and said: “If the right supervisory framework is not in place, it's as if you have done nothing to reform the financial sector".
Leaders built on declarations at a summit in Pittsburgh last September. They examined a report prepared by the IMF on options for how the financial sector could make a fair and substantial contribution toward paying for the costs to governments of interventions to rescue or prop up banks during the global financial crisis. Leaders said countries could adopt a range of strategies, including the option of a bank tax
Strengthening IMF governance
Strauss-Kahn welcomed the G-20’s support of the IMF, including the commitment to accelerate work in order to complete IMF quota reforms by the Seoul Summit in November, and to deliver in parallel on other governance reforms, in line with the Pittsburgh Summit commitments.
“Today’s commitments will bolster IMF legitimacy and credibility. Much remains to be done until Seoul. Commitments to ratify the 2008 Quota and Voice Agreement, as well as recent reforms to the New Arrangements to Borrow, will require follow through. Beyond this, there is difficult work to be done to deliver on the new set of reforms. But I am confident that our membership will rise to the challenge,” Strauss-Kahn underlined.
