A substantial deal

It may be an exaggeration to describe the series of measures agreed upon by the leaders of the world’s largest economies at the G20 London summit as a global new deal or as representing a new architecture for the international financial system.

They nevertheless represent substantial progress in addressing the sharp downturn and the financial crisis and in stepping up assistance to the developing world. When the discussion of the global economy, which had long been the preserve of the G7 club of industrial nations, was opened up to the 19 largest economies of the world, including emerging markets and developing countries, there were fears that decision-making would be very difficult in such a heterogeneous group. The run-up to the summit did seem to confirm the fears, with rhetoric running high among the western nations, particularly France and Germany on one side and the United States and the United Kingdom on the other.

The leaders were, however, aware of the disastrous consequences a failure of the summit would have for global sentiment. In the event, confronted with the most severe crisis since the Great Depression of the 1930s, leaders of nations across the political spectrum summoned the political will in the final hours of the London summit to go beyond high-sounding declarations and come up with concrete plans.The most significant move is to provide additional resources of $1.1 trillion to the International Monetary Fund, the World Bank, the Asian Development Bank, and other multilateral agencies. Of this, $500 billion in the form of additional resources will enable the IMF to assist countries in trouble and another $250 billion of Special Drawing Rights will be created, of which $70 billion will be available to the developing countries.

It is somewhat of a disappointment that while the review of the quotas in the IMF is to be brought forward by two years to 2011, the demand of India and China to redistribute the quotas to reflect the current economic strengths of the members rather than the position in the 1940s has not yet found wider acceptance.The other significant achievement is the decision to extend the regulatory framework to cover the shadowy areas of hedge funds and derivative markets, which are unregulated but which with their extensive connection with the financial system hold the potential to stabilise the economy as a whole.

The issue of tax havens and banking secrecy had threatened to lead to a deadlock at the summit, with France demanding that the G20 set up a naming and shaming system as well as tough sanctions against countries that fail to meet international banking information disclosure norms. In the end, the Group declared that the era of banking secrecy was over and got the Organization of Economic Cooperation and Development to issue a list on compliance of different jurisdictions with disclosure norms.