G20 summit won't mean a quick financial fix

Next year the high-income economies are to face a negative growth rate of 0.3 per cent, according to the OECD projection. The World Bank has also predicted an overall global growth rate of 1 per cent. With this contraction in demand, who is going to sell what to whom?

Altogether, the G20 countries account for 90 per cent of the world's gross domestic product. Besides the US and the European Union, the other countries that make up the G20 are Argentina, Australia, Brazil, Canada, China, India, Indonesia, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey.

The G20 Summit takes place amid a political transition in the US President George W Bush is about to end his term. President-Elect Barack Obama has declined to attend the summit out of courtesy, preferring to send his representatives to observe the event instead. Given Bush's lame-duck status, the summit is not likely to produce any result over how the global financial system and architecture should be reformed. There have been calls for a modern version of Bretton Woods, the agreement that led to a new international financial system after World War II. But it is too early for that to come to pass now.

Still, it is clear that the US, the European Union and the rest of the G20 have differed on key issues on how to deal with or to reform the global financial system. Bush on Thursday urged leaders of the world's biggest economies not to abandon free-market capitalism, insisting that it was the best system to assure growth. Bush said policymakers should resist the urge to meddle too much in markets as they seek to reverse the financial and economic turmoil now engulfing the world.

"History has shown that the greater threat to economic prosperity is not too little government involvement in the market, but too much," Bush said. "Our aim should not be more government, it should be smarter government."

With the financial crisis raging, governments worldwide have stepped in to inject liquidity into the financial system, help banks to re-capitalise, work out ways to deal with bad debts, and try to restore the credit system. There are some broad areas up for discussion such as accounting standards, tighter oversight on financial instruments and protection for investors against fraud.

"The answer is not to try to reinvent that system," Bush said. "It is to fix the problems we face, make the reforms we need, and move forward with the free market system."

The European Union feels that the free-market system has gone too far. Its banks have become fragile in the midst of the financial storm. European governments have had to bail out the banks and also guarantee deposits. They are angry with the Americans, who started the financial flu. Brussels officials now want stiffer regulation of credit rating agencies, the hedge funds, and a crackdown on risk-taking and executive pay.

The French president has support from German Chancellor Angela Merkel, who seeks regulation of hedge funds and curbs on bonuses for bankers as part of a new "constitution" governing financial markets. UK Prime Minister Gordon Brown has lobbied for improving cross-border oversight of the financial system by placing the world's top 30 banks under the supervision of a panel of regulators. The European proposal might not strike a chord in the US, which still prefers the status quo. The US views that the existing system works, and that it is only necessary to strengthen the oversight.

The Chinese would like to have a greater role to play in the global financial system. China is going to provide more than US$600 billion (Bt21 trillion) to reinvigorate domestic demand over the next two years to boost growth. Its voice, and that of other members, will be louder in the IFF and the World Bank and other international organisations. At the Asia-Europe Summit in Beijing two weeks ago, the leaders agreed to set up an $80-billion stabilisation fund to help cushion Asia from the financial crisis. Such a move represents one of the multilateral efforts under way to build up a new financial order.

Whether the G20, which comprises countries from all regions, will achieve any results remains to be seen. Since the US is still the major global power, direction won't become clear until Obama takes over the White House after January 20, 2009. Only then will we see a clear indication of how the key issues in the global financial system will be dealt with.