Economy

Toronto Summit: Little has been achieved, more to be done

By Huang Ying (Chinadaily.com.cn)
Updated: 2010-07-05 10:08

Unlike the previous three G20 summits, whose purpose was to tackle the financial crisis, the Toronto summit, for the first time, functioned as the premier forum for international economic cooperation. Was it successful in playing such a role? Well, that depends on how low you set your expectation for it.

Although the Canadian government spent about $1 billion on preparing for the summit, the summit itself achieved very little besides a few unimportant issues. The major powers couldn’t reach consensus on three of the four main agenda items, namely, the exit strategy, the financial sector reform and the reform of the international financial institutions (IFIs). For the only one they were able to reach an agreement on, which was about fighting trade and investment protectionism, it is generally expected that only lip service will be paid.

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First is the quarrel over the exit strategy. As stipulated by the Growth and Stability Pact, Euro-zone members are not allowed to run a fiscal deficit of more than three percent of their GDP, or national debts exceeding 60 percent of their GDP. However, the huge stimulus package agreed to at the London Summit to fight the world crisis and recession has left most of the Euro-zone members above the red lines and brought a few even to the brink of another form of crisis, the sovereign debt crisis. To consolidate the fiscal position is the remedy the EU prescribes for its member states who have suffered from external speculation, and also for stabilizing the euro. However, this exit strategy is deemed as “premature” by America, who is still plagued by a high unemployment rate and the so-called jobless recovery. As a result, the communiqué released after the Summit emphasizes both the importance of following through on fiscal stimulus and carrying out the “growth friendly” fiscal consolidation plans, leaving the readers completely at a loss.

Second is the financial sector reform. Although America and the major EU powers have all passed bills and adopted measures to overhaul their domestic financial sectors, it proves very difficult for them to produce something jointly at the international level. In fact, all of the four pillars identified in the communiqué in reforming the financial sector have the potential to cause clashes among the major powers. These four pillars are forming a strong regulatory framework, putting in place effective supervision, resolving and addressing systemic institutions, and conducting transparent international assessment and peer review. Take the first pillar, for example. The Basel Committee on Banking Supervision is working on a new global regime for bank capital, and is struggling to gain support from the 20 members. It is expected that a new capital framework will be forged at the Seoul Summit. However, it is very difficult to persuade G20 members to agree on such a plan in such a short period of time. There is not only a rift between the developed and developing economies, but also a perceptible gap between the developed countries.

The third is reforming the IFIs. In the spring conference held jointly by the IMF and the World Bank this year, member countries agreed on a plan to increase the voting power of developing and transition countries by 4.59%. However, the reform of quota share in the IMF seems to be more controversial and difficult. This task, again, is postponed to the Seoul summit. The problem is that even though the advanced countries all agree on the need to increase emerging powers’ quota share, none of them wants to see it happen at their own expense. A tentative plan produced by the IMF last year suggested a slight increase of US share to more than 17 percent, and more surprisingly, a decrease for most of the European countries and all the emerging members except for China. This episode highlights the complexity and difficulty of the reform of the IMF.

Although little had been achieved in the Toronto Summit, we shouldn’t forget that this summit took place when the world had not yet fully recovered from the international financial crisis, and that perhaps a new sovereign debt crisis will engulf most of the advanced economies if not handled properly. So the opening of the fourth G20 summit, amid the vociferous doubts about its effectiveness, legitimacy and representation, is still a sign of great success and reflects the unequivocal determination of the 20 countries to combat the crisis through vigorously promoting the reform of the world economic governance system.

The Toronto summit left much work to be done at Seoul. There are at least five issues that will be high on the agenda. Besides the two already mentioned above, the other three items are: promoting the developmental issue, building up a global financial safety network, and the institutionalization of the G20. All of them are big issues that entail a great deal of bargaining, debating and planning. While great breakthroughs may not be easy to achieve at the next summit, let us hope the momentum of the G20 and the spirit of cooperation and coordination will remain.

The author is associate research fellow of Institute of World Economic Studies,China Institutes of Contemporary International Relations(CICIR)