What G20 Leaders Must Do To Stabilise our Economy and Fix ... - Vox

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VOXResearch-based policy analysis and commentary from leading economistsstructure to give clout to those who can provide resources, including governmentswith sovereign wealth funds. Its collective experience – having handled more thanone hundred banking crises – is a source of significant expertise. It has mechanismsfor emergency finance and for conducting macroeconomic surveillance to track crosscountryfinancial and economic linkages. Its Financial Sector Assessment Programs(FSAPs) are a source of credible and comprehensive analysis and advice – althoughone that the US ignored (the IMF's warnings of impending problems in its surveillancereports and semi-annual surveys of the world economy went largely unheeded.)Help the real economyThird, G20 leaders should accord a high priority to the real economy.External imbalances still need to be reduced by governments adopting nationalpolicies that are good domestic policy as well. A worrisome development is the growingperception that globalisation is bad for the middle class.A strong pledge by leaders to eschew protectionism is essential. The best signal ofsuch commitment is to complete the Doha Round by year's end. The lessons from the1930s demonstrate the disastrous consequences of trade protectionism and lack ofmutual trust and cooperation among governments. Nationalism and protectionismtrumped the global public interest and the crisis deepened. This must not be allowedto happen again.Establish a new ‘G7’ to match New Century realitiesFourth, leaders should permanently restructure the global leaders' group. This is nota topic that should top the agenda because it will use all the "oxygen," but it is animportant one. G-20 membership is based on criteria of economic significance andlocation which give it legitimacy. It should replace the G-7 as the regular, not just crisismanagement, leaders' forum.Pitfalls to avoidThere are two significant pitfalls to avoid.1) The grandiose global super-regulator.This won't fly because governments will not cede national sovereignty. Nor shouldthey since, to be effective, regulators need to be very knowledgeable about the institutionsthey oversee. A global regulator fails this test. Size and reach cannot make upfor the necessary proximity and focus and would very likely have negative unintendedconsequences.2) Too much government intervention.There is a tendency during a financial crisis to emphasise instability and unfairnessover the growth benefits of open capital markets. Cross-country studies show thatcountries with deeper and more sophisticated financial systems have grown fasterbecause capital can be allocated more efficiently. Individual welfare is also promotedwhen households can obtain credit to smooth their consumption requirementsthrough time. The costs of the current crisis are associated with the deficiencies ofgovernments and national regulatory systems, most recently in the US, not with liberalisedand open financial markets.Increased government ownership of banks and financial institutions was essentialto their rescue. Yet unless governments sell down their stakes in a timely way in the46
What G20 leaders must do to stabilise our economy and fix the financial systemmonths and years ahead, we can expect to see bureaucrats and politicians substitutingfor the market in picking winners and losers and intervening in bank strategiesand daily decision making. We will also see governments in key emerging marketsmaintain their ownership and control of bank-dominated financial systems – an outcomethat would perpetuate the high cost of capital for small entrepreneurial growthenterprises that banks shun as business that is too risky.Crises will happen again: Listen to IMF warnings next timeFinally, we should have no illusions. Financial institutions will continue to innovateand financial regulators will continue to be one step behind. When regulators and theIMF warn of impending problems during the next boom, politicians and market participantsshould listen and regulators should act in timely ways. But will they?About the authorWendy Dobson is Professor at the University of Toronto and Director of the Institute forInternational Business (Rotman School of Management), having previously been President ofthe C.D. Howe Institute (Canada's leading independent economic policy research organization).She was Associate Deputy Minister of Finance in Ottawa and is a non-executive directorfor Canadian companies in finance, energy and life sciences, as well as Vice Chair of theCanadian Public Accountability Board. Her research focuses on emerging market economies,economic integration in North America, the international financial system, regional andglobal governance, and Canadian public policy issues.47
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What G20 Leaders Must Do To Stabilise our Economy and Fix ... - Vox

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