–  V.Srinivas IAS –

In 2008-09, the G20 navigated the global economic recovery through one of the worst economic crisis the world had seen since the great depression. This article covers the journey of G20 through 3 summit meetings in Washington DC in 2008 and London and Pittsburgh in 2009. It was multilateralism – many countries working in unison that saved the world economy.

In 2008, Global Output was contracting at a pace not seen since 1930s. Trade was plummeting, jobs disappearing rapidly. The world was on the edge of a depression. The Summit on Financial Markets and the World Economy was held on November 15, 2008 in Washington DC amid serious challenges to the world economy and financial markets. The Leaders of the Group of Twenty expressed determination to enhance cooperation and work together to restore global growth and achieve needed reforms in the world’s financial systems. The root causes of the 2008 crisis were inadequate appreciation of the risks building up in financial markets and insufficiently coordinated macroeconomic policies. These developments led to severe market disruptions.

The G20 formulated the Common Principles for Reform of Financial Markets. The common principles for reform were (a) Strengthening Transparency and Accountability; (b) Enhancing Sound Regulation; (c) Promoting Integrity in Financial Markets; (d) Reinforcing International Cooperation and (e) Reforming International Financial Institutions. There was an urgent need for intensified international cooperation amongst regulators, to bolster investor protection and prevent illegal market manipulation. The Bretton Woods Institutions were in need of urgent reform. The Financial Stability Forum needed to include emerging market countries. Surveillance by the International Monetary Fund and standards setting by the Financial Stability Board were top priority. The lending capacities of IMF and World Bank needed to be bolstered to provide emerging and developing countries access to adequate credit.

The Leaders of the G-20 confronted with a massive Global Financial Crisis, reiterated their commitment to an Open Global Economy.They felt that increasing financial sector regulation was necessary but nothing should be done to contract capital flows and reforms should be grounded in a commitment to free market principles. Continued partnership, cooperation and multilateralism was the clarion call given the Leaders of the G-20 in Washington DC in November 2008.

At the London Summit of April 2009, the Leaders of the Group of Twenty faced the greatest challenge to the world economy in modern times. Global economic activity was falling and turning around the global growth depended critically on concerted policy actions and concerted policy support. The crisis had deepened since November 2008, and the global crisis required a global solution. It was in this backdrop that the Leaders of the Group of Twenty adopted 3 major declarations – the Global Plan for Recovery and Reform, the Declaration on Strengthening the Financial System and the Declaration on Delivering resources through International Financial Institutions.

The Global Plan pledged to (a) restore confidence, growth and jobs; (b) repair the financial system to restore lending; (c) strengthen financial regulation to rebuild trust; (d) fund and reform international financial institutions to overcome the crisis; (e) to promote global trade and invest to underpin prosperity and (f) build an inclusive green and sustainable recovery. To restore growth and jobs, the Central Banks of the G-20 took exceptional action. Central Banks cut interest rates. Governments put together the largest fiscal and monetary policy stimulus and agreed to put in place credible exit strategies from expansionary policies. The Financial Stability Board (FSB) was established including all G-20 countries, Spain, and the European Union. The G-20 recognized the human dimension of the crisis, and agreed to create income-generating measures for those who lost jobs. The Global Plan for Recovery and Reform was accompanied by the Declaration on Delivering Resources through International Financial Institutions and Declaration on Strengthening the Financial System. The resources to the IMF were trebled to US $ 750 billion, a new SDR allocation of US $ 250 billion and additional resources from IMF gold sales for a US $ 1.1 trillion program lending.

“It Worked”  – was what the Leaders of the Group of Twenty said on September 25, 2009.The G-20 economies had implemented wide reaching policy measures that helped stabilize the confidence, limit the threat of financial stability, provided impetus to economic growth. A sense of normalcy had returned. There was a positive impact on growth and employment.That said the process of recovery and repair was not complete. The global economy was beginning to grow again, but the recovery was sluggish. Financial conditions continued to improve but markets remained dependent on public support. The Banking systems were undercapitalized and saddled with impaired assets. The biggest risk was a premature exit from accommodative macroeconomic policies. In the years ahead, the G-20 faced the key challenge to map a course between unwinding public interventions in a time-bound manner and maintaining market confidence for sustainability of public finances. They also needed to evolve clear communication of exit strategies. Central Banks needed to unwind their extraordinary liquidity and credit support and start tightening their monetary stance.

The path from Pittsburgh in September 2009 was to Canada in June 2010 and then to Korea in November 2010.

About the author

V.Srinivas IAS

Senior Bureaucrats and Author

V.Srinivas is an IAS officer of 1989 batch, currently posted as Chairman Board of Revenue for Rajasthan and Chairman Rajasthan Tax Board.

He has served as Advisor to Executive Director (India) in the IMF, Private Secretary to Finance Minister & External Affairs Minister Government of India and Planning & Finance Secretary Rajasthan.

Disclaimer : The views expressed by the author in this feature are entirely his  own and do not necessarily reflect the views of INVC NEWS.