PART IV - The 25 sentries take on the global turmoil

PART I -World braces for crucial summit
PART II -Demand deficiency threatens world order
PART III-Streets heat up as world faces tough choices
PART V -Financial stability a must for healing

The cure to any illness comes from the right diagnosis. In a similar vein, to discuss what the G20 should do and will do on April 2, one first needs to be clear on what is behind the crisis and why the crisis is taking so long to resolve.

First of all, while I am not a big fan of the maestro myself, easy U.S. monetary policy during the last years of the Alan Greenspan era did not cause the current mess, although it provided the necessary nice and warm cultivation environment in the form of a liquidity flush. Similarly, financial innovation was not the culprit, but lax financial supervision and regulation coupled with distorted incentives were.

But if this were all, we would not be dealing with a global crisis, just a bigger version of the numerous crises of the past two decades such as the time when the genius failed, savings and loans fiasco and the dotcom crash. At a more fundamental level were the global current account imbalances that have been eloquently brought to light by Financial Times economics editor Martin Wolf in his weekly columns for the past couple of years. These balances were to be corrected sooner or later; the catalysts above contributed to a rapid and therefore damaging unraveling, rather than a slow and steady adjustment.

Given the nature of the crisis, the first priority of the G20 should be to agree on a global response so that these current account imbalances will shrink rather than expand. After all, everyone needs to chip in wood to light a strong fire, as a proverb from China, which has started the largest stimulus package along with the United States, aptly puts.

However, imposing strict guidelines, such as the proposal by the International Monetary Fund of a fiscal stimulus of 2 percent of gross domestic product should be avoided on many grounds.

First, a one-size-fits-all jacket ignores each country’s unique structure. While the German stimulus seems to pale in comparison to the U.S. package when the actual numbers are compared, adjusting for automatic stabilizers, brings it to the same level. As Tolstoy noted, all happy families are alike, but every unhappy family is unhappy in its own way. Each country has different room for fiscal policy. The consequences of attempting a stimulus of Chinese proportions would be devastating for Turkey. So, the G20 should agree on general guidelines rather than specific targets.

But this is barely enough, given the financing woes of many emerging markets. Capital flows to emerging and poor countries is expected to retract to $165 billion in 2009 from almost $1 trillion in 2007. The IMF’s resources should at least be doubled to $500 billion, so that the IMF does not run out of funds soon.

Other related matters, such as defining a new role and drawing up new voting rights, should be put to sleep for now in favor of expediency. One exception could be extending reforms on doing business with emerging markets to low-income countries.

A third direction is a clear stance against protectionism. While a global protectionist backlash similar to the aftermath of the Great Depression is unlikely, anti-dumping cases and buy-domestic clauses are surging. Further protectionism would cause world trade to contract much more than the optimistic 9 percent forecasted by the World Trade Organization. A recent World Bank note reports that 17 of the very same 20 who had "underscored the importance of rejecting protectionism" in November at the summit in Washington, D.C., have resorted to protectionist measures since then.

Walking the walk

What I am concerned about is that the G20 will attempt at much more and end up achieving much less, especially as the agenda is more and more looking like a shopping list. For example, even more ambitious than an overhaul of the IMF, the G20 has been charged with setting up a global financial regulatory structure, creating an early warning system to prevent future crises and help the poor, who are starting to feel the effects of the crisis.

Some of the measures are debatable. The much-touted Spanish regulation model, where banks have to adapt cyclical capital provisioning, may help marginally at best. Similarly, global regulation may not be the optimal response, as Harvard-based Turkish economist Dani Rodrik has argued in a recent The Economist article. Other measures make sense from an economic point of view, but Homo sapiens are not only homo economicus, but also homo politicus. Such ambitious proposals are likely to divert the G20 from the real issue. It seems silly that many are concentrating on preventing future fires without first putting out this one. Moreover, a more ambitious list also means more potential sources of discord.

I hope the summit will not be diluted by demands for a new reserve currency or the anger at U.S. fiscal profligacy. Such outbursts reflect the worries about the decline of the dollar and, at a more fundamental level, who will bear the burden of the U.S. stimulus at the end of the day, which is another debate that should be postponed. If the G20 does not act decisively, there will not be many trees left to save in the next wildfire.


* Emre Deliveli is a Daily News columnist and an independent consultant. Write him at emre.deliveli@gmail.com