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Any return to strong, sustainable, and balanced global growth will require an ambitious, broadly shared and supported plan for structural reform and its implementation.
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Reshaping Global Economic Governance and the Role of Asia in the Group of Twenty (G20)
Any return to strong, sustainable, and balanced global growth will require an ambitious, broadly shared and supported plan for structural reform and its implementation.
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Any return to strong, sustainable, and balanced global growth will require an ambitious, broadly shared and supported plan for structural reform and its implementation.
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Attribution Non-Commercial (BY-NC)
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Descargue como PDF, TXT o lea en línea desde Scribd
in the Group of Twenty (G20) Prepared under Asian Development Banks Technical Assistance 7501 Asias Strategic Participation in the Group of Twenty for Global Economic Governance Reform April 2011 2011AsianLevelopmentBank Allrightsreserved.Published2011. PrintedinthePhilippines l3BN978-92-9092-280-3 Publioation3tookNo.RP1102850 Cataloging-ln-PublioationLata ReshapingglobaleoonomiogovernanoeandtheroleofAsiainthe0roupof1wenty(020) MandaluyongCity,Philippines:AsianLevelopmentBank,2011. 1.0lobalLoonomio0overnanoe 2.Asiaandthe0roupof1wenty(020) l.AsianLevelopmentBank. 1he views expressed in this publioation are those of the authors and do not neoessarily reteot the views and polioies of the Asian LevelopmentBank(ALB)oritsBoardof0overnorsorthegovernmentstheyrepresent. ALBdoesnotguaranteetheaoouraoyofthedatainoludedinthispublioationandaooeptsnoresponsibilityforanyoonsequenoe oftheiruse. By making any designation of or referenoe to a partioular territory or geographio area, or by using the term oountry in this dooument,ALBdoesnotintendtomakeanyjudgmentsastothelegalorotherstatusofanyterritoryorarea. ALBenoouragesprintingoroopyinginformationexolusivelyforpersonalandnonoommeroialusewithproperaoknowledgmentof ALB.usersarerestriotedfromreselling,redistributing,ororeatingderivativeworksforoommeroialpurposeswithouttheexpress, writtenoonsentofALB. Note: lnthisreport,$referstou3dollars. AsianLevelopmentBank 6ALBAvenue,MandaluyongCity 1550MetroManila,Philippines 1el+6326324444 lax+6326362444 www.adb.org lororders,pleaseoontaot: LepartmentofLxternalRelations lax+6326362648 adbpubadb.org iii Contents Listof1ablesandligures iv loreword v Aoknowledgments vii Abbreviations viii Pighlights ix lrameworkfor3trong,3ustainable,andBalanoed0rowth 1 linanoe3eotorReform 11 Reformoflnternationallinanoiallnstitutions 18 Relationshipbetween0lobalandRegionallinanoiallnstitutions 21 0loballinanoial3afetyNets 26 1rade 31 Levelopment 34 LnergyandClimateChange 38 1hePerspeotivefromLevelopingAsia 46 Referenoes 59 iv Tables and Figures Tables 1 3ummaryoflnternationalMonetarylundvotinganduota3hare3hifts 19 2 lnternationalMonetarylundNewlaoilities 28 3 0reenlnvestmentin0lobalLoonomio3timulusPlans 44 Figures 1 3overeignCreditLefault3wap3preads 2 2 CurrentAooountlmbalanoes 3 3 CurrentAooountComposition 6 4 loreignLxohangeReserves 7 5 RealLffeotiveLxohangeRates 8 6 BankConoentrationofAssetsAdvanoedLoonomies 15 7 0reenhouse0asLmissions 39 8 3ouroesof0LP0rowth,byLxpenditureApproaohLmergingAsia 47 9 lntraregionalLxportsandLxohangeRateLmergingLastAsia 50 10 linanoialAooountllows 50 11 3ouroesof0LP0rowth,by3eotorLmergingAsia 56 iv v Foreword 1he global tnanoial and eoonomio orisis left in its wake important lessons we oannot ignore. Anyreturntostrong,sustainable,andbalanoedglobalgrowthwillrequireanambitious,broadly sharedandsupportedplanforstruoturalreformanditsimplementation. 1wo important and fundamental ohanges are taking plaoe in the post-orisis world. lirst, the orisis prompted unpreoedented polioy ooordination aoross borders and oontinents to build a oolleotiveresponsenotjustbetweenlarge,advanoedeoonomies,butwithstrongpartioipation from emerging market eoonomies. 1his rise of emerging market eoonomies heralds a signitoant ohange in the global eoonomio and politioal order. 3eoond, the orisis greatly undermined the oonoept of self-regulating free markets, whioh has long dominated the world of tnanoe. 1he orisishasgeneratedmeaningfuloritiquesofsuohanapproaohand,inresponse,anewwaveof globalization will likely take plaoe in a more texible and multipolar fashion. Anewfoundationisneededtoresumeeoonomiodevelopmentandgrowthonebasedonresolving four oentral global issues. lirst is an orderly resolution of global imbalanoes. with eoonomio reooveryvariedindepthandspeed,globalimbalanoesareagainontherise,posingathreatto the sustained reoovery. 3eoond is strengthening the global tnanoial arohiteoture to safeguard tnanoial stability, more so beoause the impetus for reform is weakening as the urgenoy of the orisis fades. Already, efforts to reform distressed tnanoial systems in advanoed eoonomies have enoounteredstrongresistanoe.1hird,theglobaleoonomiogovernanoesystemshouldbemore inolusive, to better reteot new emerging eoonomies. while the broader 020 has replaoed the 07astheworldspremierforumforeoonomiooooperation,ithasyettoprovideeffeotiveglobal eoonomio governanoe. And tnally, eoonomio growth and development must be made sustainable. with the polioy foous shifting from orisis responses to systemio management of the post-orisis eoonomy, the 020 is now taking responsibility for steering reforms to aohieve sustained and balanoed growth for all while safeguarding global tnanoial stability. withstrong,robusteoonomies,Asiaiswell-positionedtoassumeits020responsibilitiesandtake theleadintheinevitableglobalrebalanoingprooess.1hisreportisdesignedtoprovidestrategio guidanoeforAsianmembersofthe020toforgeastrongregionalpositiononglobalissues.By loreword vi doing so, they oan make a substantive oontribution to sustained and balanoed growth for the worldwhileensuringtheregionsdevelopmentohallengesandprioritiesaremet. without tighter ooordination, partioularly between traditional and emerging eoonomio powers, we will fail to preserve the development gains of the reoent past, let alone tnding any lasting solutions to pressing global problems. Lrawing on the experienoe and knowledge of both the AsianLevelopmentBankandthePetersonlnstituteforlnternationalLoonomios,thisreportwill provide essential guidanoe for building a oooperative and ooherent eoonomio framework that supportsandpromotessustainedandbalanoedgrowthforall. C.lredBergsten ParuhikoKuroda Lireotor President PetersonlnstituteforlnternationalLoonomios AsianLevelopmentBank vii Acknowledgments 1hisreportisanoutoomeoftheAsianLevelopmentBanks(ALBs)ResearohandLevelopment 1eohnioal Assistanoe projeot 7501, Asias Strategic Participation in the Group of Twenty (G20) for Global Economic Governance Reform. 1he projeot was oonoeptualized, supervised, and ooordinated by Cyn-oung Park under the overall guidanoe of lwan Azis, Pead of ALB's 0ftoe of RegionalLoonomiolntegration. 1hereport,jointlypreparedbyALBandthePetersonlnstituteforlnternationalLoonomios(PllL), draws on important lessons from the global tnanoial orisis to offer polioy reoommendations in the areas of growth, tnanoe seotor reforms, international tnanoial institution reforms, the link between global and regional tnanoial institutions, global tnanoial safety nets, trade, development,andenergyandolimateohange.ltalsohighlightstheimportanoeofAsiasaotive partioipationinglobalpolioydialogueandreforminitiatives.AteamofPllLresearohfellowsled byMarousNolandpreparedbaokgroundpapersonkeyeoonomiogovernanoereformandpolioy issueswhileCyn-oungParkooordinatedsimilareffortsfromALBandotherregionalsoholars. 1heoontributorstothesebaokgroundpapersinoludeLouglasArner,lwanAzis,1aehoBark,oon 1eCho,1oseph0agnon,Morris0oldstein,0aryPufbauer,C.RandallPenning,1revorPouser, Moon3ungKang,1aoobKirkegaard,Cyn-oungPark,Ldwin1ruman,andwoanloongwong. lnternationalworkshopswereheldatwashington,LC,united3tatesinApril2010and3eoul, Republio of Korea in 0otober 2010 to review and retne the baokground papers. Both ALB and PllLorganizersaregratefultoallthespeakersandpartioipantsfromthesetwoworkshopsfor theirvaluableoommentsandsuggestions.1heorganizersarealsothankfultovonnePriestly forhelpingooordinatethewashingtonoonferenoeandtoMa.1heresaRoblesfororganizingthe 3eouloonferenoe. RogelioMeroadoprovidedexoellentresearohassistanoeanddatasupport.RobertLavisguided theprojeotteaminthepublioationprooess.MitziroseLegalhelpedintheadministrationofthis publioation.LdithCreusdesignedthelayoutandartwork,andtypesetthereport. vii viii Abbreviations ALB AsianLevelopmentBank A3LAN Assooiationof3outheastAsianNations A3LAN+3 Assooiationof3outheastAsianNationsPlus1hree CMlM ChiangMailnitiativeMultilateralization Lll duty-freequota-free Lu Luropeanunion lCL texible oredit line l3AP linanoial3eotorAssessmentProgram l3B linanoial3tabilityBoard l1A freetradeagreement 07 0roupof3even 020 0roupof1wenty 0lC global tnanoial orisis 0LP grossdomestioproduot lLA lnternationalLnergyAgenoy lll international tnanoial institution lMl lnternationalMonetarylund LLC leastdevelopedoountry MLB multilateraldevelopmentbank 0LCL 0rganisationforLoonomioCo-operationandLevelopment PCL preoautionaryoreditline PllL PetersonlnstituteforlnternationalLoonomios PRC PeoplesRepublioofChina 3LR speoialdrawingright uN unitedNations uNlCCC uNlrameworkConventiononClimateChange u3 united3tates w10 world1rade0rganization ix Highlights laoed with the most serious global tnanoial orisis sinoe the 0reat Lepression, in November 2008 the 0roup of 1wenty (020) initiated a series of summit meetings to address the oritioal issues oonfronted by the global eoonomy. 1he November 2010 3eoul 020 3ummit marked the trst time thatthegroupwasoonvenedbyanAsianornon-0roupof3even(07)host.1hisreportaddresses the extensive set of ohallenges on the 020 agenda, reteoting both ongoing issues from previous summitmeetingsandnewohallengesthatoonfrontedleadersin3eoul. 1he report begins with a oonsideration of the 020 lramework for 3trong, 3ustainable, and Balanoed 0rowth, followed by disoussions of tnanoe seotor reform, reform of the international tnanoial institutions, the relationship between regional initiatives and the global tnanoial arohiteoture, global tnanoial safety nets, trade, development, energy and olimate ohange, and aseotionontheperspeotivesofAsiasemergingeoonomies. 1he key tndings oan be summarized as follows: Lxternal imbalanoes appear to onoe again be growing, and inoreased exohange rate texibility in large-surplus oountries is a neoessary, though not suftoient, oomponent of balanoedadjustment. whilethestrengthenedbankoapitalandliquidityrequirementsannounoedbytheBasel Committee on Banking 3upervision are weloomed, additional work at the multilateral andnationallevelsisadvisable. 1here is a broad need to strengthen existing institutions under stress, an inorease of lnternational Monetary lund quota resouroes from $250 billion to $500 billion was agreed,butthisistobeaooomplishedwithoutinoreasingitstotalavailableresouroes beoausethesizeoftheNewArrangementstoBorrowwillbereduoedproportionately. Agroupof1radewisemenshouldbeoreatedtoestablishanlknowitwhenlseeit dootrineagainstnewproteotionism,whiohwouldaotasnameandshameenforoersof theopeneoonomypledgesmadeby020leadersandoommendoountriesthatunwind priorproteotionistmeasures. x Pighlights whilethereislittlesoopeatpresentforthe020totakeonolimateohangediplomaoy, itoandoagreatdealtoadvanoeolimateohangeaotion.1heexisting020agendahas the potential to reduoe global emissions, aooelerate the deployment of olean energy teohnology, and mobilize publio and private tnanoe for mitigation and adaptation. 1he new global eoonomio governanoe struoture needs to reteot the ohanging eoonomio weightofemergingeoonomiesintheglobaleoonomy.Asiashouldandwillplayagreater role on the global stagefor example, shaping the 020 agenda for balanoed and sustainablegrowththroughstrengtheningintraregionaltradeandstimulatingdomestio demand. 1 Framework for Strong, Sustainable, and Balanced Growth Atthe3eptember2009Pittsburgh3ummit,leadersofthe0roupof1wenty(020)announoedthe lrameworkfor3trong,3ustainable,andBalanoed0rowth.1heyoommittedtoundertakingmaoro- eoonomiopolioiestopulltheworldeoonomyoutofreoessionandtosubmittingtheiraotionsto peerreview,aidedbythelnternationalMonetarylund(lMl).1he3eoul3ummitmarkedtheone- year anniversary of the formal launoh of the initiative in November 2009 by tnanoe ministers and oentralbankgovernors. At the 1une 2010 1oronto 3ummit, the trst stage of the mutual assessment prooess was suooessfully oompleted. 1his involved maoroeoonomio assessments by the lMl and the development of polioy options for groups of oountries. Building on this outoome, the leaders oommittedtoanambitioussetofgoalsthatinoludedtheneedforsomehigh-inoomeoountries to implement growth-friendly tsoal oonsolidations, for oountries with large ourrent aooount surplusestofoousondomestiodemand-ledgrowth,andforalloountriestoundertakestruotural reformstoraisetheirgrowthpotential.Akeyaspeotofthetransitionfrom1orontoto3eoulwas the020takingownershipoftheprooess,workingwiththelMltodevelopforeoastsoenarios andpolioyoptionsattheoountrylevel. ln taking ownership, the group faoes a number of ohallenges. lirst, there is oonsiderable unoertainty about the future trajeotory of the global eoonomy. while eoonomio performanoe has generally improved from the depths of 2008, there is signitoant variation among the 020 oountries in the paoe of reoovery. 1his implies that the individual 020 oountries now faoe different polioy priorities, unlike the beginning of the orisis when they shared the urgenoy of orisis. Contiots of national interests oould delay the progress of the 020 agenda and present hurdlesinreaohingnewagreements. 3eoond, adverse developments in some Luropean sovereign debt markets oontinue to test the 020 oommitments to restore tsoal sustainability (Figure 1). 1here is ambiguity about the advisable tsoal stanoe of some 020 governments, whioh has emerged as a subjeot of oontroversybothatthedomestioandinternationallevels,partlyduetoanalytioaldifferenoes Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 2 0 100 200 300 400 500 600 700 800 900 1000 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Greece Portugal Italy Spain Ireland a 5-year senior; spread over German sovereign credit default swaps. Source: Datastream. Figure 1 Sovereign Credit Default Swap Spreads a (inbasispoints) about the likely response to short-run ohanges in tsoal polioy. At the 1oronto 3ummit, the 020 oommitted to tsoal plans that would at least halve their tsoal detoits by 2013 and stabilize or reduoegovernmentdebt-to-grossdomestioproduot(0LP)ratiosby2016. what is olear is that some of the rioh 020 oountries faoe signitoant long-run tsoal ohallenges assooiated with publioly tnanoed pension and health oare oosts. And whereas there is broad oonsensusinthe020aboutthedesirabilityofreininginlong-termsooialexpenditures,there is less oonsensus with regard to advisable short-term tsoal polioy, oharaoterized by Changyong Rhee(2010)asadebatebetweenoutterswho believe that the improvement in oontdenoe assooiated with short-term tsoal oonsolidation would induoe suftoient private seotor aotivity to more than fully offset the tsoal dragandthepostponerswhoadheretomoretraditional Keynesiannotionsofshort-rundemandmanagement. 1he textbook solution would be to oombine short-run tsoal expansion with a long-term oommitment to tsoal oonsolidation. 1he problem is that suoh oommitments may not be politioally oredible, oreating the oonundrum in whioh the 020 ourrently tnds itself. whatever the speoito merits of eaoh position, it is important that the 020 governments oontinue to oommit themselvestopoliciesoverwhiohtheyexertoontrolandnottooutcomes, whioh they intuenoe onlyimperfeotly. lrameworkfor3trong,3ustainable,andBalanoed0rowth 3 Athirdohallengeisthereemergenoeofwideningexternalimbalanoes,whiohmanyobservers believe oontributed to the tnanoial orisis and now threaten the balanoed" aspeot of the lrameworkfor3trong,3ustainable,andBalanoed0rowth.Currentaooountimbalanoesreaohed reoord levels before the tnanoial orisis of 20082009 (Figure 2). As eoonomies oontraoted during the orisis, the imbalanoes narrowed oonsiderably, but they remain historioally large. 3everalfaotorsseemtohaveoontributedtothepersistentlylargepaymentimbalanoes. lirst, tsoal polioies are important drivers of ourrent aooounts in both advanoed and developing eoonomies. 1oseph 0agnon (2010) demonstrates that tsoal balanoes are more important drivers of ourrent aooount imbalanoes than previously thought. 1he ourrentaooounttendstoinoreaseby2030 of any inorease in the tsoal balanoe, whereaspreviousresearohfoundaneffeotof1020. lisoal detoits are expeoted to be larger in the next 5 years than they were before the tnanoial orisis in many eoonomies with ourrent aooount detoits. Based on these statistioal results and on polioy plans thathavebeenannounoedtodate,ourrentaooountimbalanoesarelikelytoreturnto reoordlevelsoverthenext5years.1hisoonolusionsupportstheviewthatthereoent narrowingofimbalanoeswasalmostentirelyaresultoftheglobalreoessionandthat global reoovery will unwind this effeot. lndeed, the most reoent data for some of the largest 020 eoonomies suggest that lMl foreoasts for ourrent aooounts substantially -2.8 -2.0 -1.2 -0.4 0.4 1.2 2.0 2.8 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Australia Peoples Republic of China France Germany Italy Russian Federation Japan Saudi Arabia United Kingdom United States Rest of G20 Rest of the World 2009 Rest of G20 includes Argentina, Brazil, Canada, India, Indonesia, Republic of Korea, Mexico, South Africa, Turkey, and rest of European Union 27 (Austria, Belgium, Bulgaria, Czech Republic, Cyprus, Denmark, Estonia, Finland, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden). Source: World Economic Outlook Database (October 2010), International Monetary Fund. Figure 2 Current Account Imbalances (ofworld0LP) Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 4 understate the likely rebound in imbalanoes in 2010. 1his result also reinforoes the 1oronto 3ummit oall for tsoal oonsolidation in eoonomies with ourrent aooount detoits. 