From the Globe and Mail, writer Kevin Carmichael explains the agreement and gives a little history on how the global economic crisis helped to make it.
In a surprising show of faith in an institution that has met only four times, leaders from countries as disparate as Germany and Saudi Arabia agreed Sunday in Toronto to subject their domestic economic programs to peer review within the G20.
By this fall’s Seoul summit, countries have promised to explain in some detail how their domestic policies are helping to achieve the G20’s goal of reducing the excessive mismatches in spending and saving that exacerbated the financial crisis. Then, with the help of the IMF and its expertise in economic modelling, the other members will assess whether each partner is doing enough.
The commitment is historic.
The promise by each leader agreed to put his or her cards on the table adds a level of transparency and credibility that the process lacked until now. While economic co-ordination has been tried before, it has been with lesser officials or the International Monetary Fund as the arbiter. Now, the accountability rests at the highest levels. Where previous failures could be blamed on bureaucratic deadlock, global economic co-operation is now a political imperative in the hands of presidents and prime ministers.
The increased transparency could even encourage competition among members to implement policies that curry favour with investors.
Since the review remains a voluntary exercise without penalties, success will depend on G20 members taking the process seriously, both by submitting credible policies and showing the courage to offer tough, but fair, criticism. Given how these countries allowed the global economy to get so out of whack in the first place, there is reason to be skeptical they have what it takes to deliver, especially as the economy improves.
In Pittsburgh, the G20 acknowledged that self-interested policy making had created the conditions for the global recession that was sparked by the 2008 credit crisis.
U.S. consumers spent too much borrowed money, an unsustainable circumstance that the world’s major exporters were all too happy to exploit.
In fact, China underwrote the spending by purchasing U.S. debt in an effort to keep its currency low against the dollar, a policy that had the effect of lowering American interest rates. Big oil exporters run up surpluses of their own by using their wealth to buy U.S. bonds instead of investing in their domestic economies. Continental European countries refused to confront rigid labour markets that constrained investment and productivity.
The IMF and World Bank submitted studies that showed the G20 could generate GDP of $4-trillion, create tens of millions of jobs and lift even more out of poverty if countries actually made the changes necessary to achieve more balanced growth.
The IMF warned recently that trade imbalances, which narrowed after the financial crisis, are starting to move back to pre-crisis levels. The U.S. still has a current-account deficit that is more than 3 per cent of GDP, while China and Germany run current-account surpluses that are about 4 per cent of GDP and 5 per cent of GDP respectively.