The historic G20 summit held in London on 2 April 2009 came out with a decisive outcome—to “fight back” the global recession with US$1,100 billion funding for the International Monetary Fund, regional development banks and international trade finance as against the accepted practice of injection of liquidity to create demand. The gathering stayed away from committing themselves to any new fiscal stimulus. Under the funding plan, US$750 billion will go to IMF, US$250billion to reinviogorate trade finance and US$100billion in multilateral development banks. The new funding for the IMF is ostensibly to support poorer nations hit hard by the crisis.

In fact, consensus eluded on a new global round of fiscal stimulus. The stimulus lobby of the US, UK and Japan finally yielded to pressure from Germany and France for tougher regulation to prevent future crises. But the G20 summit asserted that the fiscal expansion already planned over the next two years is equivalent to US$5,000 billion or a 4 per cent boost that will automatically compensate for the lack of any fresh fiscal stimulus.

Brown’s Day

This was evident in the words of Gordon Brown, British Prime Minister and host of the London summit, “This is the day that the world came together, to fight back against global recession. We will do what is necessary to restore growth and save jobs.”

Brown talked about a “common global approach” to clean up banks’ balance sheets though no details were forthcoming. The communique issued at the end of the summit spoke eloquently about restoring not only growth but also creating a fair and sustainable world economy. It added, “We recognise that the current crisis has a disproportionate impact on the vulnerable in the poorest countries and recognise our collective responsibility to mitigate the social impact of the crisis to minimise long-lasting damage to global potential.”

Tax Havens

Besides the funding measures, G20 leaders pledged to crack down on tax havens, extend regulation of the financial system to large hedge funds, set tougher pay rules in the financial services and oversee credit ratings agencies.

Tax Havens were a matter of concern for the Barack Obama administration in the US which had decided to go after world’s most secretive tax havens after it endorsed a legislation to crack down on them. The decision to force “secrecy jurisdictions” to reveal the identities of the super-rich and major corporations in places such as Jersey, the Cayman Islands and Switzerland will have a major impact on the revival mechanism.

Rough estimates suggest that an estimated US$13 trillion of untaxed wealth is held in offshore centres. Taxing them would add US$255 billion of revenue to governments, which is more than double the global aid budget to poor countries. The Organisation for Economic Co-operation and Development (OECD) took the initiave in publishing a blacklist of countries considered tax havens who do not co-operate with efforts to identify individuals and companies dodging taxes.

Stringent Regulation

On tighter financial regulation, the G20 agreed to “extend regulation and oversight to all systemically important Financial Institutions, Instruments and Markets” including the big Hedge funds. It also said that Credit Rating agencies would be registered and monitored for the first time, after the failing of credit ratings played a big part in exacerbating the credit crisis.

The communique said that the G20 would extend “regulatory oversight and registration to credit rating agencies to ensure they meet the international code of good practice, particularly to prevent unacceptable conflicts of interest.”

The communique noted, “major failures in the financial sector and financial regulation and supervision were fundamental causes of the crisis. Confidence will not be restored until we rebuild trust in our financial system. We will take action to build a stronger, more globally consistent, supervisory and regulatory framework for the future financial sector, which will support sustainable global growth and serve the needs of business and citizens”.

“We agree to ensure our domestic regulatory systems are strong. But we also agree to establish the much greater consistency and systematic cooperation between countries, and the framework of internationally agreed high standards, that a global financial system requires. Strengthened regulation and supervision must promote propriety, integrity and transparency; guard against risk across the financial system; dampen rather than amplify the financial and economic cycle; reduce reliance on inappropriately risky sources of financing; and discourage excessive risk-taking. Regulators and supervisors must protect consumers and investors, support market discipline, avoid adverse impacts on other countries, reduce the scope for regulatory arbitrage, support competition and dynamism, and keep pace with innovation in the marketplace.

French Pressure

At the end of the summit, Nicolas Sarkozy, President of France, addressed a press conference and claimed credit for the outcome that endorsed tighter regulation. According to Sarkozy, further financial regulation means that there would now “be an international norm which will define the capital base of banks”.

The President added, “Since Bretton Woods, the world has been living on a financial model, the Anglo-Saxon model – it is not my place to criticise it, it has its advantages - clearly, today, a page has been turned”. Sarkozy recalled his own role in persuading the Chinese President, Hu Jintao in accepting the publication of a list of tax havens by the OECD, despite China not being a member of the body.

Praising President Obama, Sarkozy said, “President Obama really found the way to consensus. He did not focus exclusively on stimulus. He was determined to enhance and step up regulation.”

Sarkozy gave an impassioned answer to a question about how ordinary people would see any difference after the G20 summit: “Getting ourselves to agree with the British and Americans on a reasonable trader remuneration regime – if that is not capitalism with a conscience I don’t know what is. Sixty percent of hedge funds are registered in tax havens. Putting hedge funds under supervision is not going to generate jobs in the textile industry. But we have to put behind us the madness of this time of total deregulation. We can’t say that this won’t have an impact on peoples’ lives.”

Angela Merkel, the German chancellor on her part described the G20 agreement as “a victory for common sense” and an “important step toward order” in markets.

Revival of Trade

The Communique noted, “world trade growth has underpinned rising prosperity for half a century. But it is now falling for the first time in 25 years. Falling demand is exacerbated by growing protectionist pressures and a withdrawal of trade credit. Reinvigorating world trade and investment is essential for restoring global growth. We will not repeat the historic mistakes of protectionism of previous eras. To this end: we reaffirm the commitment made in Washington: to refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organisation (WTO) inconsistent measures to stimulate exports”.

The communique said, “We will ensure availability of at least US$250 billion over the next two years to support trade finance through our export credit and investment agencies and through the MDBs. We also ask our regulators to make use of available flexibility in capital requirements for trade finance”.

India’s Position

India’s Prime Minister Dr. Manmohan Singh is happy at the outcome as the Summit yielded to the demand of developing countries like India to have a higher voting right in institutions such as the International Monetary Fund and the World Bank.

One of the key demands from India, represented by Dr. Singh was to negotiate a speedy conclusion of the Doha trade round and put some US$250 billion more into trade finance. That was accepted.

The G20 leaders also agreed to another demand from India for selling IMF gold reserves to raise US$6 billion to help out the world’s poorest countries with cheap loans over the next two to three years.

Besides India, Britain and the U.S., the G20 comprises Argentina, Australia, Brazil, Canada, China, France, Germany, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey and the EU.