3eoond, external tnanoial polioies are also important drivers of ourrent aooount imbalanoes in developing eoonomies, although their impaot on these imbalanoes is relativelylimitedinadvanoedeoonomies.1hesepolioiesinolude,forexample,preventing exohangerateappreoiationafterpositiveshookstonetexportsbysterilizedintervention inforeignexohangemarkets.3uohpolioiesenableourrentaooountbalanoestoremain positive indetnitely beoause they shut off the normal adjustment ohannel of real exohangerateappreoiation.1hesepolioiesaremoreoommonindevelopingeoonomies than in advanoed eoonomies, in part beoause greater oapital mobility in advanoed eoonomiesmakessterilizedinterventionlesseffeotive. 1hird,eoonomieswithpersistentourrentaooountsurplusestendtobuildtheirstooks ofnetforeignassets,andthesenetassetpositionstendtoinoreaseourrentaooount surpluses further through positive net inoome tows. lourth, ohanges in oil prioes and produotion also have important effeots on ourrent aooountbalanoes.0therfaotors,suohasdemographiosandstageofdevelopment,are notrobustlyassooiatedwithourrentaooounts. linally,alternativeapproaohestoprojeotingourrentaooounts,basedeitheronhistorioal trade elastioities or estimates of the Balassa3amuelson effeot, show that if real exohangeratesareheldoonstantoverthenext5years,ourrentaooountimbalanoesare likely to widen oonsiderably. 0reater exohange rate texibility in developing eoonomies, and thus reduoed net oftoial tnanoial tows, would go a long way toward reduoing imbalanoesindevelopingeoonomieswithourrentaooountsurpluses.1heoounterpart tothisadjustmentwouldbeaninoreaseofourrentaooountbalanoesintheadvanoed eoonomies that have been the reoipients of oftoial tows from these developing eoonomies. lor the united 3tates (u3) and the united Kingdom, whioh have ourrent aooount detoits, the result would be a reduotion in imbalanoes. But for 0ermany and 1apan,whiohhaveourrentaooountsurplusesalready,theresultwouldbeawidening ofimbalanoes. Looking ahead, these underlying faotors driving the ourrent aooount imbalanoes, suoh as tsoal detoits, stooks of net foreign assets, and exohange rate misalignments, are unlikely to reversetheiroourseandareprojeotedtostrengthenevenfurtheroverthenext5yearsinmany eoonomies,suggestingthatevenlargerimbalanoesareontheway.3tooksofnetforeignassets haveinoreasedinmanyeoonomieswithaourrentaooountsurpluswhilerealexohangerates are not expeoted to adjust signitoantly, despite large differentials in eoonomio growth rates. 1he main exoeptions are the oil-exporting eoonomies, notably the Russian lederation and 3audi Arabia,whioharerampingupplanstospendelevatedoilearningsoverthemediumterm. lfrealprogressisnotmadeonpersistentlylargeinternationalpaymentimbalanoes,prospeots for a sustainable global reoovery will diminish. 1o avoid a return of large global imbalanoes, lrameworkfor3trong,3ustainable,andBalanoed0rowth 5 eoonomies with ourrent aooount detoits should out tsoal detoits more than they are ourrently projeoted to, and eoonomies with ourrent aooount surpluses should reduoe oftoial tnanoial outtows and allow their ourrenoies to appreoiate. Powever, the postorisis reoovery remains fragile and oountry-speoito oiroumstanoes need to be taken into aooount when oonsidering the polioies to reduoe large global imbalanoes. lisoaloonsolidationinsurpluseoonomiesthoughneoessaryinsomeoasesisdetrimental to rebalanoing and should prooeed at a slower paoe and to a lesser degree than in detoit eoonomies.Monetarypolioyshouldremainaooommodativeandeveneasefurtherineoonomies where output remains below potential and intation threatens to fall below desired levels. 3truotural reforms to boost long-run growth and rebalanoe domestio savings and investment should be enoouraged, but the speoitos of these reforms differ aoross oountries and it is diftoult toprediotthesizeandtimingoftheireffeots. 1heprospeotsofspeedyexternalrebalanoingremainoloudyunlessfurtheroolleotiveaotionsare taken. 0ne of the key oonoerns is signitoant ourrenoy misalignment. Lxohange rate adjustment is an essential element for global rebalanoing. while there has been visible progress toward inoreased exohange rate texibility in emerging market eoonomies with ourrent aooount surpluses, somelargeemergingmarketeoonomiesappeartobereluotanttoallowanysharpadjustment intheirexohangeratesforvariousreasons,inoludingthefearoflosingexportoompetitiveness. Meanwhile,theseemergingmarketeoonomies,espeoiallyinAsia,oontinuetopostlargesurpluses andaooumulateforeignexohangereserves(Figures 3, 4, and 5). 1he lMls mutual assessment prooess offers useful guidelines for further oolleotive aotions toreduoeglobalimbalanoes.lnitsreporttothe020priortothe3eoul3ummit(lMl2010b), the lMl provides an assessment of the 020 polioies and emphasized benetts of oollaborative aotiontowardglobalrebalanoing.Priorityareasinoludeagradualreduotionofpubliosupport and further tsoal oonsolidation in advanoed eoonomies, greater exohange rate texibility to shift demandfromexternaltointernalsouroesinsurplusemergingmarketeoonomies,andstruotural reformsinproduot,servioes,andlabormarketstoenhanoeproduotivity. Persistently large global imbalanoes assooiated with signitoant ourrenoy misalignment and the laokofmeohanismstooorreotitpointstoahugeholeintheinternationalmonetarysystem. ltisgenerallymuohlessoostly,botheoonomioallyandpolitioally,forourrentaooountsurplus oountries to maintain the surpluses and aooumulate reserves than it is for detoit oountries to sustain detoits. Letoit oountries must either run down their reserves or detate their ourrenoies, while surplus oountries oan simply aooumulate reserves. Reserve aooumulation oan go on forever, seemingly depending on the openness of the tnanoial system and the degree of sterilization. 3uoh an asymmetrio adjustment prooess tends to delay a rebalanoing of the internationalreserves.Meanwhile,thereisnoworkable,graduatedsetofpenaltiesforoountries thatrefusepersistentlytoadjusttheirmaoroeoonomioandexohangeratepolioypartioularlyif Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 6 -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Net Current Transfers Net Income Receipts Net Trade in Services Net Trade in Goods Current Account 2009 Source: OREI staf calculations using data from International Financial Statistics and World Economic Outlook Database, International Monetary Fund. Figure 3 Current Account Composition (of0LP) -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Net Current Transfers Net Income Receipts Net Trade in Services Net Trade in Goods Current Account 2009 Source: OREI staf calculations using data from International Financial Statistics and World Economic Outlook Database, International Monetary Fund. a)People'sRepublioofChina b)1apan lrameworkfor3trong,3ustainable,andBalanoed0rowth 7 Source: OREI staf calculations using data from International Financial Statistics and World Economic Outlook Database, International Monetary Fund. -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Net Current Transfers Net Income Receipts Net Trade in Services Net Trade in Goods Current Account 2009 o)RepublioofKorea ligure3 continued 121 150 449 674 956 1,792 4,331 0 1,000 2,000 3,000 4,000 5,000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Sep-10 People's Republic of China India Indonesia Japan Republic of Korea Asia (G20 members) 3,446 Note: Asia (G20 members) includes the People's Republic of China, India, Indonesia, Japan, and the Republic of Korea. Source: International Financial Statistics, International Monetary Fund. Figure 4 Foreign Exchange Reserves ($billion) Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 8 theyarelargeeoonomieswithourrentaooountsurpluses.1herehastobesomeorediblepenalty inthemiddlebetweenthelMlsopiniononmaoroeoonomioandexohangeratepolioy(easily dismissed)andexpulsionfromthelMlfornothonoringobligationsunderArtiolelv(toodrastio tobeuseful). 1 A fourth and related ohallenge is the reform of the global monetary and reserve system. Lvaporation of international liquidity during the orisis was a strong reminder of the frailty of theexistinginternationalmonetarysystem.lnternationalreservesremainhighlyoonoentrated in a few holdersthe top tve oountries hold nearly half. Reserves are also oonoentrated in one ourrenoy, with the u3 dollar aooounting for about three-tfths. while the global eoonomy is beooming inoreasingly multipolar with the rapid rise of emerging market eoonomies, the internationalmonetaryandreservesystemhasyettoadjust. ManyAsianeoonomieshaveoontributedtothisimbalanoebypursuingexport-orientedgrowth strategies,supportedinpartbyundervaluedourrenoies.Byhavingpersistentourrentaooount surplusesandaooumulatingthereserves,Asianeoonomieshavetradedexohangeratestability 1 Morris0oldstein(2010)offerssuohasetofgraduatedpenalties. 113 113 93 99 117 77 130 62 81 125 94 50 60 70 80 90 100 110 120 130 140 150 Jan-00 Feb-01 Mar-02 Apr-03 May-04 Jun-05 Jul-06 Aug-07 Sep-08 Oct-09 Nov-10 Source: OREI staf calculation using data from Bank for International Settlements. Peoples Republic of China Japan India Indonesia Republic of Korea Figure 5 Real Effective Exchange Rates (1anuary2000=100) lrameworkfor3trong,3ustainable,andBalanoed0rowth 9 forexposuretolargeoapitallossesiftheu3dollarweretosuddenlydepreoiate.Powever,as theshareofemergingAsianeoonomiesinglobaleoonomioaotivitygrows,delayedadjustment wouldbeself-defeating.Polioydeoisionsinemergingmarketeoonomiesarenowpivotalforthe stability of the global monetary and tnanoial system, and ultimately global eoonomio growth and stability. 3uoh inevitable and rapid struotural ohanges need to be fully reteoted in new global monetary and tnanoial governanoe. Reforms at the lMl and other international tnanoial institutions to inorease the size of tnanoial safetynetsshouldreduoetheinoentiveforeoonomiestobuildlargeforeignexohangereserves and other oftoial assets. ln prinoiple, this oould help to narrow ourrent aooount imbalanoes assooiated with large net oftoial tnanoial tows. various proposals for global safety nets have been put forward, inoluding a new preoautionary oredit line and for liquidity assistanoe to regional tnanoing arrangements introduoed by the managing direotor of the lMl (3trauss-Khan 2010). 2 1hegovernmentoftheRepublioofKoreaalsomadeaproposalforextendingthesystem of oftoial ourrenoy swaps on a more multilateral basis (3aKong 2010), as disoussed below. 1hereisawinwingrandbargaintobestruokbetweenadvanoedandemergingeoonomies (0oldstein2009).undersuohabargain,theadvanoedeoonomieswouldagreetopushformore generousinsuranoefaoilitiesandforafurthershiftinohairsandsharestotheemerging world (disoussed below)in exohange for a pledge by the latter to adhere to strengthened internationalrulesofthegameonexohangeratepolioy.Powever,theaggregatesizeofthe safety nets ourrently under oonsideration is muoh smaller than existing holdings of foreign exohangereserves,soitisnotolearthattheseproposalswillhaveamajoreffeotonreserve aooumulation. A tfth ohallenge oonoerns advisable struotural reforms to raise individual oountries' potential growth rates. 1he ohallenge for the 020 is twofold: trst, by their very nature, struotural reforms are oountry speoito, henoe oonsiderable knowledge of eaoh individual oountry is required. 3eoond, almost by detnition, struotural reforms are politioally diftoultifeasymeohanismsto aooelerategrowthrateswereavailable,theyalmostoertainlywouldalreadyhavebeenadopted. undersuohoiroumstanoes,the020mayplayaoonstruotiveroleinaotingasakindofneutral sounding board, providing a souroe of multilateral external enoouragement for governments to undertake politioally diftoult aotions and providing analytioal support to demonstrate the benetts of suoh reforms. ln the trst stage of the mutual assessment prooess, 020 governments 2 3omeoommentatorshaveobjeotedthattherelaxationofoonditionalityandintroduotionofinsuranoemeohanisms oould inorease moral hazard both among polioy makers and market partioipants. while the expression of suoh oonoernsometimesappearsexaggerated,moralhazardoonoernsoannotandshouldnotbeignored.lndesigning appropriate oriteria for qualitoation, relevant attaohment of oonditionality and oaps on available liquidity are good examples of design features to minimize moral hazard in tnanoial safety nets. with oareful design, the moral hazard risks assooiated with global tnanoial safety nets need not be any greater than those already inherent in the lMl's ourrentlendingfaoilitieswithex-postoonditionality. Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 10 agreedtolabor,produot,andservioemarketreforms,aswellasaotionstoreduoebarriersto oompetition-enhanoingoross-borderaotivitiesattheoountrygrouplevel.1heohallengeinthe ourrent stage of the prooess is to bring this down to the individual oountry level beyond the 3eoul3ummit. linally, while the 020 is a broadly representative assemblage, it is not universal. 3peoitoally some developing oountries in Asia and many largely poor oountries more generally are not members.Aspartofitsdevelopmentagenda,disoussedbelow,the020oanworkwithdeveloping oountriestomaximizetheiroontributiontoglobalreooveryandgrowth. 11 Finance Sector Reform 1here is a oonsensus among many observers that failures of tnanoe seotor regulation were at the heart of the global tnanoial orisis. 3tarting at the washington 3ummit in November 2008, 020 leaders initiated a tnanoe seotor reform agenda oonsisting of four pillars: a strong regulatory framework, effeotive supervision, the related issues of too big to fail systemioally important tnanoial institutions and oross-border resolution, and transparent international assessment and peerreview. 3trongRegulatorylramework AssetBubbles Any oredible story about the origins of the global tnanoial orisis has to give a role to easy oreditoonditions,arapidrun-upinhousingandequityprioes,andbroadmisprioingofrisk.1he preorisisorthodoxywasthatitwasunwiseandunneoessarytoaskoentralbankstopriokasset- prioebubblesforatleastthreereasons.lirst,itwassaidthatoentralbankshavenoreliable methodologyfor,oroomparativeadvantagein,identifyingsuohbubbles.3eoond,evenifthey oouldidentifysuohbubbles,short-terminterestrateswerenotagoodinstrumentforprioking them.Andthird,preemptiveaotionwasunneoessary:anypost-bubblemessoouldbeoleaned upatlowoostbyengineeringaswiftandsizabledeolineinpolioyinterestrates. 1heorisishasupendedthat(preorisis)orthodoxy.1heweoanoleanitupoheaplyafterthebubble burstswithlowinterestratesargumentoanbedisoardedatleastforoaseswherethebuildup of the bubble involves signitoant leverage. More fundamentally, the orisis has underlined the needforabetterbubble-bustingtoolkit.Agatheringoonsensusamongpolioymakers,regulators, andeoonomiopunditsisthatthistoolkitshouldoertainlyinoludeaoounteroyolioaloapitalbuffer and forward-looking provisioning for banks. lt should also inolude oounteroyolioal ohanges in loan-to-value ratios on residential and oommeroial mortgages, in lending standards, and in oollateral and margin requirements for equities. 1rue, suoh maoro-prudential aotions run the riskofkillingoffsomeexpansionstoosoon,buttheyalsooouldavertsevereoollapseslikethe reoentone. Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 12 CapitalandLiquidity 1heglobalorisishashighlightedtheinadequaoyofthepreviousinternationalregimeforbankoapital (andliquidity)requirements.Aweakbankoapitalandliquidityregime,bothintermsofquantity andquality,wasoneofthemajoroontributingfaotorstotheorisis.underthepreorisisinternational standard, the detnition of 1ier 1 bank oapital was exoessively broad and allowed for substantial oountrydifferenoes.lorexample,mortgageservioingrightsintheu3,tax-deferredassetsin1apan, and minority interest in subsidiaries in Lurope all qualited as bank oapital in these regions. 1his broad detnition of bank oapital allowed banks to rely on oheaper, lower-quality oapital. lnaotuality,banksintheu3andtheeurozonefailedtheultimatestresstest:followingalong seoulardeolineinoapitalandliquidityratios,manymajorbankswereabletosurvivethisorisis onlywithmassivegovernmentsupport.Butevenwiththatsupport,loangrowthwentnegative. Regulators now aoknowledge that some of the prinoipal innovations of Basel llpartioularly theinoreasedemphasisonoreditratingsandonbanksinternalmodelsforriskweightswere deeply tawed and that the (preorisis) deoisions not to inorease the level and quality of oapital ortobetougheronoapitalrequirementsfortheriskinbankstradingbooksweremistaken. At the Pittsburgh 3ummit, 020 leaders oommitted to developing by end-2010 internationally agreedrulestoimproveboththequantityandqualityofbankoapitalandtodisoourageexoessive leverage. 1hese rules will be phased in as tnanoial oonditions improve and as eoonomio reoovery is assured, with the aim of implementation by end-2012. ln 3eptember 2010, the Basel Committee on Banking 3upervision announoed a new detnition of bank oapital and framework fordeterminingadequateoapitalandliquidity. Powever, when it oomes to tnanoial regulation and reform, there is a natural tendenoy for oountries whose tnanoial institutions were not major players in the reoent tnanoial meltdown to step aside, oritioize those institutions and jurisdiotions that were prinoipally involved, and deoline to partioipate in a strengthened regulatory and supervisory regime. 1hat would be a mistake. esterday's oautious institutions oan quiokly beoome tomorrow's high tiers. Meanwhile, institutionsinthemajorjurisdiotionswillusetheveryrealthreatofregulatoryandinstitutional arbitragetowaterdownagreedreforms.1herearereasonstobelievethattheseinnovations, whileweloome,areinadequate,andbankoapitalandliquidityrequirementswilloontinuetobe areourringfeatureof020deliberations(0oldstein2010). 1he Basel lll agreement would, among other things, allow banks to meet up to 15 of the oommonequityoomponentofthe1ier1oapitalrequirementwithdeferredtaxassets,mortgage- servioing rights, and signitoant investments in the oommon shares of unoonsolidated tnanoial institutions,effeotivelydroptheproposedmedium-runliquiditystandard(thenetstablefunding ratio) until at the earliest 1anuary 2018, while softening oonsiderably the detnition of liquid assetsintheshort-runliquiditystandard,andtestaminimum1ier1leverageratioofonly3, withimplementationsoheduledonlyfor1anuary2018.lnshort,whiletheoruoialparametersfor linanoe3eotorReform 13 theminimumoapitalratiosaswellasforoapitaloonservationandoounteroyolioalbuffersare yettobedeoided,Basellllisindangerofemergingasamouseratherthanastheoornerstone ofatransformedsystem. ln an outline of what would qualify as a serious reform of bank oapital requirements, two observations are instruotive. 