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Reshaping Global Economic

Governance and the Role of Asia


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.
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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. Regional or subregional arrangements oan be used
tofaoilitateAsiasstrongervoioeandsenseofownership.
1he new global eoonomio governanoe struoture will need to be based on representative
institutions that reteot the ohanging eoonomio weight of emerging eoonomies in the global
eoonomy.Asiashouldandwillplayagreaterroleontheglobalstage.
16
1hewaytheregionlooksattheimportanoeofinvestmentandtheneoessaryinfrastruoture,beyondjusttrade,by
establishinginternationalproduotionnetworksisaoknowledgedbymanyoountriesandinstitutions,inoludingthe
lnter-AmerioanLevelopmentBank.ltsuggeststhatAsiahasauniquetraokreoordinestablishingsuohproduotion
networks. Asia also has muoh to offer in terms of resouroes management, innovative tnanoing, teohnioal expertise
onengineeringanddesign,andprojeotmanagement.
59
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