Returning from a week's vacation, I've been catching up on the G20 summit in Pittsburgh. I am moved, of course, by the FT's strictures against cynicism, but one is still entitled to ask what was achieved.
Certainly, the communique is full of fine promises and commitments. The FT summarises:
They agreed to: avoid premature withdrawal of stimulus; plan their exit strategies; launch a "framework for strong, sustainable and balanced growth"; strengthen financial regulation, via reformed rules on capital adequacy and remuneration of bank employees; reform the global institutional architecture, including reallocation of quotas in the IMF; phase out fossil fuel subsidies; "bring the Doha round to a successful conclusion in 2010"; reach agreement in Copenhagen on climate change; and meet twice in 2010, first in Canada and then in South Korea.
Well done. But was there ever any risk that they would promise instead to withdraw stimulus too soon, commit themselves to not thinking about their exit strategies, strive to make financial regulation less effective, increase fossil-fuel subsidies, abandon the Doha round, pledge to reach no agreement on climate change, or say "we may meet again next year, or we may not"? I didn't think so.
The G20 is a far better forum for international economic co-operation than the G8. That is an important symbolic change, and it is good to see it formalised. Even so I think that Simon Johnson is right to say that if you ask people in a month what was accomplished in Pittsburgh, you'll get a blank stare.
Actually Johnson goes further, and says that the summit made things worse, by making it more likely that financial reform--in particular, moving towards more demanding bank capital requirements--will proceed at the pace of the most reluctant reformers. It would be better, he argues, for the US to press on alone. International co-operation is an obstacle to prompt action.
Possibly. As a rule, that is a line of argument I am drawn to. In this case, though, I doubt it. An internationally co-ordinated bank capital regime, aside from making more sense on its merits, has a better chance of overcoming domestic political resistance, as I argued here. Johnson says, "It's time to get past the thinking that our economic prosperity is tied to the 'competitiveness' of the financial sector, when that means doing whatever finance wants and keeping capital standards low." I agree, but the challenge is to win the political argument. Complaints about having to compete on an unlevel playing field count for a lot with US politicians.
As you may notice, the logic is WTO-like. Unilateral trade liberalisation usually makes sense, but the politics goes more smoothly if import barriers are lowered multilaterally. Admittedly, the WTO looks like a dead end right now. In some ways it has indeed become an obstacle to trade reform, owing I would argue to the complexity of the current disputes and undue enlargement of its mission. But devising new bank-capital standards is a simpler exercise, and international co-ordination therefore ought to be more help than hindrance. The communique promises joint action. We'll see.
Here is a further reading I found useful on the subject of capital requirements, by Douglas Elliott at Brookings. (The study was commissioned by the Pew Financial Reform Project.) What difference would higher bank capital standards make to the volume of bank lending, to bank profitability, and to the cost of loans? Elliott works through the numbers. It is an incomplete analysis, as he says, because it ignores some second-round competitive effects. (He promises another paper.) It is not an easy read, either. But it is very helpful in thinking through the implications and I recommend it.