1he trst oomes from studies of bank oapital requirements (Panson, Kashyap, and 3tein 2010a, 2010b). Markets were reoently (trst quarter 2010) pressuring the fourlargestu3banksatthelowerendoftheoyoletoholdaoommon1ier1oapitalratioof about8(ofrisk-weightedassets).3inoeu3bankslostabout7ofrisk-weightedassetsduring 20072010 in the wake of the tnanoial orisis, Panson, Kashyap, and 3tein (2010a) oonolude thattheminimumoapitalrequirementatthetopoftheoyoleoughttobearound15.3olong asbanksaregivenareasonabletransitionperiodtomeetthesehigheroapitalrequirements, thereisalsolittlelikelihoodthatevenverylargeinoreasesinoapitalrequirementswouldlead tolargeinoreasesinloanprioesandlargedeolinesinloanvolumes. 1he seoond observation oomes from 3witzerlands reoent unilateral reform of bank oapital requirements. 1he 3wiss regulatory authorities mandated in Leoember 2008 that uB3 and Credit3uissewouldhavetomeetmuohtougheroapitalandliquiditystandardsby1anuary2013. lngoodtimes,theminimumrevised1ier1oapitalratio(torisk-weightedassets)wouldhaveto be16morethan6peroentagepointshigherthantheprevioustarget,inaddition,aminimum (unweighted)leverageratioof5wasintroduoed.Notonlydidthetwolarge3wissbankssatisfy thetougheroapitalstandardwayaheadofsohedule,butthemaoroeoonomioimpaotonlending hasbeenanythingbutoalamitous. linanoialMarketlnfrastruoture:Pedgelunds,CreditRatingAgenoies, 0ver-the-CounterLerivatives,Aooounting3tandards,andCompensationPraotioes 1hereisbroadoonsensusamong020governmentsthatabsenoeand/orinadequaoyofrules and regulations about hedge funds, oredit rating agenoies, and nontransparent trading in nonstandardized over-the-oounter derivatives oontributed to the tnanoial orisis. Broadening regulatorysoopeandinoreasingregulatoryoonsistenoyisimportantattheglobal,regional,and nationallevels. lnlebruary2010,thelnternational0rganizationof3eouritiesCommissionspublishedanagreed templatefortheglobaloolleotionofhedgefunddataanditsdisseminationamongregulatorsto faoilitateinternationalsupervisoryoooperation.Legislationtoestablishregistration,reporting, andoversightarrangementsforhedgefundsandadvisorsisadvanoinginmajorjurisdiotions, notably the Luropean union (Lu) and the u3. 0iven the inoreasing prominenoe of sovereign wealthfunds,thefurtherdevelopmentofinternationalregulatorymeohanismsoouldbeweloome inthissphereaswell(1ruman2010a). Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 14 ltiswidelybelievedthatoreditratingagenoiesoontributedtotheorisisbyunderestimatingrisks assooiatedwithstruoturedoreditproduotsandlaggingthemarketinrevisingtheirratings.ln 1oronto,020leadersoommittedtoanumberofreforms,andoalledonthelinanoial3tability Board(l3B)andtheBaselCommitteeonBanking3upervisiontoreporttheprogressto020 tnanoe ministers and oentral bank governors in 0otober 2010. 1he l3B report (l3B 2010) setsoutanumberofprinoiplestoreduoethemeohanistiorelianoebymarketpartioipantson oreditratingagenoiesandestablishesaworkprogramforstandardsettersandregulatorsto inoentivizemarketpartioipantstoimprovetheirindependentoreditriskassessmentanddue diligenoeoapability,andtoreduoetheirrelianoeontheseagenoies. lntheareaofover-the-oounterderivatives,020leadersoommittedinPittsburghtoinoreased transparenoyinthetradingoftheseoontraotsbyend-2012,andworkisunderwaythrougha varietyofohannelsinoludingthelnternational0rganizationof3eouritiesCommissionsandthe l3Btorealizetheseoommitments. ln 1oronto, 020 leaders onoe again reiterated the neoessity of establishing universal high-qualityaooountingstandards.Currentlythefoousofdisoussionisonthesoopeoffairvalue mark-to-marketversuswiderfairvalue,basedonlong-termhistorioalvalue.Abroadrangeof issues also exist as to how to harmonize different aooounting and regulatory treatments in relationtooapital,off-balanoesheetassets,andprovisioning.1heleadersurgedthelnternational Aooounting3tandardsBoardandlinanoialAooounting3tandardsBoardtoredoubletheirefforts tooompletetheiroonvergenoeprojeotbyend-2011.workinthisareaoontinues.Compensation praotioes have been a oentral oonoern with the propagation of prinoiples, implementation guidanoe,andl3Bmonitoringofoomplianoe. 1he Basel Committee on Banking 3upervision and the l3B were to assess progress in implementing these goals and report to the 020 tnanoe ministers and oentral bank governors in0otober2010ifadditionalworkiswarranted.Asobservedby3tephaneRottierandNioolas vron (2010), the implementation of global reporting standards is not feasible in the short run,andasaoonsequenoe,itmaybeadvisabletoadoptaprinoipleofsubsidiarity,inwhioh standardswouldbeimplementedatthenationallevel.Powever,wheresuitablebodiesdonot exist,polioymakersshouldbereadytooreatethemasmayberequiredfortheoversightoforedit ratingagenoies,globalauditnetworks,orseouritiesolearinghouses.lntensivepeerreviewhas beenoneoftheapproaohesemphasizedbythel3B,andareportonMexioowasoompletedin 3eptember2010.ReportsonAustralia,Canada,and3witzerlandareduein2011. Lffeotive3upervision At the 1une 2010 1oronto 3ummit, 020 leaders identited more effeotive oversight and supervision as an essential oomponent of tnanoe seotor reform. ln this regard, the l3B, in oonsultation with linanoe3eotorReform 15 the lMl, reported to the tnanoe ministers and oentral bank governors meeting in 0otober 2010 withreoommendations.1hel3Bprooessshouldbestrengthenedbyexpandingitintoaproper international self-regulatory institution and by providing the lMl with the speoito mandate under its artioles of agreement to address tnanoial stability. 3ystemioallylmportantlinanoiallnstitutionsandResolution 1ooBigor1oolnteroonneotedtolail 1he orisis established that bank and nonbank tnanoial institutions, either individually or oolleotively, oan pose risks to tnanoial stability or trigger oontagion when they are olosely oonneotedtoregulatedentitiesorhaveaoonoentrationofassetsgivingrisetosystemiorisks. Aooording to Andrew Paldane (2010), 145 global banks with assets over $100 billion eaoh aooounted for more than 90 of the government support during this orisis. Also, top-3 and top-5 oonoentration ratios (for bank assets relative to 0LP) have inoreased sharply in large advanoedeoonomiesoverthepasttwodeoades,despitesoantevidenoeofeithereoonomies of soale or eoonomies of soope in banking beyond $100 billion in assets (Figure 6). Large 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 France Germany Italy Japan United Kingdom United States Note: Assets of three largest banks as a share of assets of all commercial banks. Source: Financial Structure Database, March 2010. Available at http://go.worldbank.org/X23UD9QUX0 Figure 6 Bank Concentration of AssetsAdvanced Economies Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 16 and oomplex tnanoial oonglomerates now have hundredsand sometimes thousandsof majority-owned subsidiaries (Carmassi and Perring 2010). 1he 020 oommitted in 1oronto to establishingasystemwhereauthoritieshavetheoapaoitytorestruotureorresolvealltypesof tnanoial institutions in orisis, without taxpayers ultimately bearing the burden. 1hese powers shouldfaoilitategoingoonoernoapitalandliquidityrestruoturingaswellasgoneoonoern restruoturingandwind-downmeasures. Addressingtheseissueswillrequireanexpandedtoolkit,enoompassingthefollowingmeasures: (i)higheroapitalandliquidityrequirementsforthelargest,mostinteroonneoted,andmostoomplex tnanoial institutions (to internalize the externalities assooiated with the higher expeoted oost ofresolvingsuohinstitutions),(ii)mandatorywind-downplansforsuohsystemioallyimportant tnanoial institutions, approved by the regulatory body oharged with primary supervisory responsibility, in oases where the wind-down plan is inadequate, the supervisor would have the authority to require the institution to shrink and beoome less oomplex, (iii) ensuring that speoial resolution authority exists for all systemioally important tnanoial institutionswhether banksornonbankssothatthereisaviablealternativetoover-the-weekendmassivebailout of the failing trm (Cohen and 0oldstein 2009), (iv) designing resolution authority in a way that supportsmarketdisoipline,thismeanswipingoutshareholders,ohangingmanagement,and payingofforeditorspromptlyatexpeotedreooveryoost(notatpar),anditalsomeansfunding 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Belgium The Netherlands Norway Spain Sweden Switzerland Note: Assets of three largest banks as a share of assets of all commercial banks. Source: Financial Structure Database, March 2010. Available at http://go.worldbank.org/X23UD9QUX0 ligure6 continued linanoe3eotorReform 17 resolution in large part with fees on the larger tnanoial trms, (v) imposing binding explioit size oaps (relative to 0LP) on the size of systemioally important tnanoial institutions, so as to limit thesizeoflossesinoaseoffailure,evenifsuohsizeoapsweredifferentaorossoountriesand wereimposedonanational(notinternational)basis,theywouldgoalongwaytoretardingthe growthoftoobigtofailentities,and(vi)requiringthatashareofbankdebtbeoonvertible to oommon equity under prespeoited stress oonditions. ln the absenoe of a global regulatory authority,insomeinstanoesthesepolioiesimplyohangestonationalresolutionandinsolvenoy prooessesandlawstoprovidetherelevantnationalauthoritieswiththeoapaoitytooooperate andooordinateresolutionaotionsaorossborders. 1hesemeasuresshouldbeundertakenjointlybeoausenoneoftheindividualpolioypresoriptions byitselfislikelytobeeffeotiveenough(orperhapssalableenough)tosolvetheproblem.when put together, however, these measures offer a workable plan for oonfronting too big to fail ifanditisabigifregulatoryauthoritiesarewillingtoaotivatesuohmeasures. An interim report on this issue was submitted by the l3B in 1oronto, tnal reoommendations were submittedtothe3eoul3ummit.Asintheoaseofbankoapitalandliquiditystandards,itremains tobeseenifthereoommendedmeasureswillbeadequatetoresolvetheproblem. linanoe3eotorResponsibility At the 1oronto 3ummit, the 020 agreed that the tnanoe seotor should make a fair and substantial oontributiontowardpayingforanyburdensassooiatedwithgovernmentinterventions,wherethey ooour, to repair the tnanoial system, fund resolution, or mitigate the risks of the tnanoial system. 1othatend,itreoognizedthatthereisarangeofpolioyapproaohes,embodyingasetofoommon prinoiples inoluding proteoting taxpayers, reduoing risks from the tnanoial system, proteoting the tow of oredit in good times and bad, taking into aooount individual oountries' oiroumstanoes and options, and helping promote a level playing teld. 3ome oountries are pursuing the idea of a bank or tnanoial levy, a polioy that has been oonsidered extensively at the lMl. 1ransparentlnternationalAssessmentandPeerReview 1he 020 pledged to support independent international assessment and peer tnanoial system review through the lMl and world Banks linanoial 3eotor Assessment Program (l3AP) and thel3Bpeerreviewprooess.1helMlhasadoptedamandatoryrequirementthat25member oountries with systemioally important tnanoial seotors reoeive l3APs at least onoe every 5 years. 1hel3Bintendstoformalizeandintensifyoutreaohtogovernmentsbeyondthemembershipof the020.1he020in3eoulalsounveiledanantioorruptionaotionplan. 18 Reform of International Financial Institutions 1he3eoul3ummitpresented020leaderswithanopportunitytodemonstratetheiroonorete support for the informal and formal international tnanoial institutions (llls) of the global system. 1he 020s overarohing objeotive should be to strengthen existing institutions, not to supplantthem.1odate,the020hasagoodreoordinbuildingontheexpertiseofinternational organizations suoh as the lMl, world Bank, the 0rganisation for Loonomio Co-operation and Levelopment(0LCL),andl3B,whilestimulatingandadvanoingaworkprogramofglobalaotion andreform. 1heriskisthatoountriesindividuallyandoolleotivelyintheirregionalandsubregionalgroups will fail to learn the oentral lesson of the orisis: all oountries were adversely affeoted and a ooordinatedglobalresponsewasrequired(andproduoed)tomaximizethepositiveeffeotsand minimizefreeridingandnegativespillovers.1herefore,globalinstitutions,inpartioular,needto bestrengthenedandsupported.ltalsofollowsfromthesoopeofthereoentorisisthatglobal institutionslikethelMlandthoseintheworldBank0roupmayhavepriorityoverregionaland subregionalinstitutions,preoiselybeoausetheyareglobalintheirorientationandaotivities. 0n lMl reform, 020 leaders in 3eoul reaohed oonsensus on a number of key issues. Most importantwasthesizeoftheoverallinoreaseinlMlquotas.1heleadersin3eoulendorseda doubling of quotas, but without adding to the total tnanoial resouroes available for lMl lending beoausethesizeoftheNewArrangementstoBorrowwillbereduoedbyaboutroughlythesame amount.AlsoimportantwasreduoingtherepresentationofLuropeonthelMlexeoutiveboard fromtheourrenteighttotenohairstowardanultimatetargetoftwo,oratmostthree,ohairs. An initial step was agreed in this direotion with a oommitment to reduoe Luropean ohairs by twoseats. 1he Pittsburgh oommitment to a shift in quota share to dynamio emerging market and developingoountriesofatleast5peroentagepointsfromover-representedtounder-represented oountries should have been interpreted as requiring a shift of quota share away from the traditionaladvanoedeoonomiestotheemergingmarketanddevelopingoountries,inpartioular thosethataremostdynamio,andasimultaneousbroaderredistributionfromoverrepresented tounderrepresentedoountrieswithinbothgroups(Table 1).lntheevent,ashiftof6peroentage points was agreed, but less than half that amount will go to dynamio and emerging market eoonomiesasawhole. Reformoflnternationallinanoiallnstitutions 19 Another oruoial issue was the presumptive use and status of the lMl quota formula that was agreedoninearly2008.1hebestwaytodealwiththisissuewouldhavebeentoemploywhatin effeotwouldbearevisednewformulathatoouldbeblendedwiththe2008formulatoproduoe the agreed result. 1hat approaoh oould be aooompanied by a oommitment to phase out the tawed 2008quotaformulaovertimeinfavoroftherevisednewformula.1he3eoulagreementdidnot involvetheintroduotionofarevisedformulatooonstruotthebasisonwhiohtoredistributequota shares,buttheagreementdidoommitoountriestoarevisionoftheformulaby1anuary2013in preparationforthenextquotareview,whiohwasadvanoed2yearsto1anuary2014. 0fmarginalimportanoewasapossiblesymboliodeoisionin3eoultoabandontheoonvention thattheheadofthelMlshouldbeaLuropeanoitizenandtheheadoftheworldBankshouldbe au3oitizen.Muohmoreimportanttoallthelllswouldhavebeenaoommitmenttoopen,merit- From Pre-2008 Reform From Post Second Round a
Shift of voting shares (ppts) to underrepresented countries 8.2 5.8 to dynamic EMDC 8.8 5.7 to EMDC 5.3 2.6 to non-oil EMDC b 7.7 3.9 Shift of quota shares (ppts) to underrepresented countries 8.5 6.2 to dynamic EMDCs 9.0 6.0 to EMDCs 3.9 2.8 to non-oil EMDCs b 6.4 4.2 Number of countries that increase quota share 54 61 Advanced countries 10 8 EMDCs 44 53 Number of countries that increase or maintain quota share 54 110 Advanced countries 10 8 EMDCs 44 102 Number of countries with nominal quota increases greater than 150% 40 16 Advanced countries 6 3 EMDCs 34 13 Adjustment coef cient c 65.8 55.7 ppts=peroentagepoints,LMLCs=emergingmarketanddevelopingoountries. a Postseoondroundinoludesadhooinoreasesfor54eligiblemembersthatarenotyeteffeotive,alsoinoludesKosovoand1uvalu whiohbeoamememberson1une29,2009and1une24,2010,respeotively.lorthetwooountriesthathavenotyetoonsentedto, andpaidfor,theirquotainoreases,11thReviewproposedquotasareused. b 0il-exporting LMLCs are those that 1he world Loonomio 0utlook olassites in the funotional group fuel exporters," oonsisting of 27oountries. o 1he adjustment ooeftoient measures the extent to whioh deviations between aotual and oaloulated quota shares are reduoed by the quotaadjustment.1hepre-3ingaporeoaloulationsexoludeKosovoand1uvalu. 3ouroe:lnternationalMonetarylund.Availableatwww.imf.org/external/np/seo/pr/2010/pr10418.htm Table 1 Summary of International Monetary Fund Voting and Quota Share Shifts Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 20 based prooesses irrespeotive of nationality for the ohoioe of all their senior oftoials down to the levelofdepartmentheadsinthelMlandtheequivalentintheworldBankandtheotherllls. ln3eoul,nosuohdeoisionsweremade. 1helessonoftheglobalorisisisthatthellls,thelMlinpartioular,areessentialtoeffeotive orisis management and to limiting, or preventing, orises. 1he world is not ready for a global oentral bank that oan aot as an international lender of last resort to the international tnanoial systemasawhole,butthereoentorisishasdemonstratedthatthelMlshouldbemovedoloser tothisrole. 1heleadersandoitizensofsomekeyoountriesdonotagreewiththisproposition,theyartioulate oonoernsaboutwastingtaxpayersmoneyandoombinethoseargumentswithsimplistiomoral hazardoonoernsassooiatedwithllllending.Allllllendingaotivitiesinvolveabalanoebetween the provisions of tnanoial assistanoe on oonoessional terms and the promotion of polioy reforms through programs or surveillanoe. Aotual and potential tnanoial assistanoe may oontribute to moralhazard.1heissueiswhethertheassooiatedreformsareworththerisks.ltisimportant togetthisbalanoeright,whiohhasnotreoentlybeentheoase.lorexample,in1anuary2008, thelMlgovernorsaoquiesoedinthejudgmentthatthelMldidnotneedageneralinoreasein quotaresouroes.Astheorisiswasunfolding,thebalanoewastippedtoofartowardstarvingthe lMl, and the other llls, of tnanoial resouroes. As a oonsequenoe, the llls under 020 leadership had to soramble during the orisis to assemble tnanoial resouroes. ltisnaivetobelievethattherewillnotbeotherorisesinthefuture.1hatiswhyitwasessential that the authorities in the Republio of Korea made signitoant progress in their quest to strengthen the global tnanoial safety net provided by the lMl and move it oloser to being an internationallenderoflastresort.AoruoialelementofthispaokageistoprovidethelMlwith suftoient tnanoial resouroes to play this role, whioh is why doubling the size of the lMl quotas andhenoeaddingtothelMlsoverallresouroesintheprooesswouldhavebeenimportantas partofthe3eoulpaokage.Powever,the3eoulagreement,whiledoublingthelMlquotas,does notinoreasethetotalavailablelMlresouroes.1heplantosimultaneouslyreduoethesizeof theNewArrangementstoBorrowbythesameamountwillessentiallyleavethelMlslending oapaoity unohanged. 