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> Analysis on L'Aquila Summit

The G8 Leaders Declaration on the World Economy: Form and Content at the 2009 L'Aquila Summit

George M. von Furstenberg
J.H. Rudy Professor of Economics Indiana University
G8 Research Group
vonfurst@indiana.edu
July 9, 2009

Declarations on the world economy in recent years typically start with a characterization of the current economic situation and the challenges it poses. They then proceed to a discursive review of major ongoing international efforts that relate to these challenges or to longer-term structural issues, often mentioning the leading international organizations (United Nations, Organisation for Economic Co-operation and Development [OECD]) and international financial institutions (International Monetary Fund [IMF], World Bank, Bank for International Settlements [BIS], multilateral development banks), or their programs and facilities (e.g., Financial Action Task Force for OECD, Financial Stability Board [FSB] for theBIS), by name. Earlier G8 commitments, such as the 2007 Heiligendamm Dialogue Process (HDP) – defined as a topic-driven dialogue of the G8 with major emerging economies currently known as the G5 – tend to be explicitly reaffirmed. There also tends to be recommitment to as yet unfulfilled actions which were promised previously by the G8 countries on their own or in conjunction with other countries, such as in the G20. The last and often leanest part of declarations on the world economy involves announcement of agreements on new programs that will be introduced and steps taken to confront current problems or to guard against future damage to the world economy. Attempts may also be made to populate the agendas of future G8 and other meetings.

We Shall Overcome Some Day

The latest declaration follows this script fairly exactly but not necessarily in the accustomed order. The document starts by noting recent conditions of financial turmoil, widespread recession, intense deleveraging, an abrupt decline in international trade, and growing unemployment and social suffering. But, as if propelled by the severity of the recent crisis, it then quickly proceeds to policy affirmations that are designed to build confidence. Thus early in the document there are ringing statements of common purpose and common method in securing recovery from the current crisis and taking steps to guard against a recurrence. While these statements essentially describe what countries have been doing, or working on, for almost a year, the G8 appear determined to document that they intend to press ahead with their previously introduced measures without any sign of bailout fatigue and with only scant reference to any exit strategy. To show this tenor, these statements deserve to be quoted in full:

12. We will take, individually and collectively, the necessary steps to return the global economy to a strong, stable and sustainable growth path, including continuing to provide macroeconomic stimulus consistent with price stability and medium-term fiscal sustainability, and addressing liquidity and capital needs of banks and taking all necessary actions to ensure the soundness of systemically important institutions…

15. Besides ensuring access to liquidity, it is crucial to deal decisively with distressed assets and to recapitalize viable financial institution…

23. Greater macroeconomic policy coordination will also be needed to help ensure that the burden of adjustment is fairly shared.

25. We emphasize the need for an enhanced global framework for financial regulation and supervision, promoting consistency between accounting and prudential standards and setting up adequate tools to address procyclicality [due to the working of the financial accelerator in business expansions], as well as ensuring a comprehensive oversight of all systemically significant entities and activities.

Ritualistic Incantations on Free Trade and Reduction of External Imbalances

The G8 and its predecessors with fewer Gs have always postured as advocates of free trade at the summit while being far less committed at home. Thus they “reconfirmed” their commitment “to keep markets open and to reject protectionism of any kind” (45) at l’Aquila while subsidizing certain domestic financial and nonfinancial industries and seeing to it that the manufacturing industries’ domestic suppliers remained in business.

This inconsistency is not as glaring as it seems since safeguard and emergency clauses designed to protect domestic industry from sudden shocks have been ensuring the political acceptability of freer trade at least since the beginning of multilateral trade liberalization under the auspices of GATT that started soon after World War II. Although the shocks, such as import surges, that can trigger exception clauses are supposed to be principally of foreign rather than domestic origin, shocks that are primarily domestic but globally connected may qualify under certain circumstances if they impact a particular, previously viable, industry disproportionately and unexpectedly. Temporary actions to protect certain domestic industries thus need not represent WTO-inconsistent measures. Hence the G8 statements in favor of free and unrestricted trade must be taken cum grano salis, as usual. They contain nothing particularly energizing for the completion of the Doha round, rhetoric to the contrary notwithstanding.

