Global approach to Global Financial Crisis still missing

By Professor Fariborz Moshirian  Monday, 6 April 2009  Features

The G20 Summit in London produced extensive documents as a way of articulating some of the underlying causes of the current global financial crisis and the way the G20 leaders are going to address them, including reform of the international financial system. They have come up with a new board, referred to as the Financial Stability Board (FSB), to replace the Financial Stability Forum, writes Professor Fariborz Moshirian from the School of Banking and Finance at the Australian School of Business.

There is no question that the G20 Communication was intended to e​nsure that there is one united voice with clear articulation of how they are going to address some of the factors that have contributed to the current global financial crisis. The fact that we are now seeing the G20 Forum as opposed to say G7 or G8 should be welcomed. However, we should also accept that the global economy in the 21st century is very different to what we witnessed during the Great Depression and hence simply gathering some national leaders with their national agendas as the key priority may not necessarily lead to effective, speedy and enduring outcomes.

One of the key points in the G20 Communication states that "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 restriction.. or inconsistent measures to stimulate exports." However, despite such rhetoric, one has to be more realistic about this and a number of other statements in their communication.

For instance, despite a commitment to free trade, one should note that since the G20 Summit in Washington in November 2008, 17 countries from amongst the G20 group introduced 47 trade restricting measures. The EU applied antidumping duties on US biodiesel. The EU also introduced export subsidies on butter, cheese and milk powder. China and India embarked on export subsidies, while India banned the importing of toys from China. Russia raised tariffs on used autos. Beside the slogan of "Buy America", non-tariff barriers for restricting trade such as barriers in country ports like Indonesia is now a way of slowing down flows of foreign goods into various countries. In addition, countries are using "legal Protectionism", as allowed by the WTO, to increase their tariffs without technical violation of free trade. Of course, one has to recall that subsidies for the auto industry in different parts of the world may well reach US$48 billion during 2009, as stated by the World Bank.

The G20 Communication does not commit itself to the successful conclusion of the Doha round of negotiations during 2009. Instead, they simply reiterate their commitment to the Doha round without providing any deadline for it. They are committed to providing US$250 billion in the form of trade finance over the next two years, as the international credit liquidity crisis affected trade finance.

However, this does not cure the underlying cause of protectionism that is well entrenched in national economic activities which now support domestic products and projects. Furthermore, despite the commitment of the G20 group to flows of capital around the world, with national rescue packages for national financial institutions, a number of countries amongst the G20 group have implicitly stipulated support for national projects and national companies as a way of ensuring that lending activities by financial institutions are more focused within national boundaries. Therefore, one has to wait and see how some of the statements of the G20 group will translate into real change in the global capital market.

Foreign capital outflows from Eastern European and other emerging countries back to the US and European countries have created a significant down turn in economic activities and in some cases led to foreign exchange crises. The injection of capital into the IMF fund to the tune of US$750 billion does not necessarily mean that the IMF's major role has been enhanced. One of the main reasons for the massive capital injection into the IMF fund is because it is politically far easier for Western Europe and other countries to assist some of the embattled Eastern European countries through the IMF than directly through Germany or France whose taxpayers will be furious to see their money flowing out to support jobs in other countries. Of course, there is now an expectation that China will make major contributions to the IMF fund. As to whether the IMF will have enough funding left to support other emerging countries in the next 12 months, we will have to wait and see.

At the same time, while we should welcome the emergence of the Financial Stability Board as a new entity to work with national regulators on a number of fronts, it is too unrealistic to expect a new Board to act almost as a super-national entity in an environment where not all national regulators will be able or willing to fully cooperate with this new Board, particularly when national interest could overtake other considerations. Furthermore, in the presence of a number of offshore centres, one has to wonder how the FSB could have jurisdiction over such major financial centres.

We are living in the era of "financial globalisation" where toxic assets are moving instantaneously from one bank's balance sheet in one continent to another bank's balance sheet in another continent or in an offshore centre. While we should be happy to see the significant progress made during the London Summit in identifying the key factors contributing to the current global financial crisis, we are yet to see global institutions and global approaches that promote global leadership, global confidence and global ownership over problems of trade, finance and the environment that are ultimately global in nature.

A version of this opinion piece was published in the Australian Financial Review on Saturday 4 April 2009.