0ther meohanisms to mobilize lMl tnanoing are also appropriate: speoial drawingright(3LR)allooationsandtemporaryswaparrangementswiththeoentralbanksthat issueinternationalourrenoies. AnassooiatedoomponenttothisreformoflMllendingshouldbetointegratebetterthelMls surveillanoe and tnanoing roles. 0ne possibility would be a framework for suoh integration based on the lMl's Artiole lv oonsultation prooess: oomprehensive prequalitoation (1ruman 2010b). loreverymemberofthelMl,itsArtiolelvreviewshouldinoludeastaffjudgmentonthenature of the polioy oonditions, if any, neoessary to qualify that member for lMl tnanoial assistanoe if needed.1hisproposalremainsontheagendaforthefuture. 21 Relationship between Global and Regional Financial Institutions with the inorease in the frequenoy and severity of tnanoial orises, the expansion in the number and size of regional tnanoing arrangements, and the dramatio inorease over the last deoade in thelevelofinternationalreservesthatoanbeplaoedatthedisposalofbilateralandregional faoilities,theneoessityandoomplexityofooordinatingthesefaoilitieswithglobalinstitutionssuoh as the lMl inoreases dramatioally. 1he plethora of regional tnanoing arrangements raises the stakesonpolioyissues(suohastherelativeoontributionsofregionalandmultilateralfaoilities, oonditionality, terms, and negotiating modalities) and institutional issues (suoh as ohannels ofoommunioation,representation,andevenmembership).0ivenitsmomentum,regionalism poses the most important long-term ohallenge to the lMl and its role in the international monetary and tnanoial system. 1hreeeventsmakethisagendapartioularlyimportantatthemoment.lirst,A3LAN+3hasmade theChiangMailnitiativeMultilateralization(CMlM)operationalandisoreatingasurveillanoe unit based in 3ingapore in early 2011. 3eoond, the tnanoial orisis in Lurope's southern tier ledtoaresouepaokagefor0reeoeofunpreoedentedsizeandtheestablishmentofanearly $1 trillion arrangement that, if aotivated, would mix Luropean and lMl tnanoing. 1he stakes in mixed paokages have inoreased dramatioally and are now enormous. linally, the lMl has updateditslendingfaoilitiesandisreviewingproposalstoaddresssystemioshooksandimprove oollaborationwithregionalfaoilities,astaskedbythe3eoul3ummit. Cooperation between the lMl and Luropean authorities in reoent programs in Central and Lastern Lurope and in 0reeoe, while suooessful, is not likely to be easily replioated in other regions. 1he Luropean numerioal dominanoe at the lMl and the Luropean identity of the managingdireotorapersonintimatelyfamiliarwiththedeoision-makingmaohineryoftheLu, eurozone,andkeymemberstatesrenders the intimaoy of this oooperation speoito to Lurope. Choosing an Asian managing direotor, while desirable on other grounds, will not solve this problembutwould,rather,improveoooperationwithoneregionattheexpenseofoooperation with another. 1he lMl and regional tnanoing arrangements should therefore arrange key elementsofoooperationinadvanoe,ratherthannegotiatetheminthemidstoforisesasthey havedoneinthepast. Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 22 020membershold80ofthequotasand79ofthevotesofthelMl.Atthesametime,almost all of them partioipate in a bilateral or regional tnanoial arrangement, one member, the Lu, is itself a regional organization that operates a tnanoial arrangement. As essential players at all theselevels,themembersofthe020arebestsituatedtomandateoooperationamongthem. 1he020isthereforethelogioalgrouptoguidetheagendaforoooperationbetweenregional institutionsandthelMl.AsproposedbyPenning(2010),thatlnterinstitutionalAgendashould havethreeoomponents:measuresthatwouldapplyundernewfaoilitiesatthelMl,aoodeof oonduotbasedonasetofagreedprinoiples,anddeeperinstitutionalreforms. MeasuresunderNewlaoilitiesatthelMl Paving updated the institutions faoilities, members of the lMl oontinue to review proposals foroombatingsystemioshooks.lnoludedinthisagendaareseveralproposalsforhowthelMl oould oooperate with regional tnanoing arrangements, and vioe versa, now that new faoilities are in plaoe. 3peoitoally, the CMlM oould make qualitoation under the updated texible oredit line (lCL) and the new preoautionary oredit line (PCL) suftoient to satisfy the lMl link and thus qualifyforCMlMdisbursements.A3LAN+3ooulddisburseinparallelwithlMldisbursements under a multioountry aotivation of the lCL for the emerging-market eoonomies of 3outheast Asia,forexample,or,shoulditeventuallybeintroduoed,a0lobal3tabilizationMeohanism.1he 020 tnanoe ministers and heads of government should advanoe proposals for their regional tnanoing arrangements generally to oooperate with the lMl in these ways. But,inlayingthegroundworkforsuooessfulinterinstitutionaloooperation,the020shouldgo muoh further by endorsing a set of prinoiples for both the lMl and regional tnanoing arrangements andbyurgingtheiradoptionbythoseinstitutionstheseoondoomponentoftheframework. ACodeofConduotBasedona3etofAgreed-0nPrinoiples Transparency. 1ransparenoy varies signitoantly aoross regional arrangements and the lMl. 0noerelativelyopaque,thelMlhasbeoomeremarkablymoretransparentduringthe13years sinoe the Asian tnanoial orisis of 199798. 1he lederal Reserve swap agreements are now postedatthetimeoftheannounoementoftheagreementanddrawingsarereportedweekly in lederal Reserve statistioal releases. 1he CMlM, on the other hand, has lagged: A3LAN+3 tnanoe ministers have published a summary of the agreement establishing the CMlM but nottheagreementitself.Lifferenoesaorossfaoilitieswilltemptsomepartiestousetheleast transparent faoility in a tnanoial resoue. 1o enhanoe publio understanding, market oredibility, and interinstitutional oooperation, regional tnanoial faoilities should establish an internationally oompatibleandtransparentmeohanismfortheiroperations. Relationshipbetween0lobalandRegionallinanoiallnstitutions 23 Multilateral Review. ltwouldbeusefultohaveameohanismforformalreviewofregionalfaoilities through either the lMl or other multilateral arrangements. 1he international oommunity has reviewed the oonsistenoy of regional tnanoial faoilities with oountries' multilateral oommitments inaoompletelyadhoofashionorhasfailedtoreviewthematall.1hereisnoprooedurethrough whioh suoh arrangements are evaluated formally. 3ome have been disoussed by the lMls exeoutive board but have not been the foous of sustained board review. 3uoh reviews may be needed to identify any potential oontiots among these arrangements and the lMl, and to antioipate any stioking points in negotiations over parallel tnanoing. lt is far better to identify suohsnagsinadvanoethantoenoounterthemunexpeotedlyduring11th-hourbargainingina tnanoial orisis. Conditionality. PolioyoonditionalityisaoritioalquestionintherelationshipbetweenthelMland regional tnanoing arrangements. when grappling with orises, the lMl and regional faoilities must notoompetebyrelaxingthepolioyadjustmentsrequiredofborrowers.Lespiteitsaoknowledged mistakes,thelMlholdsaoomparativeadvantageoverregionalandmultilateralorganizations in the speoitoation of oonditionality by virtue of its analytioal resouroes, experienoe, and global perspeotivethatoonfersauniqueabilitytodrawlessonsaorossoountriesandregions.Regional tnanoing arrangements are thus wise to import or borrow the lMl's oonditionality. Powever, the oomparative advantage of the lMl in this respeot should not be oonsidered absolute. 1he Latvian program of 2008 represents a oase where the region prevailed over the lMl on an important element of polioy adjustment. Lu oftoials argued against ourrenoy devaluation,whiohmostleadingmembersofthelMlstaffandsomemembersoftheexeoutive board favored. 1he managing direotor and responsible Luropean Commissioner oame to an agreementwherebytheLuropeanpositionwasaooeptedandtheLuoontributedagreatershare ofalargeroverallpaokage,aprogramwhiohhassofarbeenquitesuooessful.lnprinoiple,if aregionalarrangementdevelopsanalytioallysound,high-qualityoonditionality,itoughttobe abletosubstitutethatforlMloonditionality.1heoritioaloonsiderationsarethequalityofthe program,nottheinstitutionalorigin,andtheoperationalooordinationoftheworkoftheregion withthatofthelMl. 1hestigmaassooiatedwiththepastlMloonditionalityalsoremainsveryrealinmanyemerging and developing eoonomies. ln Asia espeoially, the stigma oonoern goes beyond the simple eoonomio sense of being seen tnanoially weak to international investors, but rather it is a oomplex politioal risk for the national authorities to lose faoe to their own oonstituenoies. ln many parts of Asia, the Asian tnanoial orisis is still dubbed as the lMl orisis." lor proud Asians whoaohievedtheAsianmiraole,theshameofhavingtorendertheireoonomiosovereignty tothelMl,whiohseemedtorepresenttheinterestofwesternoapitalists,hashadlong-lasting impaot. And on the baok of regained eoonomio strength, a new nationalism rises. 1he lMl has introduoed new lending faoilities that rely more on ex-ante qualitoations rather than Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 24 ex-postoonditionalityforlendingtoreduoethestigma(disoussedinthenextseotion).etlittle enthusiasmbypotentialborrowersseemstoarise.Again,theprevailingstigmaisinlargepart duetotheoonoernofemergingmarketeoonomiesorregionsabouttheirunderrepresentation and limited intuenoe in the lMl's deoision making. unless this fundamental problem is properly addressed,nopieoemealreformonthemodeoffaoilitieswouldbeabletoalloweffeotiveuse oflMlresouroesduringaorisis. Bailing In the Private Sector. Reoognizingapredominantoonoernintheresolutionofreoent orises,regionalgroupsmustavoidguidanoetotheprivateseotorandpolioiesthatoouldunderout thelMls(andtheirown)effortstostabilizeoountries.lorexample,regionalarrangementsmust notenoouragebankstoreduoetheirexposurestooountriesthathaveborrowedfromthelMl. NorshouldthelMlunderoutarrangementsthatmightbeagreedwithintheregionsinthefuture regardingprivateseotorinvolvementandsovereigndebtrestruoturing. Cooperation. 1he lMl is unique among orisis-tghting faoilities in the universality and diversity of its membership. lt remains the tnal resort in efforts to oombat regionwide and systemio tnanoial orises. whereas a regional tnanoial faoility oan turn to the lMl if a regional operation fails, there is no fallbaok among international tnanoial faoilities if an lMl operation fails. All the lMl members thus have a strong interest in maintaining oontdenoe in the institution. lor these reasons,thelMlshouldretainthestatusofpreferredoreditor,atleastforthetimebeing. Powever,inadequatereforminthelMlgovernanoestruotureunderminesitsroleastheglobal tnanoial safety net provider. Lespite the efforts to address the stigma oonoern, delayed reform oflMlgovernanoeledtoaproliferationofregionalarrangements.Asiaalreadymovedforward in establishing national and oross-border orisis management and resolution meohanisms, notablyA3LAN+3sCMlM.1his$120billionreservepoolingarrangementistoprovideliquidity to any A3LAN+3 member in an emergenoy. 1here is a olear oase of mutual benetts from explioit oooperative arrangements between suoh regional arrangements and the lMl in the global network of tnanoial safety nets. Most regional arrangements still laok researoh oapaoity, humanresouroes,experienoe,andtheinstitutionalsetuptoeffeotivelysupporttheiroperations, makingoooperationwiththelMlessential.Closeoooperationwiththeregionalarrangements offersaohanoeofmitigatingthestigmaoonoerninlMloperations.ltwillalsohelptoohange theperoeptionofthegeographioandpolitioalbiasinthelMl,henoeimprovingtheoredibility, legitimaoy,andeffeotivenessofitspolioies. ldeally,theseprinoipleswouldbeinoorporatedintoaoodeofoonduotgoverningtherelationship betweenregionalfaoilitiesandthelMl.lf,however,agreementonthesepointsisunattainable owingtoheterogeneouspreferenoesamongtheregionsthe020shouldadvanoeoooperation alongeaohofthesepointsseparately. Relationshipbetween0lobalandRegionallinanoiallnstitutions 25 LeeperlnstitutionalReforms with respeot to the third, deeper institutional reforms, regional tnanoing arrangements should oreateolearandooherentmeohanismsforexternalrepresentation,inordertoengagethelMl and other international tnanoial institutions. Lxternal representation of the eurozone was an afterthought in the Maastrioht 1reaty and, while now established, is oumbersome and often oontentious.NoexplioitarrangementforrepresentationhasbeenagreedamongA3LAN+3,the lMlmustengagewithCMlMthroughitsmembers,noneofwhiohisauthorizedbythegroupto speakfortheregion. lor its part, the lMl and other llls should provide meohanisms for faoilitating and reoeiving the oolleotive representation of the regional institutions. 1he eurozone is represented in the exeoutiveboardunderarrangementsinvolvingtheLupresidenoy,LuropeanCommission,and Luropean Central Bank. 1hough workable, the arrangement is oomplex and not at all olearly replioableinotherregions. linally, the agenda raises the question of membership of regional organizations in the lMl. Atpresent,onlynationalgovernmentsaremembersofthelMl.Monetaryunionsthatmeeta highstandardofoohesivenessandhaveadoptedmajoritydeoisionmakingshouldbeaooepted as members of the lMl, their member states having surrendered monetary sovereignty to the regional union. 3uoh a move would oertainly faoilitate ooordination with the eurozone. ConsiderablestreamliningislikelytobeneoessaryifthelMlistoworksimultaneouslywitha numberofregionseffeotively. 26 Global Financial Safety Nets 1he global tnanoial orisis highlighted the speed at whioh events in one market oan rebound in another. Countries with seemingly little tnanoial diftoulty quiokly found themselves affeoted by sudden reversals of oapital tows and serious volatility in their tnanoial markets, inoluding their foreignexohangemarkets. 0ne oan envision a oonoentrio series of defenses against this kind of externally generated tnanoial shook beginning with national polioies and eventually reaohing global meohanisms. 1he trst line of defense oould be prudential regulations and sound macro-policiesimplemented at the national level. 1he reoent orisis experienoe suggests that these should be oonsidered neoessary, but not suftoient, to avoid tnanoial orisis. Another response at the national level is reserve accumulation as self-insurancebysomeemergingeoonomies.lntheaftermathofthe Asian tnanoial orisis, some oountriesespeoiallyinLastAsiahaveaooumulatedlargereserves asaformofself-insuranoe.loreignreserveaooumulationalsooausesdireotandindireotoosts, atbothdomestioandgloballevels.Attheoountryleveltheseinoludetheopportunityoostof keeping a large part of national wealth in holding developed oountries' tnanoial instruments rather than investing it in domestio projeots with higher returns and the impaot on domestio monetary oonditions (if sterilization reaohes very high levels). 1he orisis demonstrated that even this polioy is not foolproof, as oountries suoh as Republio of Korea experienoed signitoant tnanoial market turbulenoe despite possessing large reserves. Additionally, it is very diftoult to oaloulatetheoptimallevelofreserves,andasaoonsequenoe,self-insuranoeandmeroantilism areobservationallyequivalent.Aorisis-preventionpolioybasedonthemassiveaooumulationof reservesisimpossiblefortheglobaleoonomyasawholeandrisksaproteotionistbaoklashin ourrent aooount detoit oountries. 1heseoondlineofdefenseoouldbebilateral swap lineswithkeyourrenoy-issuingoountries. 1he Republio of Korea regained market oontdenoe onoe it announoed a $30 billion bilateral swaparrangementwiththelederalReserve,thoughitisunolearwhya$30billionswapline wouldbesoimportantinsofarastheRepublioofKoreahadroughly$200billionofreserves remaining. 1here are a variety of possible explanations that bear on the assessment of the eftoaoy of bilateral swaps. 1he most positive interpretation is that the bilateral swap arrangement represented a signitoant signal of oontdenoe and oalmed the market. A less oomplimentary explanationisthatitwaswidelybelievedinthemarketthattheauthoritiesintheRepublioof Koreawereoommittedtomaintaining$200billioninreserves,soasthereserveleveldwindled 0loballinanoial3afetyNets 27 tonearthisthreshold,$30billionwasalargeoontributiontoeffeotivereservesatthemargin. lnthisinterpretation,theswapwaseffeotivebutonlybeoauseofthedeoisionoftherelevant authorities to effeotively take $200 billion of reserves off the table. A third interpretation is that the nature of the orisis, involving the tnanoial seotor in the u3, made it eoonomioally and politioally diftoult for the authorities in the Republio of Korea to massively disinvest reserves that were largely held in u3 dollars in u3 tnanoial institutions that were under strain. under suohoiroumstanoes,wheresellingofdollar-denominatedassetsintheRepublioofKoreamight be interpreted as worsening the u3 tnanoial orisis and so adding fuel to the tre, the provision ofdollarsviaabilateralswapwouldaddressinbalanoe-of-paymentsproblemintheRepublioof Korea but avoid the possible intensitoation of the tnanoial orisis in the u3. Regional instruments represent a third response meohanism. lor example, during the orisis, regional arrangements suoh as the Lu medium-term tnanoial assistanoe faoility and Luropean BankCoordinationlnitiativeplayedanimportantroleinaddressingtheorisisinLasternLurope. Butinmostotherregions,regionalarrangementsarenotaswelldevelopedandhavenotbeenas importantinorisisresolution.LveninLurope,whereregionaloooperationisthemostadvanoed, the reoently established Luropean 3tability Meohanism is regarded as a supplementnot a substitutefortheglobalresponserepresentedbythelMl.Consideringtherelativeeasewith whioh tnanoe seotor shooks propagate interregionally, if not globally, regional responses by themselveshaveinherentlimitations.3ome,however,voioetheneedforthedevelopmentand advanoementofregionalinstitutionssuohasthenowmultilateralizedChiangMailnitiativeto oomplementandaugmenttheroleofthelMl,whiohhasadiversemembershipandso,too, manydiverseinterests(ALBl2010). Crisisexperienoessinoethe1990shaveenoouragedthelMltorethinkitsglobalorisisprevention programs. 1here are two related issues. lirst, there is a need for rapid disbursement without signitoant oonditionality, enoouraging a trend toward preapproval-type" approaohes based on the oomprehensive assessment for prequalitoation. 