On Friday, at the conclusion of the two-day summit in Pittsburgh, the leaders of the Group of Twenty (G-20) issued a communiqué reviewing the actions and progress that has been made by its member countries since the London Summit in April and outlining important new commitments. The leaders noted that their collective “forceful response [to the crisis has] helped stop the dangerous, sharp decline in global activity and stabilize financial markets” and acknowledged slight improvements in the economic environment, including increases in industrial output overall and recovery in international trade, but cautioned that “the process of recovery and repair [still] remains incomplete.”
Many of the commitments agreed upon today build substantially on the framework of the London summit. The leaders designated the G-20 to be the "premier forum for their international cooperation" and backed a shift in country representation at the IMF of "at least 5%" towards "dynamic emerging market and developing countries.” Other specific commitments made at the Pittsburgh summit include the following:
- creating a framework to generate strong, sustainable and balanced growth;
- enhancing and strengthening the international financial regulatory system;
- modernizing global institutions, including reforming the mission, mandate and governance of the IMF and the development banks;
- facilitating energy security and climate change;
- supporting the most vulnerable; and
- an open economy.
Framework to Generate Strong, Sustainable and Balanced Growth
The communiqué notes that each government must continue to implement stimulus programs to support economic activity until complete recovery is achieved, while developing “a transparent and credible process for withdrawing our extraordinary fiscal, monetary and financial sector support, to be implemented when recovery becomes fully secured.” The leaders tasked their respective Finance Ministers to work with IMF and the Financial Stability Board (FSB) at their November meeting in this regard. The leaders also agreed to:
- Develop a process to outline objectives and policies to achieve overall objectives and assess progress.
- Request the IMF to provide an analysis of how respective national or regional policy frameworks fit together.
- Request the World Bank to advise governments on “progress in promoting development and poverty reduction as part of the rebalancing of global growth.”
- Work jointly “to ensure that our fiscal, monetary, trade, and structural policies are collectively consistent with more sustainable and balanced trajectories of growth” and implement “macro prudential and regulatory policies to help prevent credit and asset price cycles from becoming forces of destabilization.”
Enhancing and Strengthening the International Financial Regulatory System
The leaders noted that regulatory reforms adopted since the crisis have both enhanced and expanded the scope of regulation and oversight of over-the-counter (OTC) derivatives, securitization markets, credit rating agencies, and hedge funds. Notwithstanding this "substantial progress" in strengthening the international financial regulatory system, [“f]ar more needs to be done to protect consumers, depositors, and investors against abusive market practices [and] promote high quality standards.” The leaders agreed to:
- Take “action at the national and international level to raise standards together so that our national authorities implement global standards consistently in a way that ensures a level playing field and avoids fragmentation of markets, protectionism, and regulatory arbitrage.”
- Continue "where needed" to implement measures to deal “with impaired assets and to encourage the raising of additional capital.”
- Continue conducting transparent stress tests where appropriate and encourage banking institutions “to retain a greater proportion of current profits to build capital, where needed, to support lending.”
- Improve the regulation and transparency of financial and commodity markets to address excessive commodity price volatility.
The leaders also called upon Finance Ministers and Central Bank Governors to arrive to an agreement on an international framework of reform in the following areas:
- Build high quality capital and mitigate pro-cyclicality: Commit to implementing higher level and better quality capital requirements, counter-cyclical capital buffers, higher capital requirements for risky products and off-balance sheet activities, as set forth by the Basel II Capital Framework.
- Reform compensation practices to support financial stability: Implement the compensation standards issued by the FSB, which are aimed at aligning compensation with long-term value creation and not excessive risk-taking. While stopping short of outright compensation caps, the proposals would require significant changes to existing compensation arrangements at many financial services firms. Specific proposals include:
- eliminating multi-year guaranteed bonuses;
- requiring “a significant portion of variable compensation to be deferred, tied to performance and subject to appropriate clawback and to be vested in the form of stock or stock-like instruments,” or any other like incentives that are “aligned with long-term value creation and the time horizon of risk;”
- requiring senior executive or high level employee compensation to be aligned with performance and risk;
- requiring disclosure of firms’ compensation policies and structures; and
- limiting “variable compensation as a percentage of total net revenues when it is inconsistent with the maintenance of a sound capital base.”
