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Saturday, April 04, 2009

The G20 agreement: a good first step but the debate about market values continues

Despite worries it would fail, the G20 London Summit has finished with an agreement to do more to help the world economy. The world’s poor were not forgotten. There will be more to talk about and do in the months ahead.

The world economy is facing a significant slowdown. The OECD forecasts that on average GDP in its member countries will fall by an average of 4.3% this year. The US is forecast to see GDP fall 4.0% and UK GDP is predicted to be down 3.7%. Such a rapid fall in income does not come without costs and unemployment is expected to rise above 10% in many industrialised countries. For the UK, that would mean over 3 million unemployed (from around 2 million now).

Meanwhile, the drop in demand in the richer countries is impacting the poorest in the world. While food prices have held up, demand for metals and other commodities has fallen. Demand for manufactured products is also dropping. This is affecting the job prospects of millions. Moreover, countries do not receive the tax revenues from extractive industries that they have become used to.

The financial system remains in a fragile state and governments have to continue to take action to support banks and help them deal with ‘toxic’ assets. This is the first step to restoring economic confidence. There are some early signs that confidence, while subdued, has at least recovered from the lows of a few weeks ago but this needs to be sustained. In addition, governments need to take action to stimulate their economies.

The Summit did not announce a fiscal expansion beyond what governments are already putting in place but leaders did agree a programme to help support the global economy worth $1.1 trillion. This represents an additional $500bn available to the International Monetary Fund (IMF), a new allocation of Special Drawing Rights worth $250bn, a boost to trade finance worth $250bn, and extra lending by Multilateral Development Banks worth $100bn. IMF gold sales will also be used to help provide finance to poor countries ($6bn). These combined funding measures are not going to be pumped into the global economy immediately but will stand ready to be used and even its existence should help increase confidence.

Leaders agreed to resist trade protectionism (and so avoid repeating a mistake made during the Great Depression in the 1930s) and announced measures to improve the regulation and transparency of financial institutions and markets. They restated their commitment to meeting the Millennium Development Goals, achieving increases in aid budgets and further debt relief, and to creating green jobs.

The fact that the leaders seemed to agree at all will probably help sentiment. However, there was little in the final communiqué about the values that Gordon Brown and Australian Prime Minister Kevin Rudd talked about in St Paul’s Cathedral earlier in the week. They would probably argue that the Summit agreement represented first steps in putting those values into practice. Besides, as President Obama noted, more than one meeting is required to solve the problems facing the global economy. This summit was never going to come up with a blueprint for the reform of the global market economy. It could have done much damage had it failed: instead, it was part of the solution and the debate about what kind of society and market economy we want continues. Nevertheless, what matters now is the actions taken once the leaders have returned home

An article I have on the CSM website.

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