3eoond, the lMl is deeply unpopular with manypubliosaroundtheworld,andasaoonsequenoe,governmentsmaybereluotanttoapproaoh thelMl,evenwhenobjeotiveeoonomiooonditionswarrantit.(1hereisalsothepossibilitythat involvementinlMlprogramsmayaotasanegativesignaltomarkets.)1heseoonsiderationslie attheheartofthereluotanoeevenstigmaatbeoominginvolvedwiththelMl. 1he texible oredit line (lCL) introduoed in the midst of the reoent orisis, involves no ex-post oonditionalities(Table 2).etonlythree(relativelyseoure)oountriesaooessedthelCL,andthey appliedaftertheworstoftheorisishadpassed,suggestingthatthestigmaineitheritspolitioalor eoonomiomanifestationmaybeatwork.lnadditiontothelCL,thelMlintroduoedapreoautionary oreditline(PCL)inAugust2010.ltisalsooonsideringaglobalstabilizationmeohanism,aswell as ways to strengthen ooordination with regional tnanoing arrangements. Apart from the speoito formofthesafetynet,aspreviouslyobserved,resouroesareanissue.Moreimportantly,however, the required reform of lMl governanoe should be advanoed to enhanoe the role of lMl tnanoing for global tnanoial safety nets. Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 28 Concessional Facilities for Low-Income Countries (LICs) LxtendedCreditlaoility(LCl) 3tandbyCreditlaoility(3Cl) RapidCreditlaoility(RCl) Purpose 1osupportoountries eoonomioprogramsaimedat movingtowardastableand sustainablemaoroeoonomio positionoonsistentwith stronganddurablepoverty reduotionandgrowth 1osupportLlCsthathave reaohedbroadlysustainable maoroeoonomiopositions, butmayexperienoeepisodio, short-term tnanoing and adjustmentneeds,inoluding thoseoausedbyshooks 1oprovidelowaooess, rapid,andoonoessional tnanoial assistanoe with limitedoonditionalitytoLlCs faoinganurgentbalanoe-of- paymentsneed Eligibility AvailabletoallPoverty Reduotionand0rowth 1rust(PR01)eligible memberoountriesthatfaoe aprotraotedbalanoe-of- paymentsproblem AvailabletoPR01-eligible memberoountriesfaoing animmediateorpotential balanoe-of-paymentsneed AvailabletoPR01-eligible memberoountriesthat faoeanurgentbalanoe-of- paymentsneed Duration and repeated use 1hree-yearperiod,extendable forupto2additionalyears Rangesfrom12to24 months,normallylimitedto 2.5outofany5years 0utrightdisbursement eitherthroughone-off disbursementsorrepeated disbursementsoveralimited numberofyears Conditionality Memberoountriesagreeto implementasetofpolioies thatwillhelpthemsupport signitoant progress toward astableandsustainable maoroeoonomiopositionover themediumterm Memberoountriesagreeto implementasetofpolioies thatwillhelpthemaohieve astableandsustainable maoroeoonomiopositionin theshortterm Limited(outright disbursementwithoutexplioit program-basedoonditionality orreviews) Lending terms linanoingundertheLCl oarriesazerointerestrate, withagraoeperiodof 5.5 years and a tnal maturity of10years linanoingunderthe3Cl oarriesa0.25interestrate, butissubjeottoexoeptional reliefofallinterestpayments onoutstandingoonoessional loansduetothelMlthrough end-2011.lthasagraoe period of 4 years, and a tnal maturityof8years linanoingundertheRCl oarriesazerointerestrate, hasagraoeperiodof5.5 years, and a tnal maturity of 10years 4XDOLFDWLRQ criteria 3ouroe:lnternationalMonetarylund.www.imf.org/external/np/exr/faots/howlend.htm Table 2 International Monetary Fund New Facilities 0loballinanoial3afetyNets 29 Nonconcessional Facilities llexibleCreditLine(lCL) PreoautionaryCreditLine(PCL) Purpose 1oreduoetheperoeivedstigma ofborrowingfromthelMlandto enoourageoountriestoaskfor assistanoebeforetheyfaoeafull- blownorisis 1osupportoountrieswithsoundfundamentals andpolioytraokreoords,butfaoingmoderate vulnerabilitiesthatmaynotyetmeetthehigh lCL qualitoation standards. lt oombines a qualitoation prooess similar to lCL with fooused ex-postoonditionalityaimedataddressing vulnerabilities identited during qualitoation Eligibility Availabletomemberoountriesthat meet the qualitoation oriteria Availableonlytooountriesthatdonotfaoean aotualbalanoe-of-paymentsneedatthetimeof approval Duration and repeated use worksasarenewableoreditline, whiohattheoountrysdisoretionoould initiallybeforeither1or2yearswith a review of eligibility after the trst year worksasarenewableoreditline,withduration between1and2years.Countriesthatqualify underthePCLhavelargefrontloadedaooess, withupto500ofquotamadeavailable onapprovalofthearrangementandupto atotalof1,000ofquotaafter12months onsatisfaotoryprogressinreduoingtheir vulnerabilities Conditionality CountriesusingthePCLshouldoommitto afoousedsetofpolioiesaimedatreduoing the remaining vulnerabilities identited in the qualitoation prooess Lending terms 1heoostofborrowingunderthelCLis thesameasthatunderthetraditional 3tand-ByArrangements,whiohvaries withthesoaleanddurationoflending. 1helendingrateistiedtothelMls market-relatedinterestrate(basio rateofoharge),whiohislinkedtothe speoialdrawingrights(3LR)interest rate. 3ubjeottothesameoharges,suroharges, oommitmentfees,andrepurohaseperiod (3.55years)asthelCLand3tand-By Arrangements 4XDOLFDWLRQ criteria 1oqualifyforanlCLarrangement, amemberoountryshouldhave:(i) sustainableexternalposition,(ii) oapitalaooountpositiondominated by private tows, (iii) traok reoord of aooesstointernationaloapitalmarkets atfavorableterms,(iv)oomfortable reserveposition,(v)soundpublio tnanoes, (vi) low and stable intation, (vii)nobanksolvenoyproblems, (viii) effeotive tnanoial seotor supervision,and(ix)dataintegrityand transparenoy 1heoriteriatoassesswhetheraoountry qualites for the PCL are the tve broad areas enoompassed in the lCL qualitoation oriteria: (i)externalpositionandmarketaooess,(ii) tsoal polioy, (iii) monetary polioy, (iv) tnanoial seotorsoundnessandsupervision,and(v) dataadequaoy.Countriessufferinganyof thefollowingproblemsatapprovaloannot aooessthePCL:(i)sustainedinabilitytoaooess internationaloapitalmarkets,(ii)theneedto undertakelargemaoroeoonomioorstruotural polioyadjustment,(iii)apubliodebtposition thatisnotsustainableinthemediumterm withahighprobability,or(iv)widespreadbank insolvenoies Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 30 0lobal tnanoial systems appear to be inherently subjeot to periodio orises. 1here should therefore be an international tnanoial arohiteoture that is designed to address the nature of globalized tnanoe and the assooiated risks of periodio orises. Powever, in a world of inoreasingly oomplex eoonomio and tnanoial aotivity, relying on a single institution for resolving national, regional, or global orises may be unrealistio. 0lobal tnanoial safety nets essentially require a globalnetworkofsafetynets,enoompassingthemultiplelayersoforisis-responsesystemsat allthesethreelevels. Arangeofregionalarrangementsarebeingestablishedandstrengthenedtooombatpotential orises(ArnerandPark2010).Asiahasbeenattheforefrontofsuohregionaleffortsandthree important regional initiatives are noteworthy: liquidity provisionCMlM, maoroeoonomio and tnanoial surveillanoeA3LAN+3 Maoroeoonomio Researoh 0ftoe, and regional bond market developmentAsianBondMarketslnitiative. 1he international arohiteoture should be designed to support suoh regional arrangements in preventing and managing orisis. Lffeotive regional arrangements would then improve the effeotiveness of the international tnanoial arohiteoture in orisis management and resolution, allowing that the ohallenges of globalized tnanoe and the oountry- or region-speoito development agendaarebetteraddressed. 31 Trade Atthewashington3ummit,the020pledgedtorefrainfromraisingnewbarrierstointernational trade and investment, a pledge that has sometimes been honored in the breaoh (Pufbauer, Kirkegaard,andwong2010). 1his pledge was most reoently reaftrmed in 1oronto, where 020 leaders renewed their oommitment to refrain from imposing new barriers on trade in goods, servioes,orinvestment,fromimposingnewexportrestriotions,orfromimplementingmeasures inoonsistent with the world 1rade 0rganization (w10) to stimulate exports. Moreover, they oommittedtodismantlingoffendinginitiatives.Andwhiletheyreiteratedtheiroommitmentto oonoluding the Loha Levelopment Round of global trade negotiations under the auspioes of thew10,theydidnotprovideanytimetableorsuggestanypartioularinnovativeapproaohor meohanismthroughwhiohthisgoalwouldbeaohieved. 1hemostreoentanalysisbyPufbauer,Kirkegaard,andwong(2010)suggeststhatwhileaotual proteotive measures peaked in the trst quarter of 2009, there has not been an abatement of either aotual or pipeline proteotion in 2010, and a seoond wave of proteotion appears poisedfor2011.Powever,someoftheproteotionistaotionswereeithertime-limitedandhave lapsedorwerewithdrawnbypolioymakers.Pufbauer,Kirkegaard,andwong(2010)oonstruot metriosbasedonnewproteotionimposed,pipelineproteotion,majorproteotivepolioies,tariff lineandpartneroountryaffeoted,aswellasmeasureslapsedorwithdrawn.0nthebasisof theiroompositeoountryrankings,the020membersthathaveintroduoedthemostpostorisis proteotionareBrazil,theRussianlederation,theu3,lndia,andArgentina,theleastproteotionist are 1urkey, 3audi Arabia, the Republio of Korea, Australia, and Mexioo. Powever, they do not oonstruot rankings of virtuous oountries that have removed proteotion, insofar as the withdrawalwasmadepossiblebyoriginalimpositionofproteotion. Possibly the simplest and most effeotive means of tghting proteotionism would be to suooessfully oonoludetheLohaRoundnegotiations.1heoonolusionoftheLohaLevelopmentAgendahas beenoneverydeolarationofthe020summitmeetingsbutanysubstantialprogressremainsto be seen (Bark and Kang 2011). Apart from tghting proteotion, suooessful oonolusion of the round wouldrepresentagrowth-enhanoingstruoturalreformforallpartioipants.lurthermore,asmost ofthestalemateissuesinvolvedisputesamongtheooremembersofthe020,notaddressing andresolvingthedisputesoouldseriouslyunderminetheoredibilityofthe020summitasthe premier forum for international eoonomio oooperation (Bark and Kang 2011). 0ne possibility Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) wouldbetoexpandtheservioesnegotiation,whiohwouldholdforththepossibilityofinduoing greateroonoessionsfromadvanoedoountriesonagrioulturalsubsidiesandrelatedissues. Anotherpossibilitywouldbetoforma020groupof1radewisementoestablishanlknow it when l see it dootrine against new proteotionism. 3 020 leaders appear to reoognize that proteotionist measures oonoern the world oommunity when they provoke justitable demands, onthepartoftradingpartners,foremulationorretaliation.1ogiveforoetothisreoognition,020 leaders should appoint a small group of widely reoognized and globally representative trade experts. 1hese experts should be then mandated to spotlight new measures, whether w10 oompliantornot,thatoonstituteproteotionisminapolitioalsensebuildingontheaotivityof theweb-based0lobal1radeAlertandothersuohgroups. 1hisgroupoouldaotasnameandshameenforoersoftheopeneoonomypledgesmadeby 020 leaders in suooessive summits. lf this group had been established in 1oronto, the rare earthquotasofthePeoplesRepublioofChina(PRC),theRussianlederationsproposedauto tariffsandextendedgrainexportban,andtheunitedKingdomsimmigrationrestriotionswould allbefairgameforadverseoomment.Pronounoementsbythe1radewisemenoanbothdeter proposedproteotionistaotsandoommendoountriesthatunwindpriorproteotionistmeasures. Lxamplesofdeservedpraisewouldbelndiasremovalofitssoybeanoilimportdutyandthe Russianlederationsdeoisionstoallowarangeofdisoretionaryimporttariffstoexpire. 1his high-protle name, shame, and praise exeroise oould serve as a guidepost for all w10 members, even if its purview were limited to 020 members. ln addition to their periodio pronounoements, the 1rade wisemen oould provide useful brietngs to trade ministers at summit meetings. Anotherpossibilityoouldbetoestablisharegular020tradeministersmeeting.1radeissues should be brought direotly into the 020 prooess, similar to the manner in whioh tnanoe ministers meet independently, but alongside their politioal leaders. 1o ensure broad representation of the multilateral trading system at regular 020 trade ministers meetings, the direotor- general of the w10 should serve as the ohair. Reports from the 1rade wisemen would give the ministers an independent assessment of global trade oonditions. As early as their trst meetinginwashington,LCinNovember2008,020leaderstaskedtheirtradeministerswith oonoludingthew10sLohaLevelopmentRound,andpledgedtostandreadytoassistdireotly, as neoessary" (020 2008). ln these diftoult times, trade ministers need all the assistanoe they oangetfromtheir020leaders.1oughissuesthatblooktheLohaLevelopmentRound,aswell as fresh oontiots sparked by episodes of proteotion, invariably involve high politios. Regular 020 3 1hephraselknowitwhenlseeitwasmadefamousbyu33upremeCourt1ustioePotter3tewartina1964legal opinion, who observed that while he oould not detne pornography, he knew it when he saw it (and in the oase at hand rejeoted the state's olaim that a tlm was pornographio). 32 1rade meetingsoftradeministerswillensurethatimportantissuesaregivendueattentionandthat thetradeagendaisnotrelegatedtolastplaoeinfuturesummits. linally, trade is a oritioally important faotor in eoonomio growth: no oountry has managed to growandreduoepovertywithoutaooesstoandtheabilitytotrade.lorlow-inoomeoountries partioularly,tradeoontributestogrowthbyexpandingthemarketfortheirgoodsandservioes. lnthemediumtolongterm,tradefurtheroontributestogrowththroughimprovedproduotivity brought about by the import of improved teohnology, learning-by-doing, and introduotion of oompetition. ButthelaokofprogressintheLohaRoundnegotiationsaugursforalternativeapproaohesthat oan be implemented while the round remains stalled. Aid for 1rade and duty-free quota-free (Lll)marketaooessforproduotsfromleastdevelopedoountries(LLCs)aretwo.Aidfor1rade wouldenhanoeoapaoitybuilding,inoludinginfrastruotureandeoonomioreformsfromthesupply sideinlow-inoomeoountries,whileLllmarketaooesswouldinoreaseLLCexportsfromthe demandside. 1he personal representatives of 020 heads of governments (oommonly known as 3herpas) agreedattheir1uly2010meetingin1orontotoinoludetradeanddevelopmentasoneofthe mainpillarsofthe020Levelopmentworking0roup,withapartioularfoousonAidfor1rade andLllmarketaooessforLLCproduots.1heworkinggroupislookingintowaystoexpandAid for1rade,aswellastoenhanoetheeffeotivenessoftheapproaohthroughbettermonitoring.ln addition,020membersarepreparingtodisoussexpansionofLllmarketaooessforLLCs, inoludingtheissueofimprovedrulesoforigin.1heseproposedmeasuresareinoludedinthe multiyeardevelopmentaotionplans,whiohhavebeenadoptedatthe3eoul3ummit. 33 34 Development 1hereoentorisishighlightstheneedtoseouresustainedandbalanoedgrowthglobally.Although the postorisis reoovery appears to be gaining traotion, the world faoes daunting ohallenges of turningthisreooverymomentumintoenduringlong-termgrowth. AtthePittsburgh3ummit,thegloballeadersolearlymandatedthe020toaddressdevelopment issues,reoognizingthatreduoingpovertyandnarrowingthedevelopmentgapareessentialto the broader 020 framework of aohieving strong, sustained, and balanoed global growth. 1he reoent orisis has likely resulted in an additional 50 million people living in extreme poverty (on less than $1.25 a day) in 2009 and approximately 64 million more people by end-2010 (020,2010).whilestronggrowthhasbeenexhibitedindevelopingpartsoftheworld,inoome inequality and pervasive poverty also remain a real threat to eoonomio, sooial, and politioal stabilityinmanyemergingmarketeoonomies. Lmergingmarketeoonomieshaveproventobeastrongengineofglobalgrowthinthepostorisis reooveryphase,althoughinoomeandnon-inoomedevelopmentgapsremainlargethere(Brooks etal.,2010).unlessthesedevelopmentgapsaretaokled,aohievingsustainedandbalanoed growthwillbeunobtainable.1hekeyishowtolinkexplioitlydevelopmentissuestothebroader maoroeoonomio and tnanoial polioy framework. Asiaishometoover2.5billionpeople,or37oftheglobaltotal.3ustainedhighgrowthinAsia isaneoessaryelementforoontinuedpovertyreduotionandimprovedlivingstandards.Buta largepartofAsiaisstillstrugglingwiththeoverarohingissueofpovertyeradioation.Lmerging Asian eoonomies will have to stimulate domestio demandoonsumption for some oountries andinvestmentforothersandredireotthesouroesofgrowthfromexportstointernaldemand. RebalanoingAsiaisoritioaltorebalanoingtheworld.whileemergingAsianeoonomieshaveled the reoovery prooess from the reoent orisis, their environmental oonditions and some sooial indioatorshaveworsened.Penoe,howdevelopingAsiataoklesitsdevelopmentohallengesholds animportantkeyforthefutureglobaleoonomy. Reforms are under way, but many national and regional ohallenges remain unaddressed. ultimately, maoroeoonomio and tnanoial reforms should support real seotor aotivity, narrowing developmentgapsandreduoingpoverty.1he2010020hostoountry,theRepublioofKorea, Levelopment 35 hasbothapartioularinterestin,andpotentiallyinsightinto,developmentissues.Atthe1oronto 3ummit,the020leadersagreedtoinoludedevelopmentasakeyagendatopioofthe3eoul 3ummitandtoestablishaworking0rouponLevelopmenttooraftadetailedagendaandaotion plans.Alongwithmeasurestopromoteeoonomiogrowthandresilienoe,theywereadoptedat the3eoul3ummit.ltistheobligationofthe020leaderstomeetthesepromises. 1houghextremelyimportant,thedevelopmentissuealsooarriespotentialrisksforthe020.lirst, mostdevelopingoountriesarenotatthetable,sothe020runstheriskofappearingtodiotate polioytounrepresenteddevelopingoountrieseitherdireotlyorindireotly,throughthelMland themultilateraldevelopmentbanks(MLBs),withoutproperprooess.3eoond,thedevelopment issue is multifaoeted and ohallenging, and plaoing it on the agenda risks drawing attention away from more immediate issues of maoroeoonomio and tnanoial management. 1he only way to avoid diluting the importanoe of development issues while maintaining the momentum of maoroeoonomio and tnanoial reforms would be to tightly weave the priority development agenda into the main framework of maoroeoonomio and tnanoial polioies. 1here is no one size tts all" formula for development suooess, however, developing oountries must take the lead in designing and implementing development strategies tailored to their individualneedsandoiroumstanoes.1hroughanextensiveprooessofoonsultation,thesummit hosts have identited nine key pillars to eoonomio growth and resilienoe. 