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ECONOMY: Emerging G20 Consensus on Solutions to Crisis

Mario Osava

SÃO PAULO, Nov 9 2008 (IPS) - For now, a consensus seems to prevail in the Group of 20 (G20) major industrialised and emerging nations, whose finance ministers and central bank presidents ended their 10th annual meeting Sunday, which took on a high profile due to the global financial crisis.

They met to prepare the groundwork for the Nov. 15 anti-crisis summit, which will bring together the G20 – made up of the Group of Seven (G7) richest countries, 12 emerging nations and the European Union as a bloc – heads of state and government in Washington.

"The G20, with its broad representation of major systemically important economies, has a critical role to play in ensuring global financial and economic stability," says the statement released at the end of the two-day gathering.

The meeting called for "comprehensive" reforms of the multilateral institutions that emerged from the 1944 Bretton Woods conference, like the International Monetary Fund (IMF) and World Bank, "so that they can more adequately reflect changing economic weights in the world economy and be more responsive to future challenges.

"Emerging and developing economies should have greater voice and representation in these institutions," the statement adds.

The reforms are needed in order to boost the "legitimacy and effectiveness" of these institutions, the G20 finance chiefs agreed.


They also underlined the need for all countries to "address the risks associated with excessive leverage and improve their regulatory and supervisory regimes in order to deliver improved risk assessment and management by financial institutions, to enhance transparency and accountability in financial markets, as well as to strengthen international cooperation to identify and respond preemptively to national and international systemic risks."

There was also agreement that the current crisis "is largely a result of excessive risk taking and faulty risk management practices in financial markets, inconsistent macroeconomic policies, which gave rise to domestic and external imbalances, as well as deficiencies in financial regulation and supervision in some advanced countries."

In addition, the ministers and Central Bank presidents urged all countries "to resist protectionist pressures" in trade and investment, and expressed their support for the "prompt and ambitious conclusion" of the World Trade Organisation’s Doha Round of multilateral trade talks.

But Brazilian Finance Minister Guido Mántega, who presided over the meeting, said discrepancies will emerge when concrete regulatory mechanisms are discussed.

Some countries, like Brazil, are calling for "more rigorous rules" for the "non-banking" financial sector, and "strict limits on leveraging," but others "will put up resistance" because they have more powerful financial markets, he said.

He also predicted opposition to proposals that call on rich countries to set aside resources for developing countries, to compensate for the damages caused by the crisis.

"Representativity and legitimacy" constitute the first principle that should govern the reforms of the international financial system, according to the proposal presented by Brazil, which says emerging nations are under-represented in the IMF, the World Bank, the G7 and the Financial Stability Forum, another body that has taken on special importance under the present circumstances.

The G20 consists of the members of the G7 (Canada, France, Germany, Italy, Japan, the UK and the United States), 12 emerging nations (Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey), and the EU as a bloc.

But the G20, whose members account for two-thirds of the world population, does not represent the poorest countries directly, acknowledged South African Finance Minister Trevor Manuel, who took part in the final press conference alongside Mántega and British Financial Secretary to the Treasury Stephen Timms.

That means the group must not take the arrogant attitude of reaching decisions for everyone, and must listen to the rest of the world’s countries, he argued.

The final statement also emphasises social concerns. Measures against the crisis must not only seek growth and financial stability, but must also be designed "to minimise the negative social impact, particularly in emerging and low income countries," it says.

Manuel, Mántega and Timms acted as spokesmen for the G20 because South Africa held the group’s presidency last year, Brazil holds it this year, and Britain will take over in 2009.

Timms underscored the need for international rules because of the intensification of cross-border capital flows, which he said makes greater international cooperation and an early warning system necessary, to prevent crises.

Brazil recommended short-term measures for restoring credit lines and financial flows, whose sharp reduction threatens to generate more serious future costs in terms of revenue, employment, investment and economic growth, said Mántega.

Many advanced countries have already taken "correct but insufficient" measures to reestablish credit and confidence, he noted.

Government action must be based not on ideology but on pragmatism, and anti-cyclical policies must be adopted, with fiscal flexibility, while expanding investment and public spending, to ward off a prolonged recession or even depression, says the Brazilian government’s proposal.

A possible rise in inflation is also a concern, but the drop in commodity prices and overall economic slowdown would tend more towards deflation, said the Brazilian minister.

A few countries whose local currencies have devalued – like Brazil’s – are experiencing inflationary increases, but this is a temporary phenomenon, he said.

Reforms of the international financial system will take time, and will require technical evaluations, but the crisis has created the "political conditions" for advancing in that direction, said Mántega.

In order for the G20 to assume a central role in this transition in the world of finance, Brazil wants the forum of finance ministers and Central Bank presidents to be formally raised to the level of heads of state and government.

Teams set up during the meeting of G20 finance authorities will continue working this week on the proposals to be presented at next weekend’s summit in Washington, which is to create working groups to design concrete measures to combat the crisis, over the next two or three months, said Mántega.

 
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