The security clampdown will be the same. The press corps will gather in droves. The spin doctors will be in full flow, claiming victory for their respective governments. But in every other way the meeting that British Prime Minister Gordon Brown will host next Thursday will be different from the last gathering of world leaders hosted by a British prime minister — Tony Blair’s 2005 Gleneagles summit.
The world has changed irrevocably since the financial crisis began in 2007, grew last year and will probably result in this year being the first that the global economy has contracted since World War II. In Brown’s view, the era of laissez-faire is over. Although they disagree about the means, US President Barack Obama, French President Nicolas Sarkozy and German Chancellor Angela Merkel agree.
A new world order is not going to be shaped in one day, but next week’s meeting can help chart the right course, creating the framework for reform at a national level. Here are the five big areas that the G20 should be concentrating on:
Proposal 1: It’s time for a new economics
The financial crisis and the environmental crisis are one and the same: crises of excess. There will be no lasting recovery without recognizing that the world needs to slow down. For central banks, it means a wider range of instruments so they can lean against the wind. More generally, it involves adopting the precautionary principle of elevating the local above the global — and having the humility to accept that the G20 doesn’t have all the answers.
Proposal 2: A Green New Deal
If former US president Franklin D. Roosevelt’s big idea for the Great Depression was public works, then it makes sense to use this crisis to start the long, hard process of making economies more sustainable and less dependent on fossil fuels. A combination of low interest rates and fiscal expansion is ideal — provided the investment is used productively rather than for speculation. That will involve two concepts that have been anathema during the heyday of laissez-faire: industrial policy and credit controls.
For Britain, a Green New Deal (GND) is even more vital than for other developed countries, since the economy is acutely unbalanced, is experiencing a manufacturing meltdown almost on a par with that of the early 1980s and has a strong science base that could, with the right support, spark a new industrial revolution. But a GND is also vital for the rest of the world: The US is responsible for 25 percent of global carbon dioxide emissions with only 4 percent of the world’s population; the problems of the big three carmakers provide Obama with an unprecedented opportunity to send the gas guzzler to the scrapheap. Rebalancing the global economy means countries such as China must boost domestic demand; one way to do that would be through investment in greener energy.
Proposal 3: Reform the IMF
One reason the big Asian creditor nations built up huge surpluses before the crash of 2007 was that they were badly scarred by the financial crisis a decade earlier and were determined never again to be at the mercy of the IMF. The IMF’s response — as it has always been since 1944 — was that countries seeing capital flight should be subject to austerity programs.
So, reforms must overhaul the fund — not just to beef up its surveillance role but to make it less dominated by developed nations (especially the US) and less driven by the dogmatic belief that free movement of capital is always a force for good. The fund’s big shareholders should go back to Keynes’s blueprint and accept that the burden of adjustment in crises should fall on both creditors and debtors.
It is a concern that IMF reform appears to be low on the G20 agenda, particularly as the weakening grip of the US over the global economy makes change easier. The era of the unipolar world dancing to the tune of the Washington consensus lasted a scant two decades between the collapse of communism and the collapse of Lehman Brothers.
Proposal 4: Make the global financial system more progressive
The humbling of Wall Street and the City of London has made them dependent on support from the taxpayer and opened up the prospect for reform. The most pressing need is for action against tax havens, not just because the money lost to national exchequers could be better used but because the big financial institutions can move offshore if threatened with tougher regulation. There seems to be greater G20 unanimity on tax havens than on any other issue, and the summit should insist on tax havens providing information to any government that asks for it. The G20 should also back a currency transaction tax — set low initially — that would provide the money to hit the UN millennium development goals.
Proposal 5: Tougher global regulation
Brown should forge ahead with his plans for an international college of supervisors to provide cross-border oversight of multinational banks. The G20 should start work on an international agreement to split retail and investment banks — an updated form of the Glass-Steagall reform in the US in the 1930s. The capital adequacy regime for banks should be toughened up; credit-rating agencies should be made statutorily independent of the companies they monitor; the more exotic forms of derivatives products should be subject to the same sort of licensing regime as new drugs. We will know governments are really serious about reform when they link the pay of regulators to the pay of bankers.
Larry Elliott is the Guardian’s economics editor.
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