4 1hisseotiondisousses sixofthemplusoorporategovernanoe,whiohdeservesfurtheroonsideration. PumanResouroesLevelopment 1heaooumulationofhumanoapitalisperhapsthesinglemostoritioaloomponentofanyoountrys growthanddevelopmentstrategy.1hereisaoontinuedneedtoimprovetheoompletionlevels andqualityofprimaryeduoationavailableinmanydevelopingoountriesandtosharpenthefoous onemployment-relatedskillsgainedthroughenhanoedvooationaleduoationandjobtraining, thoughadmittedlyimprovingthematohbetweeneduoationalourrioulaandthedemandsofthe job market oan be quite diftoult, espeoially for governments with limited resouroes. 1hereissoopefor020involvement,inoludingsupportinginitiativesthatmightinolude(i)oreating indioatorsandmonitoringtheoompletionlevelsandqualityofprimaryeduoation,(ii)assessing theavailabilityandgapsinteohnioalandintermediateleveleduoationandvooationaltraining, (iii)fosteringtiesbetweeninstitutionsofhighereduoation/universitiesandthebusinessseotorin 4 1he 020 leaders at the 3eoul 3ummit identited nine areas or key pillars that will help ensure inolusive and sustainable eoonomio growth and resilienoe in developing and low-inoome oountries. 1hese are infrastruoture, private investment and job oreation, human resouroes development, trade, tnanoial inolusion, growth with resilienoe, foodseourity,domestioresouroemobilization,andknowledgesharing.3ee020(2010). Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 36 low-inoomeoountriesand020memberoountries,and(iv)sharingbestpraotioesonvooational eduoationandspeoializedjob-skillstraining. lnfrastruoture No oountry has aohieved sustained eoonomio growth without maintaining signitoant rates of infrastruoture investment. et over the last several deoades infrastruoture investment in developing oountries has been insuftoient. Many oountries faoe severe infrastruoture bottleneoks, espeoiallyinpower,transport,someformsofoommunioations,anddigitaloonneotedness. 1opromotegreaterprovisionofpubliolong-termoapitaltowarddeveloping-oountryinfrastruoture, theroleofMLBs,partioularlyinlargeoross-borderorregionalprojeots,shouldberevisited,as well as the potential for mobilizing publio oapital through sovereign wealth funds and private oapital to tnanoe infrastruoture, inoluding through publioprivatepartnerships. Privatelnvestmentand1obCreation Capital formation is key to expanding oapaoity and employment opportunities. Private investment,mainlyfromdomestiosouroes,butalsofromforeigndireotinvestment,istherefore oruoial to generating employment and, by extension, poverty reduotion. et the outoomes in manydevelopingoountrieshavebeendisappointing.1hissuggeststheneedforamoreholistio oonsideration of the domestio polioy environment, whioh is under the direot purview of looal governments,aswellastheregionalenvironment,whiohisnot.1helattermaybepartioularly important in the oase of small oountries, whioh may have trouble attraoting the attention of foreign investors or where foreign investment may be peroeived as involving relatively high txed informationortransaotionsoostsrelativetolargerormorefamiliaralternatives.1he020may beabletohelplow-inoomeoountriesaddresssuohissuesasperoeptionofrisk,marketsize, oapaoity to negotiate with foreign investors, and aooess to tnanoe, in ways to promote investment andjoboreation. linanoiallnolusion More than 2 billion adults do not have aooess to formal or semiformal tnanoial servioes. Lmpirioal evidenoe suggests that improved aooess to tnanoe is not only pro-growth but also pro-poor, thus makingitameanstoreduoeinoomeinequalityandpoverty.1he3eoul3ummitbuildsonthe prioraotivitiesofthelinanoiallnolusionLxperts0rouplaunohedatthePittsburgh3ummitto address the issue of tnanoial aooess for small and medium-sized enterprises. Levelopment 37 0n another note, how to improve remittanoe tows is one of the key tnanoial development areas for 020oonsideration.1oday,180millionpeople,orabout3oftheglobalpopulation,liveoutside theiroountryofbirthwithmostofthisoross-bordermovementaooountedforby3outhNorth and3outh3outhmigration.Remittanoes,estimatedtobeatleast$167billionin2005,area oritioal oomponent of oapital tows for many poor oountries. 1he 020 should address ways to support a reduotion in barriers to remittanoe tows. 0rowthwithResilienoeandlood3eourity 1he 020 should be oonoerned with ways not only to promote growth but also to sustain it in low-inoomeoountries.Lmpirioalevidenoeshowsthatmostpooroountriesexperienoeperiodsof positiveeoonomiogrowth,buttheseareoftensubsequentlyoffsetbyoontraotions.Low-inoome oountries are generally ill-equipped to deal with unfavorable shooks and volatility, whioh oan arisefromavarietyofsouroesinoludingoommodityboombustoyolesandnaturaldisasters. Run-upsinglobalgrainprioeshavehadapartioularimpaotonpooroountries,andfoodseourity remainsakeylong-termohallenge,asreoognizedbythe020leadersatPittsburgh. 1he 020 oould make a partioularly important oontribution by assisting low-inoome oountries in improving their resilienoe to suoh shooks. lor example, the 020 oould support the study and implementation of risk-mitigating instruments, suoh as weather-based orop insuranoe. lt oouldalsooontributetoeffortstoimprovefoodseouritybyexertingimprovedoversightoverthe relevant publio seotor organizations, by supporting the promotion of teohnologioal advanoes thatboostagrioulturalproduotivity,andbyenoouragingmoreeffeotivemobilizationofprivate seotorresouroes. 0overnanoe Lxtensive researoh has pointed to domestio institutions of governanoe as a key oontributor to eoonomio performanoe and suooessful development outoomes. 1he effeotiveness of all the aotions reoommended above would be improved with oomplementary strengthening of governanoeinareassuohasregulatoryreformandtaxsystemreform. 38 Energy and Climate Change 1heLureofthe020asanAlternativelorumforClimateLiplomaoy 1heohaosoftheLeoember2009olimateohangenegotiationsinCopenhagenhasleftmany intheinternationalenvironmentaloommunitysearohingforanewstrategy,andanewforum, foradvanoingolimateohangeoooperation. 5 lntheyearsinoetheCopenhagenoonferenoethe 020 has been repeatedly toated, both by polioy makers and others, as a possible alternative totheexistingunitedNations(uN)prooessforadvanoingolimateohangeoooperation(theuN lramework Convention for Climate Change or uNlCCC). 3everal attributes make the 020 a seeminglyattraotivevenueforolimateohangediplomaoy,thoughoaveatsremain. Membership lnoontrasttotheuNlCCC,whereallpartieshaveequalvoioe,regardlessofsize,andoonsensus among the full group is required to take aotion, the 020s exolusive membership allows for more eftoient deoision making. Aooounting for over 75 of global greenhouse gas emissions andthevastmajorityoftheworldsmitigationpotential,aotionby020oountriesaloneoould keepglobaltemperatureinoreasestolessthan2degreesCelsius,atleastforthenextseveral deoades(Figure 7).Andinreoentyears,all020members,save3audiArabiaand1urkey,have announoednationalemission-reduotiontargets. lormat 1he uN negotiations have been aimed at produoing a legally binding olimate ohange treaty. 3harp disagreement over what legal obligations are appropriate for whioh oountries under 5 1heourrentunitedNations(uN)prooessohargedwithimplementingthe1994uNlrameworkConventiononClimate Change(uNlCCC)hasmadelittleformalprogresssinoelaunohingtheourrentroundofnegotiationsin2007.1he uNlCCCsrequirementforoonsensusamongall194partiestotheoonventionforevenroutineprooeduraldeoisions and sharp differenoes in oountries oore positions resulted in a stalemate in negotiations up to and through the Copenhagen oonferenoe. Peads of state from 30 key oountries aooounting for the majority of global emissions and global population were able to salvage the summit from oomplete oollapse by negotiating the nonbinding Copenhagen Aooord. But even this modest outoome was unable to garner the unanimous support required for formaladoptionbytheuNlCCC.ManypartiesandobserversleftCopenhagenwonderingwhethertheuNprooess willeverbeabletodeliverameaningfulinternationalsolutiontoolimateohangeifanyoneoountry,nomatterhow small,hastheabilitytoblookadeal. LnergyandClimateChange 39 1% 1% 3% 5% 2% 4% 2% Brazil PRC France Germany India Italy Japan Russian Federation United Kingdom United States Rest of G20 Rest of the World 21% 5% 19% 18% 19% PRC = People's Republic of China; Rest of G20 includes Argentina, Australia, Canada, Indonesia, Republic of Korea, Mexico, Saudi Arabia, South Africa, Turkey, and rest of European Union 27 (Austria, Belgium, Bulgaria, Czech Republic, Cyprus, Denmark, Estonia, Finland, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and Sweden). Note: Carbon dioxide emissions refer to those stemming from the burning of fossil fuels and the manufacture of cement. They include carbon dioxide produced during consumption of solid, liquid, and gas fuels and gas faring. Source: World Development Indicators, World Bank. a) Carbon Dioxide Emissions, 2007 8% 15% 2% 2% 8% 1% 1% 1% 2% 12% 18% 30% Brazil PRC France Germany India Italy Japan Russian Federation United Kingdom United States Rest of G20 Rest of the World PRC = People's Republic of China; Rest of G20 includes Argentina, Australia, Canada, Indonesia, Republic of Korea, Mexico, Saudi Arabia, South Africa, Turkey, and rest of European Union 27 (Austria, Belgium, Bulgaria, Czech Republic, Cyprus, Denmark, Estonia, Finland, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden). Note: Nitrous oxide emissions refer to emissions from agricultural biomass burning, industrial activities, and livestock management. Source: World Development Indicators, World Bank. b) Nitrous Oxide Emissions, 2005 Figure 7 Greenhouse Gas Emissions (ofworldtotal) Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 40 suoh a treaty is a large part of why the negotiations toundered. A tve-page politioal agreement betweenkeyoountriesinCopenhagen(knownastheCopenhagenAooord)demonstratedthat itispossibletoreaohagreementonsubstanoeinanonbindingdeal.1helessformalnatureof the020oouldhelpadvanoeinternationalolimateoooperationonavoluntarybasis,buildingon theCopenhagenAooord,untilanewlegallybindingagreementispolitioallypossible.1hiswould helppreventuNlCCCaorimonyfromhinderingeffortstoturnfairlypositivedevelopmentsinthe domestiopolioyofmost020oountriesintointernationaloooperationandtrust. Lxpertise Built on top of a tnanoe ministers' prooess, the 020 has oonsiderable oapaoity and expertise when it oomes to questions of olimate tnanoe, a key pillar of the negotiations. 020 oountries also provide the vast majority of both tnanoial aid and foreign direot investment into developing oountries at present and will likely oontinue to do so under any future olimate tnanoe regime. whether identifying potential souroes of publio tnanoial support for mitigation and adaptation, establishingnewinternationalfunds,ordevelopingmeohanismstoinoentivizeprivateinvestment indevelopingoountries,the020oouldplayanimportantrole. 6% 15% 1% 1% 11% 0.6% 1% 8% 1% 12% 16% 28% Brazil PRC France Germany India Italy Japan Russian Federation United Kingdom United States Rest of G20 Rest of the World PRC = People's Republic of China; Rest of G20 includes Argentina, Australia, Canada, Indonesia, Republic of Korea, Mexico, Saudi Arabia, South Africa, Turkey, and rest of European Union 27 (Austria, Belgium, Bulgaria, Czech Republic, Cyprus, Denmark, Estonia, Finland, Greece, Hungary, Ireland, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden). Note: Methane emissions refer to those stemming from human activities such as agriculture and from industrial methane production. Source: World Development Indicators, World Bank. c) Methane Emissions, 2005 ligure7 continued LnergyandClimateChange 41 Leveland3oope 1heCopenhagenoonferenoeoftoially, the 15th uNlCCC Conferenoe of the Partieswasunique inthenumberofleadersattending.luturesuohoonferenoesareunlikelytohavepartioipation byheadsofstate.AndwhiletheMajorLoonomieslorumheldaleadersmeetingin2009,itis unlikely to do so again. As a result, the 020, self-identited as the premier forum" for international eoonomio oooperation, will likely be the only ongoing plurilateral leaders prooess with both developed and developing oountries at the table and a mandate that oould extend to olimate ohange.1heooreissuesatplayinolimatenegotiationswillultimatelyneedleadersattentionto unlookthem(aswiththeCopenhagenAooord)andthe020oouldbeinstrumentalinthatprooess. lnaddition,addressingolimateohangealongsideother020agendaitemspotentiallyopensup newpathwaystoadealnotpossibleinthemorenarrowlyfoouseduNlCCCsetting. 1heChallengesandRisksofPuttingClimateonthe020Agenda while attraotive on many levels, however, the 020 also has some signitoant shortoomings as aforumforaddressingolimateohange.1houghthegroupaooountsforthemajorityofglobal emissions, it exoludes oountries most vulnerable to the impaots of olimate ohange. None of the 49 oountries the uN oategorizes as least developed or the 39 oountries that negotiate oolleotivelyintheuNastheAllianoeof3malllsland3tateshasaseatatthetableandonlyone Afrioanoountry(3outhAfrioa)isrepresented.Leastdevelopedoountries,theAllianoeof3mall lsland3tates,andtheAfrioangroupareoritioaloonstituenoiesinolimatenegotiationsandany dealstruokintheirabsenoewouldlaokoredibilityandwouldbewidelyoritioizedbythoseoutside the 020 umbrella. 1his is partioularly true on issues of olimate tnanoe, as these groups will likely reoeive the lion's share of future tnanoial tows. 1o taokle the negotiations direotly, the 020 would trst need to establish a 020+ prooess for olimateohangethatinoludedrepresentativesfromvulnerableoountrygroupings.Butgettingthe rightgroupofoountriestogetherwillnot,initself,deliveraolimateohangedeal.1hefaotthatsix oountriesCuba,Bolivia,Nioaragua,3udan,1uvalu,andvenezuelawereabletopreventthe 194-memberConferenoeofthePartiesfromadoptingtheCopenhagenAooordleftmanywiththe impressionthattheprinoipalimpedimentstoprogressinuNlCCCnegotiationsarethenumber ofaotorsandtheneedforoonsensus.lnfaot,itisthefundamentaldifferenoesinthenegotiating positionsof020oountriesthemselvesthatwereattheooreoftheCopenhagenstalemate. At its 2010 olimate oonferenoe in Canoun, the uN demonstrated a greater ability to deliver than most expeoted. 3inoe no one expeoted a legally binding agreement to oome out of oonferenoe,negotiatorswerefreetofoousonsubstanoe.AndwiththeuNprooessonnotioe afterCopenhagen,noonehadtheappetiteforanotherstandoff.All194Parties,exoeptBolivia, ohosepragmatismoverideologyandexpandedtheCopenhagenAooordintoaformaluNlCCC agreement. 1he teohnioal work now required to implement the agreement is less suited to a 020-like forum, and the uN has regained a great deal of oontdenoe. Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 42 MakingProgressonClimatethroughtheLxisting020Agenda whilethereislittlesoopeatpresentforthe020totakeonolimateohangediplomaoy,itoando muohtoadvanoeolimateohangeaotion.1heexisting020agendahasthepotentialtoreduoeglobal emissions,aooeleratethedeploymentofoleanenergyteohnology,andmobilizepublioandprivate tnanoe for mitigation and adaptation. 3everal areas deserve partioular attention and support. lossilluel3ubsidies ln Pittsburgh, 020 oountries agreed to phase out and rationalize over the medium term ineftoient fossil fuel subsidies. ln 1oronto, 020 energy and tnanoe ministers presented their plans for fultlling this pledge. while enoouraging, their reports highlighted how muoh work remains for the020inthisarea. Areportpreparedforthe020aheadofthe1orontomeetingestimatesthatnearly$557billion worthoffossilfueloonsumptionsubsidiesexistgloballyandthateliminatingthemwouldreduoe oarbon dioxide emissions by 6.9 in 2020 oompared with the business-as-usual soenario (lLA et al. 2010). By oomparison, the Copenhagen Aooord mitigation oommitments would reduoeglobalemissions713belowthatsoenario.lnaddition,the0lobal3ubsidieslnitiative estimatesthatanadditional$100billioninfossilfuelsubsidiesexistontheproduoerside,the phaseoutofwhiohwoulddeliveradditionalemissionsreduotiongains. lntheirreportstothe020,12020oountriesofferedstrategiesandtimetablesforrationalizing and phasing out fossil fuel subsidies, but only three oountriesArgentina, lndonesia, and Mexiooinoluded speoito plans for eliminating oonsumption subsidies, but these three oountries aooountforonly24of020oountryoonsumptionsubsidiesasestimatedbythelnternational Lnergy Agenoy (lLA). 1he remainder fooused on the produotion side. Most oountries plans ooveredonlyafraotionofthesubsidieslandsoape. Part of the laok of ambition oan be explained by differenoes of opinion among 020 oountries on the detnition and measurement of ineftoient fossil fuel subsidies"differenoes that also exist between the authors of the joint report. 1he mandate of the 020 Lnergy Lxperts 0roup should be extended and expanded in an attempt to address these detnitional issues so that 020 membersoanputforwardaqualitativeinventoryofdomestiosubsidypolioiesthatisoonsistent withquantitativeassessmentsoftheextentofsubsidiesinthoseoountries.0nlywithoommonly agreed detnitions will the 020 be able to monitor progress of individual members in implementing theirdomestiostrategiesandassesstheprogressofthegroupinmeetingitsoolleotivetarget. lnadditiontotraokingoountriesdomestiosubsidystrategies,the020shouldidentifyseotors whereooordinatedinternationalaotionwillallowforgreaterdomestioambition.lorexample, attemptstophaseoutsubsidiestooilandgasproduoersinoountryXwilllikelyfaoedomestio LnergyandClimateChange 43 resistanoeoutofoonoernsthatdoingsounilaterallywillonlypushproduotiontootheroountries, makingoountryXmoredependentonimportedoil.Coordinatedaotionamong020oountries wouldhelpaddresstheseoonoerns. ReformofMultilateralLevelopmentBanks Most multilateral olimate tnanoe ourrently tows through MLBs. lnoreasing MLB resouroes and reformingMLBgovernanoehavefeaturedprominentlyonthe020agenda,inpartbeoauseof theinoreasedprominenoeandimportanoeofissueslikeolimateohange.AttheLondon3ummit heldinApril2009,leaderspledgedtomakethetransitiontowardolean,innovative,resouroe eftoient, low oarbon teohnologies and infrastruoture" and oalled on the MLBs to oontribute fully totheaohievementofthisobjeotive. 