The Pittsburgh summit of G20 leaders held from 24-25 September 2009 was a cool event unlike previous summits in Washington and London as signs of economic recovery are in sight and many countries are beginning to return to modest growth. So the leaders were able to hold their discussions in less of a crisis atmosphere.

While declaring that the global economy appeared to be stabilizing after the severe downturn of the past year, the leaders struck a tone of cautious optimism, saying it was important not to withdraw the massive amounts of stimulus they had provided. “In the short run, we must continue to implement our stimulus programmes to support economic activity until recovery clearly has taken hold,” the leaders expressed in a communique, at the end of the summit.

The G-20 countries include Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, the United States and European Union.

By effectively coordinating short-term responses to the global economic meltdown during its summits in Washington DC in 2008 and London in 2009, the G-20 has shown that, at least in the short term, it can work across capitals, regulatory structures and continents to implement broad-based economic policies.

Arrival of G20

US President Barack Obama and the other leaders declared that from now on, their meetings of the Group of 20 nations would be the primary way of coordinating global economic policy, the job that had been done for more than 30 years by a smaller group of the wealthiest countries called G-8.

“The old system of international economic cooperation is over. The new system, as of today, has begun,” declared British Prime Minister Gordon Brown. He said that the G-20, which includes not only developed nations but fast-growing emerging markets such as China, Brazil and India, is the “premier economic organization for dealing with economic management around the world.”

The Leaders’ Statement (http://www.pittsburghsummit.gov/mediacenter/129639.htm) issued at the conclusion of the G20 Pittsburgh summit was a watershed, in as much as it made an effort to be more inclusive in matters of globalization, by offering to redistribute real decision-making power in key institutions and groupings from the rich countries who dominated the 20th century to a larger group of 19 nations including 11 developing countries – five from Asia, three from Latin America, two from Europe and one from Africa.

The summit agreed to shift at least five percent of the IMF quota share from over-represented to under-represented countries using the current quota formula as the basis. This could imply gains for India and China, which are being seen as the main gainers of the proposed change, but China is likely to gain more. It has a voting share of 3.7 percent.

The IMF quota review is slated to be completed by January 2011 and the G-20 leaders have sought an acceleration of work towards bringing the review to a successful conclusion. India’s Prime Minister, Dr. Manmohan Singh said in a press conference in Pittsburgh that the developing and BRIC countries had suggested seven percent rebalancing of quota share. In that case, the developing countries’ share would have exceeded 50 percent.

Acknowledging the increasing influence of emerging economies, the leaders also decided to boost the voting power of developing and transition countries at the World Bank by at least 3 percentage points. A dynamic formula that primarily reflects countries’ evolving economic weight would be adopted at the World Bank, the leaders said in the concluding statement at the Pittsburgh Summit.

Under a deal struck in February, the developing countries’ share of the World Bank’s votes were agreed to be increased to 44 percent. The G-20 decision at Pittsburgh would add to that increased level.

Strengthening IMF

The successful inauguration of the US$283 billion International Monetary Fund (I.M.F.) Special Drawing Rights facility to improve availability of funds in all countries, as agreed upon at the London summit in April has strengthened the G-20. Reportedly, developing and emerging countries have drawn down US$100 billion from the facility. Almost US$18 billion of the drawn-down funds has reportedly gone to poor countries. In addition, the G-20 successfully boosted IMF resources by US$500 billion as part of a renewed and expanded IMF to provide borrow facility to support poor countries.

The G-20 also agreed to phase out, over the medium term, inefficient subsidies on fossil fuels. India argued for a phased reduction in order to protect the interests of the poor. Also the commitment to bring the most powerful nations for a regular, ongoing scrutiny for checking conformity in policy framework was reiterated. The commitment of G20 members to conclude the Doha Development Round of trade talks in the first half of 2010 was also significant.

The communique also addressed issues such as restraining excessive bonuses paid to bankers to stop financial institutions from engaging in the risky practices that contributed to the crisis. However, the final document was mum on specific caps, something that France had pushed for and America vehemently opposed. A US push for stronger requirements of bank capital to cushion against loan losses was included with the specifics over how the capital would be determined, left for future meetings.

FSSBG

The summit statement added yet another acronym to the lexicon of global diplomacy: FSSBG (Financial Stability Board) or a framework for strong, sustainable and balanced growth. It called upon member nations of the G20 to ensure that their domestic economic and monetary policies are consistent with global economic health. To assess this, they will have to subject themselves to peer-review and resort to corrective steps.

Therefore, G20 finance ministers, aided by the IMF, will regularly assess the implications and consistency of fiscal and monetary policies, credit growth and asset markets, foreign exchange developments, commodity and energy prices and current account imbalances.

This scrutiny would apply to all, including the most powerful nations. This reflects the integration and resultant interdependence of different national economies. By creating the Financial Stability Board, G-20 is sending a strong signal that it can coordinate global efforts to strengthen financial regulations and operations.

The leaders were also in agreement to a US proposal for a “framework for strong, sustainable and balanced growth” to deal with such issues as China’s huge trade surpluses and the soaring US budget deficit. In the final communique, the G-20 talks about developing objectives that each country would pursue to deal with their imbalances through a process that will include peer reviews by the other nations with help from the International Monetary Fund. The communique underscores that the process would be successful only if it was supported by candid, even-handed and balanced “analysis of our policies.”

Outwardly, it seems that G-20 finance ministers and central bank governors have so far managed successfully a coordinated plan to inject nearly US$5 trillion stimulus funds into the global economy. But what worries the observers is the plan for an assessment shorn of penalties would not lead to hard choices in policy changes and conformity to a regulatory stand on fiscal matters. Such a clause would have added more glitter and stability to the summit to call the summit a major success.