Also as old as the summit process itself are complaints about what used to be called “the exorbitant privilege” of the United States. This privilege involved profitably lending long and investing, even more profitably, directly abroad while financing short, mostly through investment in U.S. Treasury and Agency securities, at very low interest cost even though the U.S. dollar was on a declining course. As in paragraph 23 this time, the mutually agreed exhortation formula has always been that adjustment to such an alleged disequilibrium was to be symmetric, with surplus countries (once meaning Germany and Japan, now mostly meaning China) stimulating domestic demand and the United States increasing national saving. Although that part of a fiscal deficit that is attributable to the purchase of financial assets and capital injections into financial institutions is properly excluded from the National Income and Product Account measure of the fiscal deficit, national saving has not risen in the United States. Rather, net corporate saving, i.e., retained earnings, have plunged, government saving is a big negative, and only personal saving has risen. To the extent the current-account deficit of the United States has shrunk recently, the precipitous decline in net private residential and non-residential investment in the United States has provided the room. Hence chances are that this perennial project of rebalancing will continue to be belabored, but not resolved, by governments. It may eventually be addressed in a disorderly way by market forces and unilateral portfolio decisions of surplus countries surfeited with U.S. dollar reserves.

Having characterized much of the macroeconomic content of the WE statement, its more specialized parts deserve attention. These parts draw attention to the work of a wide variety of international institutions and processes. They take up well over half of the document and contain repeated verbal cues indicating that the institutions identified are not owned and operated solely by the G8 and for their benefit but for a much wider, in some cases nearly universal, membership. Hence all the G8 can do in this area is to encourage the work of these institutions and indicate where that work might usefully be directed in the future. To do so while indicating its own subsidiarity, rather than dominance, the WE statement frequently uses the following verbs and phrases: We welcome, encourage, support, promote, emphasize, stress (recognize, acknowledge) the importance of, and consider it important to. The use of “welcome” and “encourage” is so common that the two verbs appear repeatedly in a single sentence or at least in the same paragraph. Seeing those phrases indicates that the G8 is not effectively in full control but would like to promote some actions by these international institutions more than others nonetheless.

Tasking International Institutions

To see how the G8 proceeds at this level, it is best to offer examples from the latest statement.

15. We ask the Financial Stability Board (FSB) to continue monitoring developments in financial systems and to help promote a coordinated approach, consistent with avoiding distorting competition and regulatory arbitrage. 20. We call on the [FSB] to assess jurisdictions against international supervisory and prudential standards.

36c. [W]e invite international organizations, in particular the IMF, the OECD and the ILO, to take into account the labor and social impact of their advice …

43. We … call upon the [International Energy Forum] IEF to examine the possibility of extending [[Joint-Oil-Data-Initiative] JODI-type activities to natural gas.

44. We ask the [International Organization of Securities Commissions] IOSCO Task Force on Commodity Markets to consider further possible improvements to the transparency and market supervision of oil futures markets and make specific recommendations.

53. We encourage [the relevant international institutions (ILO, OECD, UN Global Compact)] to work together in a coherent way in order to achieve synergy with existing [Corporate Social Responsibility] CSR instruments.

Running on Empty: Committing to Vague Ends without Specific Means

Laudable, but substantively vague, goals, to be achieved against obstacles or with new supporting measures undefined, are the least productive, and one of the most verbose, parts of the WE statement. If it is not clear what exactly the goal, beyond reaching agreement of any kind, is supposed to be that is to be achieved, and by when and with what means contributed by whom, only ineffective cheerleading and sputtering is likely to be the outcome. Quoting from the WE 2009 statement may provide an impression of the degree of evasiveness and futility of commitments in this area.

11. [W]e commit to achieve fiscal sustainability in the medium run …

25. We commit to vigorously pursue the work necessary to ensure global financial stability…

27. We are committed to working with our international partners to make progress [in ensuring the effectiveness of “the Lecce Framework”].

31. We are … committed to update G8 anticorruption initiatives …

36. We are committed to tackling the social dimension of the crisis, putting peoples’ concerns first …

48. We are committed [once again] to reach a rapid, ambitious, balanced and comprehensive conclusion of the Doha Development Agenda…

52. [W]e commit to enhance cooperation with our major partners to agree upon shared principles [of a multilateral framework for investment].

54. We are committed to implementing innovation policies in our countries, also through our stimulus packages.

These several “empty” commitments greatly outnumber the few commitments, particularly in the area of “Green Recovery,” that pass the test of materiality and accountability sufficient to allow performance evaluation.


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