1he views of MLB board members differ oonsiderably on how to translate these broad pronounoements into projeot-level deoision making. As part of the 020s broader effort to modernizeMLBgovernanoe,thegroupoouldplayausefulroleinestablishingamoreoonsistent frameworkforenergyandenvironmentallendingtoavoidtheneedforaoontentiousandpublio debateoneaohprojeot.1heworldBank,forexample,isinthemidstofrevisingitsenergyand environmentalstrategies,aprooessthatthe020oouldhelpmold. Lxiting3timulus Coordinated tsoal expansion in the faoe of the orisis is perhaps the 020's most important aohievement thus far. And with energy and environmental issues gaining prominenoe on domestio polioy agendas in most 020 oountries, leaders pledged at the London 3ummit to make the best possible use of investment funded by tsoal stimulus programmes toward the goalofbuildingaresilient,sustainable,andgreenreoovery.0nthebasisofstudiesbyP3BC and the lLA, Pouser (2010) suggests that 16 of 020 oountries 2009 and 2010 stimulus spendingwenttoolimate-friendlyprojeots (Table 3).1hisfundinghasbeenthedominantdriver ofdomestioenergyandolimatepolioyin020oountries,pushingglobaloleanenergyresearoh anddevelopmentbudgetstohistoriohighsin2009afterthreedeoadesofsteadydeoline. As the 020 disousses when and how to end the ourrent tsoal expansion, speoial attention should bepaidtoenergyandenvironmentalspending.1he020hashighlightedtheimportanoeofpolioy ooordination as oountries roll baok stimulus programs. 1his is doubly true for olimate-related stimulus programs. Clean energy is a global market and trms will be able to aohieve greater oost reduotionsifthelargestmarkets(020oountries)oanhelpprovideeoonomiesofsoalethrough polioyooordination.Andolean-energyresearohdollarsoangofartherwhenprogrammedrelative towhatotherlargeoountriesaredoing.Asaresult,aooordinatedtransitionfromstimulus-driven energyandolimateinvestmenttolong-termenergyandolimatepolioywillprovidegreaterenergy seourity, emissions reduotion, and energy oost savings benetts than disparate aotion. Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 44 Country Package Announcement Date Total Spending ($billion) Period (years) Green Spending ($billion) % Green Argentina n.a. n.a. n.a. n.a. n.a. n.a. Australia NationalBuilding and1obsPlan 3lebruary2009 26.7 20092012 2.5 9.3 Budget20092020 12May2009 17.1 20092013 6.8 39.8 Brazil n.a. n.a. n.a. n.a. n.a. n.a. Canada LoonomioAotionPlan 271anuary2009 31.8 20092013 2.8 8.7 China,Peoples Rep.of NationalLevelopmentand ReformCommission (NLRC)3timulus 9November2008 586.1 20092010 200.8 34.3 Budget2009 6Maroh2009 63.0 2009 17.2 27.3 Luropeanunion LoonomioReooveryPlan 26November2008 38.8 20092010 24.7 63.7 lranoe RevivalPlan 10Leoember2008 33.7 20092010 6.1 18.3 0ermany 3timulusPlan 5November2008 104.8 20092010 13.8 13.2 ltaly LmergenoyPaokage 28November2008 103.5 2009onward 1.3 1.3 3pain 3timulusPaokage 27November2008 14.2 2009 0.8 5.8 unitedKingdom Budget2009 22April2009 34.9 20092011 5.2 15.0 0therLu3tates 3timulusPaokage 91anuary2009 207.1 20092010 3.2 1.5 lndonesia 3timulusPlan 281anuary2009 5.9 2009 0.1 1.6 1apan 3timulus2008 19Leoember2008 485.9 2009onward 12.4 2.6 3timulus2009 10April2009 154.0 2009onward 23.6 15.3 3eoondBudget 8Leoember2009 72.0 2010 7.2 10.0 Korea,Rep.of 0reenNewLeal 61anuary2009 76.1 20092012 59.9 78.8 Mexioo AggrforPomeLoonomios& Lmp. 71anuary2009 7.7 2009 0.8 9.7 Russianlederation n.a. n.a. n.a. n.a. n.a. n.a. 3audiArabia Budget2009 23Leoember2009 126.8 2009 9.5 7.5 3outhAfrioa Budget20092010 11lebruary2009 7.5 20092011 0.8 9.4 1urkey n.a. n.a. n.a. n.a. n.a. n.a. united3tates LmergenoyLoonomio 3tabilizationAot(LL3A) 30otober2008 185.0 10years 18.7 10.1 AmerioanReooveryand ReinvestmentAotof 2009(ARRA) 151anuary2009 787.0 10years 94.1 12.0 Budget2010 a 1Maroh2009 4.9 2010 4.9 Total 3,202.0 521.0 16.3 n.a.=notapplioable a lnoludesonlyadditionalspending. 3ouroe:1.Pouser(2010).ARoleforthe020inAddressingClimateChange?PIIE Working Paper Series10-15.washington,LC. Table 3 Green Investment in Global Economic Stimulus Plans LnergyandClimateChange 45 At the Pittsburgh 3ummit, the 020 asked the lMl and l3B to review member oountries exit strategiesandprovidereoommendationsforooordination.Aoomplementaryprooessshouldbe setupforenergyandenvironmentalstimulusspending.Countriesshouldprovidereportsatthe next020summitontheoutlookfordomestioolimate-relatedpublioinvestment,partioularlyin researoh and development, given their respeotive plans for tsoal oonsolidation. 1he 020 should then task the newly formed Clean Lnergy Ministerial (whioh inoludes all 020 oountries save 3audi Arabia and 1urkey), working in oonsultation with the lMl and the lLA, with developing reoommendationsforpolioyooordination.1hiseffortoouldbeooordinatedthroughthe020s LnergyLxperts0roup. 0penMarkets 0ne of the prinoipal 020 objeotives following the global tnanoial orisis was to guard against proteotionism and support international trade and open markets. ln washington in 2008, leadersundersooredtheoritioalimportanoeofrejeotingproteotionismandnotturninginward in times of tnanoial unoertainty" and pledged to refrain from raising new barriers to investment or to trade in goods and servioes, imposing new export restriotions, or implementing w10- inoonsistentmeasurestostimulateexportsoverthefollowing12months. lisoalexpansionin020oountriesfollowingthewashington3ummit,however,wasaooompanied byasuiteoftradepolioiesthatviolatedthispledge,notleastintheenergyandenvironmental spaoe.1heorisis,ooupledwithgrowingpublioskeptioismaboutthesoienoeofolimateohange inseveraloountries,hasmadeindustrialpolioyandjoboreationmoreimportantpolitioaldrivers ofoleanenergydeploymentinmostpartsoftheworldthanenergyseourityorenvironmental oonoerns.Asaresult,thereisstrongpolitioalpressureinmanyoountriestoensurethattaxpayer fundingforoleanenergydeploymentgoesexolusivelytodomestioolean-teohnologyoompanies. Andwhiledisoriminatorytradepolioiestiedtostimulusdollarswillfadeasoountriestransition to tsoal oonsolidation, this emerging spaoe raoe" framing of the energy and olimate ohallenge will ensure that proteotionism will remain an issue in energy and olimate polioy making for yearstooome.Poorlymanaged,thistrendoouldraisetheoostofoleanenergyteohnologyfor alloountriesandhampereffortstoaddressolimateohange. 1he020shouldthereforesetouttodevelopa0reen1radeandlnvestmentlramework.3uoh a framework would disoipline domestio produotion subsidies, looal oontent requirements, standardssetting,intelleotualpropertyrightsenforoement,foreigninvestmentapprovals,and tariffbarriersin020oountries,helpingtoensurethatalloountriesoompeteonalevelplaying teld in the development and deployment of affordable olimate-friendly teohnology. Many of theseissuesareourrentlybeingaddressedinotherforums,inoludingtheLohaRound,despite theslowprogress.1heframeworkwouldnotbeareplaoementfortheseprooesses,butrather a nonbinding approaoh guiding the domestio polioy of 020 oountries, whioh aooount for the majorityofoleanenergyproduoersandoonsumers. 46 The Perspective from Developing Asia 0loballmbalanoes Asthemostdynamioregionintheworld,Asiahasanimportantroletoplayinshapingthe020 agendaforbalanoedandsustainablegrowth.1hisrequiresAsiatohelpprovideglobalpublio goodsandtorebalanoetheglobaleoonomy.lromtheAsianperspeotive,rebalanoingtranslates intotwostrategiogoals:inoreasingintraregionaltradeandstimulatingdomestiodemand(see Adams, 1eong, and Park 2010). 1his is partioularly relevant for Last Asian oountries. ln the last few years, the regions trade pattern has been oharaoterized by inoreased intraregional trade of intermediate inputs, while trade of tnal goods is mostly with industrial oountries. A produotionnetworkhasemergedinabigway,wheremultinationaloompaniesoanlowertheoost ofproduotionbytakingadvantageoftheproliferatingfreetradeagreements(l1As)intheregion. After the reoent orisis, suoh a trade pattern oannot be sustained, alternative markets need tobefoundasthedemandprospeotfromindustrialoountriesbeoomesmoreunoertain.1he alternative that makes sense is the region itself. lor export-oriented eoonomies, shifting entirelyfromexternaltodomestiodemanddoesnotmakesense,whileforothereoonomies, strengtheningdomestiodemandisoritioal.Raisingoonsumptionshouldbethepriorityforthe PRC,andraisinginvestmentisthemostimportantohallengefortherestofAsia.3inoeearly 2000,amajorsouroeofgrowthinmostoountriesexoeptthePRChasbeenprivateoonsumption, notinvestment(Figure 8).1hishasoausedthesavinginvestmentimbalanoetowiden. whythelowinvestment?3inoetheAsianorisis,mostinvestorsintheregionhaveturnedoautious andmoreoonservative.1heusualsuspeotsalsopersist,i.e.,institutionaloonstraints,aless thanfavorableinvestmentolimate,andlimitedinfrastruoture.0ntheotherhand,savingsremain highandgrowing.Pouseholdsindevelopingeoonomieshavestrongpreoautionarymotivesto save,for,amongotherreasons,alaokofformalsooialsafetynets.1heoorporateseotoralso hasahighpropensitytosavebeoauseofvariouskindsofunoertainties.ltisironiothatexoess saving ooours when the region badly needs tnanoing for new and improved infrastruoture (see ALBandALBl2009). 0rowingdemandinindustrialoountriesandlowsupplyelastioityintheu3meanstronggrowthof exportsandoontinuedtradesurplusinexport-orientedeoonomies.1hisoontributestothewidening 1hePerspeotivefromLevelopingAsia 47 ofglobalourrentaooountimbalanoes.lntermsofsize,theimbalanoeislargestbetweentheu3 and the PRC. 1rade of the PRC with other Asian oountries is generally in detoit, while imbalanoes ofAsiaexoludingthePRCwithindustrialoountriesandtheu3arerelativelysmall.1hus,therole ofthePRCisoritioalasfarasAsiasoontributiontoglobalimbalanoesisoonoerned. An easy money environment was one of the important souroes of global imbalanoes that fueledthereoentorisis. 6 1he fear of detationary pressure assooiated with falling asset prioes after the Asian tnanoial orisis, the teoh bust in 2000, and the looming lraq war prompted the lederal Reserve to adopt an aooommodative tsoal and monetary polioy that oaused not only exoessive spending and a oredit boom, inoluding one in the housing market, but also raised u3imports,partioularlyfromAsia(Azis2009).1hisexaoerbatedthealreadylargeu3ourrent aooount detoit oaused by the growing tsoal detoit, espeoially sinoe early 2000. 1he resulting 6 ln its tnal report, the oongressional oommission of 10 members formed to investigate the oauses of the orisis oonoludes that it was the result of human aotion and inaotion, not of Mother Nature or oomputer models gone haywire.1hereportolearlysinglesoutthelederalReserveforbaoking30yearsofderegulation.1hereportalso pointsoutthatthelMldidappropriatelystresstheurgenoyofaddressinglargeglobalourrentaooountimbalanoes thatriskedtriggeringarapidandsharpdeolineinthedollarthatoouldsetoffaglobalreoession,althoughitfailed to link these imbalanoes to the systemio risks building in tnanoial systems (lClC 2011). -4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 PRC ASEAN-4 NIEs India a Private consumption Government expenditure Investment Net exports Statistical discrepancy Pre-AFC (1996) Pre-GFC (20022007) Post-GFC (20082009) Pre-AFC (19911996) Pre-GFC (20022007) Post-GFC (20082010) Pre-AFC (19911996) Pre-GFC (20022007) Post-GFC (20082009) Pre-AFC (19941996) Pre-GFC (200207) Post-GFC (20082010) AFC = Asian fnancial crisis; ASEAN-4 = Indonesia, Malaysia, Philippines, and Thailand; GDP = gross domestic product; GFC = global fnancial crisis; NIEs = Hong Kong, China; Republic of Korea; Singapore; and Taipei,China; PRC = People's Republic of China. Note: Aggregates are computed using gross national income (Atlas method, current US$) as weights. Values refer to period average. a Based on constant factor prices. Source: Staf calculations based on data from various issues of ADB Key Indicators, CEIC, China Statistical Yearbook 2009, national sources, and World Bank World Development Indicators. Figure 8 Sources of GDP Growth, by Expenditure ApproachEmerging Asia (peroentagepoints) Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 48 appreoiationofAsianourrenoiesalbeit not all are fully texibleandlowerreturnsinindustrial oountriesbroughtmostoapitalbaoktoAsia.Penoe,around-trippingpatternwasestablished withhightransaotionoosts.MarketinterventionbymostAsianauthoritiesthenoausedfurther aooumulationofforeignreserves. 7 lromthisperspeotive,todealwithglobalimbalanoes,polioies direoted toward lowering the u3 tsoal detoit are as oritioal as other measures. Luringtheorisis,globalourrentaooountimbalanoesaotuallynarrowedasworldtradevolume alsofell.Asiaoontributedtothisenoouragingtrend:tradebegantodiversify,withintraregional tradeexpandingtoinoludemoreAsianoountries,whileexportstonon-Asianemergingmarkets inoreasedaswell.1heourrentaooountsurplusinmanyoountriesstartedtofall,andthelargest souroe of growth was domestio demand. 1he PRCs 12th live-ear Plan also put a strong emphasis on rebalanoing demand toward domestio souroes, partioularly oonsumption. 1here is,however,noreasontobelievethatthistrendofdeoliningglobalimbalanoeswilloontinue. 1hegrowthofglobaltrade,whiohshowedav-shapedreooveryin20092010,hasstartedto slow.Manyforeoastsalsoprediotthatglobalimbalanoesarelikelytogrowintheoomingyears (lMl2010o).1hisisworrisomebeoausetheourrentreooveryinmanyoountriesisfragile.lrom thereoentorisiswehaveseentheseveredamagethatgrowingimbalanoesoanoreate. Risingoilprioesraisefurtheroonoerns,although020oanaotuallyresolvethismatterinamore ooordinated way sinoe its members inolude both the worlds largest oil produoer and worlds largestoonsumer.Luringthepastdeoadeswehaveseenseveralepisodesofoilprioeinorease andtheirimpaotontheworldeoonomy.unlikeinthepast,however,thesurgeofoilprioesthat beganinthefallof2004didnotresultinamajoreoonomioslowdown,atleastnotinanyof the020oountries.lnoil-importingeoonomies,thedemand-drivennatureoftheoilprioeshook oounteraoteditsadversereperoussions. 8 Buttheimpaotoftheourrentoilprioeinoreasemay bedifferent.ltmaybemoreseriousbeoausemanyeoonomieshavejuststartedtoreooverfrom themostsevereorisissinoethe0reatLepression,andbeoausethereooveryinLuropeandthe u3isstillfragile. lor poor Asian oountries, this adds to the seriousness of the problem, sinoe they are also strugglingtooopewiththerisingfoodprioesthatraisepovertyandmalnutritionrates.lronioally, inmanyagrioulture-basedeoonomies,risingfoodprioesdonotneoessarilytranslateintohigher inoomesoffarmers,thatis,thefarmerstermsoftradedonotimprove.whiletheremaynot bemuohthatoanbedonetodealwiththesupply-sideshook(weather-related),apolioyreform infoodproduotionanddistributionthatwillensurethepass-throughoffoodprioeinoreasesto farmersinoomeoanbeproposedaspartofthe020developmentagenda. 7 with rising oosts of keeping a large amount of reserves, some Asian governments set up and use government- oontrolled investment oompanies to manage a portion of oftoial foreign reserves to adjust portfolio oomposition. 8 Most oountries in Asia are net and oil importers, intensive in energy use, and are relatively ineftoient in energy use, insomeoountries,however,theshareofoilintotalenergyuseisnotthatlarge. 1hePerspeotivefromLevelopingAsia 49 lntraregional1radeandLxohangeRateCooperation 1he impaot of a sharp fall in world trade during the orisis was partioularly severe in export- orientedeoonomiessuohas1apan,theRepublioofKorea,thePRC,Malaysia,3ingapore,and 1hailand. lndustrial oountries inoluding the u3 are important markets for their tnal goods exports, whereas intermediate goods are imported from other Asian oountries. 1his pattern oftradehasbeenoneoftheoharaoteristiosoftheproduotionnetworkthathasspreadaoross Lastand3outheastAsia. 9 AlthoughindustrialoountriesmadeassuranoesduringtheLondon 3ummit that they would keep their markets open, it would be ill-advised for Asia to oontinue relying on markets in industrial oountries for their tnal goods exports. with demand falling from the slow-growing industrial oountries, intraregional trade in tnal goods is expeoted to inorease. ltisthereforeimportantfortheregiontodismantleanybarrierstointraregionaltrade. AsoenariowherePRCoonsumersoantakeuplostu3demandforproduotsfromAsiaisunlikely in the short run. lreer trade among Asian oountries is the only reasonable solution that will simultaneously deal with the problems of global imbalanoes. Pere, the proliferation of l1As amongAsianoountriesishelpful. 10 Nolessimportantisthestabilityofintraregionalexohangerates.Lvidenoehasshownthatstable intraregional rates oan help foster intraregional trade. After Lehmans oollapse, interregional ratesstartedtobeoomemorevolatileandintraregionaltradefell (Figure 9). 11 Lxternalforoes thatarealsoatplayoausedvolatilitytooontinue.1heseoondroundofquantitativeeasingbythe u3 lederal Reserve, aimed at preventing a possible detationary spiral at a time of tsoal polioy paralysis, is adding more pressures for oapital to tow out from the u3. Lven before this seoond roundwasannounoed,interestratesintheu3andotherindustrialoountrieswerealreadylow, triggering a wave of oapital outtows. A substantial amount of these towed into emerging Asia withitshighreturns,robustgrowth,stablemaoroeoonomiooonditions,andstrongourrenoies. AsshowninFigure 10,afterdippingsharplyduringtheorisis,oapitalhasreturnedtotheregion. Lveninnetterms,thetrendinA3LAN-4,thenewlyindustrializedeoonomies,andlndiashowed a marked inorease of intows right after the orisis. while the oomposition of oapital tows varies aoross oountries, rising portfolio investment puts strong pressure on exohange rates. 1he resulting dollar depreoiation (Asian ourrenoies appreoiation)ledmanyoountriestorespondbyeitherimposingoapitaloontrolsoroonduoting 9 1hisproduotionnetworkhasplayedanimportantroleinforgingtheregionsproduotivity. 10 3ome agreements that oover all Asia are still elusive, and in some oases the paoe of implementation remains questionable. 11 0reater intraregional exohange rate stability oan also help reduoe polioy tension. lt is, however, to the regions advantage if texibility of their ourrenoies against non-regional ourrenoies is maintained. 1he texibility is important for managing external shooks and further oapital tows. Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 50 0 10 20 30 40 50 60 70 -15 -10 -5 0 5 10 15 20 25 30 2002 2003 2004 2005 2006 2007 2008 2009 Standard deviation of exchange rate across % Change (Export volume) Intraregional exports Intraregional real exchange rate Emerging East Asia = Brunei Darussalam; Cambodia; People's Republic of China; Hong Kong, China; Indonesia; Republic of Korea; Lao People's Democratic Republic; Malaysia; Myanmar; Philippines; Singapore; Taipei,China; Thailand; and Viet Nam. Note: The standard deviation of exchange rate is computed across countries and weighted using total trade (at constant 2005 US$ prices). Intraregional real exchange rate against the Asian Monetary Unit (ASEAN+3 including Hong Kong, China) was used. It does not include Taipei,China as data were unavailable. Source: Research Institute of Economy, Trade and Industry (RIETI), Japan for real efective exchange rate; IMF Direction of Trade Statistics for exports; IMF World Economic Outlook Database and national sources for domestic and foreign income, and consumer price indexes; and World Bank World Development Indicators for gross national income. Figure 9 Intraregional Exports and Exchange RateEmerging East Asia -15.0 -10.0 -5.0 0.0 5.0 15.0 10.0 1H2005 1H2006 1H2007 1H2008 1H2009 1H2010 Other Investment Foreign Portfolio Investment Foreign Direct Investment Net Flows Infows Outfows Source: OREI staf calculations using data from the International Monetary Fund and national sources accessed through the CEIC database. a) Peoples Republic of China Figure 10 Financial Account Flows (of0LP) 1hePerspeotivefromLevelopingAsia 51 Note: Other investment includes fnancial derivatives. ASEAN-4 includes Indonesia, Malaysia, Philippines, and Thailand. Data for 2Q2010 excludes Malaysia. Source: OREI staf calculations using data from the International Monetary Fund and national sources accessed through the CEIC database. -15.0 -10.0 -5.0 0.0 5.0 10.0 15.0 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 Foreign Direct Investment Foreign Portfolio Investment Other Investment Net Flows Infows Outfows b) ASEAN-4 ligure10continued -50.0 -40.0 -30.0 -20.0 -10.0 0.0 10.0 20.0 30.0 40.0 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 Foreign Direct Investment Foreign Portfolio Investment Other Investment Net Flows Infows Note: Other investment includes fnancial derivatives. Newly industrialized economies include Hong Kong, China; Republic of Korea; Singapore; and Taipei,China. Source: OREI staf calculations using data from the International Monetary Fund and national sources accessed through the CEIC database. Outfows c) Newly Industrialized Economies Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 52 ligure10 continued exohangerateintervention.1hismakeseffortstomaintainstabilityofintraregionalexohange rates more diftoult, but at the same time it opens up the possibility of polioy ooordination. lndeed, someoountriesinA3LAN+3,supportedbytheALB,haveinitiatedaseriesofdisoussionsand polioydialoguesonthisissue. 1hespillovereffeotsofunilateraloapitaloontrol,andawarenessthatitoanpotentiallyoreate distortion,alsoreinforoetheneedforoooperation.1hefearofasuddenstop(asin1997)is another souroe of oonoern. But the diftoulty in tnding an aooeptable modality of oooperation duetothediversityofexohangeregimesandassooiatedpolitioalsensitivitymayhaveputoffany formalarrangementfromemerging.Aolassiooaseoftheprisonersdilemmathusprevails. Beoause the PRC's trade balanoe with most A3LAN oountries is in detoit, a soenario of simultaneousexohangerateadjustmentthroughoooperationwillalsomaketherealignmentof theyuaneasier.ltmaybemoreeffeotivethanpressuringaoountrytoadoptapartioularexohange system.lndeed,eoonomistsarenotalwaysinagreementastowhatexohangeratesystemis best to adopt. while globally there has been a trend of inoreasing number of toaters, it remains unolear how to determine the extent to whioh a ourrenoy deviates from its equilibrium level. -6.0 -3.0 0.0 3.0 6.0 9.0 12.0 15.0 1Q2007 3Q2007 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 Other Investment Foreign Portfolio Investment Foreign Direct Investment Net Flows Inflows Source: OREI staf calculations using data from the International Monetary Fund and national sources accessed through the CEIC database. Outfows d) India 1hePerspeotivefromLevelopingAsia 53 Appropriateness of a partioular regime depends on eaoh oountrys oonditions. 1he exohange rate system in Asia is diverse, ranging from a toating 1apanese yen to a ourrenoy board system in Pong Kong, China (others are in between). Lqually ambiguous is the preoise detnition and levelofequilibriumexohangerate.whilesomeourrenoiesmaybeundervalued,thetypeand theextentofinterventionoonsideredaooeptableremainsagrayarea.lnthepast,thelMloften supported efforts made by industrial oountries to ooordinate their monetary and tsoal polioies that oould alter the exohange rate in the name of maintaining global tnanoial stability. 12 while exohange rate oooperation is warranted, Asia is likely to shy away from a strong form of oooperation or other forms that require strong institutions (suoh as monetary union or oommon ourrenoy). 1he reoent sovereign debt orisis in Lurope made the benett of having suoharrangementsdoubtful.Also,Asiadoesnothaveagoodtraokreoordofinstitution-heavy eoonomiooooperation. 13 Butthereisstillawholespeotrumofoptionstoseleot,rangingfroma basketsystemthatoanbedesignedtoavoidtheN-1problem,toBrettonwoodslikesystems where oountries direotly peg their ourrenoies to eaoh other and let them toat jointly against other ourrenoies, say, the u3 dollar (similar to what happened in Lurope before a oommon ourrenoywasadoptedandmanagedbyasupranationalbody,theLuropeanCentralBank).1he ratesagainstaregionalbasketsuohastheAsianMonetaryunit(AMu)oanalsobeusedasa referenoe zone, oertain deviations from whioh will trigger some polioy measure. 1he lightest formofarrangementwouldbesimplytoenhanoepolioydialogueamongmemberoountries,for examplethroughtheexistingLoonomioReviewandPolioyLialogueforum.AftertheChiangMai lnitiative was multilateralized in early 2010 (to beoome CMlM), tnanoe ministers of A3LAN+3 madeadeoisiontoestablishanindependentsurveillanoeunit,theA3LAN+3Maoroeoonomio Researoh 0ftoe. 1his marks the region's trst step toward institutionalizing tnanoial oooperation. lt is likely that exohange rates and oapital tows will be part of that oftoe's surveillanoe analysis, alongwithothermaoroeoonomioissues. Anotherrelatedsouroeofoonoernisthedeoliningvalueoftheu3dollar.ManyAsianoountries worry that rising oommodity prioes and a soaring u3 detoit to pay for stimulus oan lead to higher intation that will underout the value of their u3 dollar-denominated reserves. 1he PRC and 1apan are the largest holders of u3 1reasury bills. No wonder that on several oooasions PRC oftoials questioned protigate u3 spending habits. lt is in this oontext that ideas were toated that Asians eitherneedtheirownourrenoyorshouldadoptaourrenoybaskettoreplaoethedollar.Aotually suoh a proposal was raised right after the Asian tnanoial orisis, but the reoent trend may have strengtheneditsrationaleanditmayquiokentheprooess.Lookingatourrenoymovements inseleotedAsianoountries,overthelastfewyearsrelianoeonthedollarhasbeendeolining, 12 AtleastthelMldoesnotplaoeanyobligationsonthoseoountrieswhentheyoonduotsuohefforts. 13 Lvenduringthereoentorisis,theChiangMailnitiativewasnotused. Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 54 and the role of other ourrenoies, inoluding the yen and yuan, has inoreased. 1his ooourred withoutanyannounoementaboutabasketsystem.Buttomovetothenextstep,oloserpolioy ooordinationisobviouslyneeded. 1hrough the 020, Asia oan learn from the experienoe of other 020 oountriesin Lurope in partioularinpolioyooordinationandexohangerateoooperation.Byrealizingthedifferenoes betweenthetwosetsofeoonomies,lessonsoanbelearnedastowhatpolioydireotiontotake, what not to take, and what needs to be done. 1he speed and nature of eaoh stage and the oomponentsofoooperationoanbestudied,andwhenfoundrelevanttotheAsianoontext,they oanbeemulated. LomestioLemandandlnteraotionswithLevelopmentlssues lromAsiasperspeotive,givingamoreprominentroletodevelopmentissuesinthe020agenda, as deoided at the 3eoul 3ummit, is oommendable. 0ne of the 020 development initiatives highly relevant for Asia is tnanoial inolusion. 1hrough the linanoial lnolusion Lxperts 0roup, ninePrinoiplesforlnnovativelinanoiallnolusionwereannounoedatthe1oronto3ummit.1he prinoiples,fromleadershiptoregulatoryframework,areintendedtoformthebasisofaoonorete aotion plan for improving aooess to tnanoial servioes for the poor, details of whioh were released atthe3eoul3ummit.1wobroadagendahavebeenseleoted:aooessthroughinnovation,and tnanoe for small and medium-sized enterprises. But 020 also oovers other development issues, many of whioh are relevant for Asia as well. MostgovernmentsinAsiarealizetheneedtostrengthensooialsafetynets,inoludingpension andhealthinsuranoeprograms,speedupthedevelopmentofphysioalinfrastruoturetoreduoe supplybottleneoks,andraiseinvestmentformoresustainablelong-termgrowth,suohasenergy eftoienoy, renewable and olean energies, green transportation, and quality-of-life servioes (health oare and sanitation). All these are not inoonsistent with rebalanoing. 3trategies have been disoussed and designed, measures have been taken, and some may not be the most optimal and their implementation may faoe many bottleneoks, espeoially when maoro and tsoal polioy is inoonsistent with more development-oriented measures suoh as these. 3till, any strategiesandpolioymeasures(inoludingthosedireotedtowardloweringglobalimbalanoesand mitigatingtheirimpaot)oughttobelinkedwiththeultimategoalofwelfareimprovement.1he effeotivenessofthosepolioiesneedstobeevaluatedbasedonindioatorsthatgobeyondthe narrow maoroeoonomio and tnanoial seotor. lndeed,whiledevelopmentissuesarediverseandbythemselvesdeserveattention,littlehas been done to understand the interaotions between these issues and maoro, tnanoial, and trade measuresintheoontextofAsiaseffortstorebalanoe.1hus,exolusionofthepoorandsmall and medium-sized enterprises from tnanoial servioes, issues of the environment and olimate 1hePerspeotivefromLevelopingAsia 55 ohange, inoome inequality and povertyall of whioh are so oritioal in many 020 oountries should not be seen only as the oonsequential impaot of maoro-tnanoial measures that will be subsequently oountered by some oompensating polioies (suoh as tnanoial inolusion). et this praotioe is oommon, instead of attempts to reassess the respeotive maoro-tnanoial polioy and exploreanalternativethatwillensureinolusion. lnteraotions imply two-way direotions. A proaotive rather than reaotive approaoh suggested aboveisnotonlypreferableintermsofoost-effeotiveness,butitoanalsopreoludeanypossible negativefeedbaokeffeots.lorexample,adeterioratingenvironmentduetoanunsustainable patternofdevelopmentinmanyAsianoountriesoanhaveanadverseimpaotonthesupplyand produotivityofmanyseotorsintheeoonomy,anditoanoontributetotheinoreaseoffoodprioes, oommodity prioes, and intation in general. Rising inequality aoross any oountry in Asia is likely tohaveanadverseimpaotongrowth,henoeitssustainability.1hemeohanismsofthisoanwork throughatleastthreeohannels:unoertaintyoausedbygreatersooialinstability,inseouritydue to laok of property rights, and rent-seeking praotioes that oan raise transaotion oosts and so dampengrowth.Althoughtheimpaotmaynotbefeltintheshortrun,whenoutputgrowthfalls, so will household inoome, inoluding those in the low-inoome braoket. when intation rises and afoodorisislooms,povertyinoidenoetendstoinorease. Lxoess saving and the link between tnanoial seotor development and broader development issues is another noted example. Aooording to tow-of-funds data, most oountries in Asia have exoesssavinginthesensethattotalsavingexoeedsaotualinvestmentintherealseotor.1his exoess largely goes to tnanoial assets, both abroad (foreign reserves in u3 treasuries) and at home(equity,bonds,andotherseourities).Asaresult,eoonomiogrowthisstronglysupported by a growing tnanoial market. 1his is also oonsistent with the information from national inoome aooounts where the tnanoial seotor is reoorded as one of the major souroes of growth, along with domestio trade and other servioes (Figure 11). Lxoept during the Asian tnanoial orisis, this pattern has been persistent and self-reinforoing, as inoentives to invest in tnanoial assets oontinuetoexoeedthosetoinvestintherealseotor.Althoughthismayfosteroverallgrowthand tnanoial seotor development, it fails to provide suftoient employment opportunities. 1his oan spelltroubleinsomeoountriesinAsiawherethelaborforoeisgrowingfast.Consequently,an unohangedrateofoutputgrowthoreatesmuohlessemploymentnowthaninthepast(deolining employmentelastioity).1hesameappliestopovertyreduotion(deoliningpovertyelastioity). 1hus the ohallenge for Asia is how to ohannel the exoess saving toward more produotive investment in a manufaoturing seotor that will generate jobs, sinoe this is generally more employment-oreatingthanservioesingeneral.1hisiswhyimprovementsinthebusinessand investmentolimatearesoimportant.lromthisperspeotive,effortstoraisedomestiodemand arenotonlyneoessaryforloweringglobalimbalanoes,butformanyAsianoountriestheyarealso warrantedtomakedevelopmentandgrowthmoreinolusive(Lhuang2009). Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 56 lndeed, the growth pattern in many Asian oountries has been far from being inolusive. while theregionhasdonerelativelywellintermsofoutputgrowthandmaoroeoonomiomanagement, evenduringthereoentorisis,thedevelopmentandwelfareoutoomehasnotbeengood.lnmany oountriesenvironmentaloonditionshaveworsened,resouroedepletionhasbeoomealarming, unemployment (espeoially among youth and the eduoated segment of the labor foroe) has inoreased sharply, and inoome inequality has risen almost aoross the aboard. 1o be oredible andaooeptedbytheglobaloommunity,020needstoassumeleadershipinthisarea.ltshould enoourage polioy makers to seriously reassess the development pattern that has produoed unfavorable outoomes. ln partioular, foous ought to be direoted toward the interaotions of these issues with the strategy and polioy approaoh needed to lower and mitigate global imbalanoes.1hisistheonlywaytoaohievestrong,sustainable,andbalanoedgrowththe statedgoalof020. -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 PRC ASEAN-4 NIEs India a Agriculture Manufacturing Services Others Statistical discrepancy Pre-AFC (199096) Pre-GFC (200207) Post-GFC (2008) Pre-AFC (199496) Pre-GFC (200207) Post-GFC (200810) Post Pre-AFC (199196) Pre-GFC (200207) Post-GFC (200810) Pre-AFC (199196) Pre-GFC (200207) Post-GFC (2008-09) AFC = Asian fnancial crisis; ASEAN-4 = Indonesia, Malaysia, Philippines, and Thailand; GDP = gross domestic product; GFC = global fnancial crisis; NIEs = Hong Kong, China; Republic of Korea; Singapore; and Taipei,China; PRC = People's Republic of China. Note: Aggregates are computed using gross national income (Atlas method, current US$) as weights. Values refer to period average. a Based on constant factor prices. Source: Staf calculations based on data from various issues of ADB Key Indicators, CEIC, China Statistical Yearbook 2009, national sources, and World Bank World Development Indicators. Figure 11 Sources of GDP Growth, by SectorEmerging Asia (peroentagepoints) 1hePerspeotivefromLevelopingAsia 57 0lobalRoleand0overnanoe lnChinese,thewordorisisismadeupoftheoharaotersfordangerandopportunity.lrom Asias perspeotive, the 020 should see the reoent orisis as these two things. 1he faot that theglobalreooveryisstrengthening,butisstillunevenandthattheinternationalmonetary systemhasprovenresilient,butvulnerabilitiesremainindioatethattheworkisonlyhalfdone. Lmergingeoonomieshavebeoomeimportantforoesinhelpingtheworldtoweathertheorisis, andthishighlightstheimportanoeofthe020.lndeed,the020hasdoneremarkablywellin helpingtheglobaleoonomytoreoover.lthasemergedastheleadingforumforoopingwiththe orisis. But the unevenness of the reoovery and the persistent vulnerability in the global tnanoial systemremainseriousohallenges.linanoialregulationshavebeenstrengthenedbutarestillfar from suftoient to avert a similar shook in the future, espeoially when too big to fail" problems remain.Manyoomponentsneedfurtherstruoturalohanges,espeoiallythoserelatedtotheleast regulated tnanoial instruments. lor Asian oountries, the lesson of the Asian tnanoial orisis is olearthat a too liberalized tnanoial seotor not supported by proper regulation and supervision isareoipefordisaster.whethertheworldeoonomiostruotureofthepast,asoharaoterizedby liberalizationandderegulation,oanrealizeasmoothtransformationoftheglobaleoonomyto aohievemoresustainableandbalanoedgrowthwithminimumriskoforisis,dependsonhowfar the020oanhelptopushreformsoftheinternationalmonetarysystem.1hereoentorisisshould beseenasanopportunitytopushsuohmoves. 1he unevenness of growth and the diftoulties in aohieving more signitoant tnanoe seotor reform present another diftoult ohallenge as it touohes on the issue of power intuenoe. 1he role of the lMlinreportingthevulnerabilitiespriortotheorisisisanotableexample.LespitethelMls warning, oftoials from powerful industrial oountries oonoealed suoh important information and putpressureonthelMltotonedownwarningsbeforetheorisis.0ftenthelMlwiltsinthefaoeof oftoials' demands to water down oritioisms. 14 0neoannotimaginethatbeingtruefordeveloping and emerging oountries. 1he extent to whioh the 020 oan balanoe the intuenoe between the developed world and emerging eoonomies is a major test for the future development of this global forum. Another oritioal test is whether it oan properly handle its relationship with non- 020 oountries. 15 unless it listens and oaters to their olaims and respeots their interests, its legitimaoyandperhapsitsexistenoewillbeseriouslyquestioned. Asians are ooming of age. ln formulating the strategy to support its agenda, the 020 oan absorbtheexperienoeinAsiathatmayprovidelessonstobeshared,bothgoodandbad,on maoroeoonomio and development polioies. ln addition to providing tnanoial resouroes, Asian members of the 020 oan also play a greater role in helping to set the vision and ambitions 14 Revealed in a report by the lMl's lndependent Lvaluation 0ftoe (lL0) in 1anuary 2011. ln some oases, aooording to the report, so intimidated were the lMl staff that they did not ohallenge the oftoials' arguments. SeelMl2011. 15 020memberoountriesonlyaooountfor10ofmorethan200statesthatengageinglobaleoonomioaotivity. Reshaping0lobalLoonomio0overnanoeandtheRoleofAsiainthe0roupof1wenty(020) 58 for global rebalanoing, and to share Asias unique experienoe in areas suoh as establishing internationalproduotionnetworks,andusingthegovernmentandpublioseotortoplayavitalrole insupportingthesenetworks. 16 ln the global tnanoial reform, Asia should no longer be oontent toleaveittopowerfulindustrialnationstodeoide,itmustjoininsettingnewstandardsforglobal tnanoial institutions and in regulating risk. 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