- Improve over-the-counter derivatives markets: No later than year end 2012, “[a]ll standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties.” In addition, “OTC derivative contracts should be reported to trade repositories” and “[n]on-centrally cleared contracts should be subject to higher capital requirements.”
- Address cross-border resolutions and systemically important financial institutions by year end-2010: Establish “crisis management groups for the major cross-border firms and a legal framework for crisis intervention as well as improve information sharing in times of stress.” The communiqué also noted that the “FSB should propose by the end of October 2010 possible measures including more intensive supervision and specific additional capital, liquidity, and other prudential requirements.”
The leaders also asked international accounting standard setters “to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011".
The leaders also reaffirmed their commitment to address non-cooperative jurisdictions (NCJs) by supporting the expansion of the Global Forum on Transparency and Exchange of Information to help facilitate tax transparency and “the exchange of information so that countries can fully enforce their tax laws to protect their tax base.” The leaders noted that they stand ready to implement certain countermeasures against tax havens beginning March 2010 if NCJs have note adopted certain measures. In addition the leaders welcomed the progress made by the Financial Action Task Force (FATF) to address money laundering and terrorist financing and called upon the FATF to issue a public list of high risk jurisdictions by February 2010.
Modernizing Global Institutions
The communiqué acknowledges that “[m]odernizing the international financial institutions and global development architecture is essential to [ongoing] efforts to promote global financial stability, foster sustainable development, and lift the lives of the poorest.”
IMF. The leaders stated that the IMF “must [continue to] play a critical role in promoting global financial stability and rebalancing growth” and welcomed the IMF’s recent reform of its lending facilities, including the creation of the Flexible Credit Line. The leaders also reaffirmed their commitment to increase the funds available to the IMF and pledged to contribute over $500 billion to a renewed and expanded IMF New Arrangements to Borrow. In addition, the leaders “committed to a shift in quota share to dynamic emerging market and developing countries of at least five percent from over-represented to under-represented countries using the current IMF quota formula as the basis to work from.” The IMF’s quota review should be completed by January 2011.
Development Banks. The leaders stated that the World Bank, working with the regional development banks and other international organizations, should strengthen:
- Their focus on increasing food security by enhancing “agricultural productivity and access to technology, and improving access to food, in close cooperation with relevant specialized agencies.”
- Their focus “on human development and security in the poorest and most challenging environments.”
- Their “support for private-sector led growth and infrastructure to enhance opportunities for the poorest, social and economic inclusion, and economic growth.”
- Their contributions to “the transition to a green economy through investment in sustainable clean energy generation and use, energy efficiency and climate resilience.”
The leaders pledged to "help ensure the World Bank and the regional development banks have sufficient resources to fulfill these four challenges and their development mandate, including through a review of their general capital increase needs to be completed by the first half of 2010." The acknowledged that these additional resources "must be joined to key institutional reforms to ensure effectiveness: greater coordination and a clearer division of labor; an increased commitment to transparency, accountability, and good corporate governance; an increased capacity to innovate and achieve demonstrable results; and greater attention to the needs of the poorest populations." Finally, the leaders committed to move "towards equitable voting power in the World Bank over time through the adoption of a dynamic formula which primarily reflects countries’ evolving economic weight and the World Bank’s development mission, and that generates in the next shareholding review a significant increase of at least 3% of voting power for developing and transition countries."
Energy Security and Climate Change
Since “[a]ccess to diverse, reliable, affordable and clean energy is critical for sustainable growth," the leaders committed to:
- Increase energy market transparency and market stability by publishing comprehensive and timely data on oil production, consumption, refining and stock levels, as appropriate, on a regular basis.
- Improve domestic capabilities to collect energy data and improve energy demand and request the assistance of the International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC) in “ramp[ing] up their efforts to assist interested countries in developing those capabilities.”
- Improve and enhance “regulatory oversight of energy markets by implementing the International Organization of Securities Commissions (IOSCO) recommendations on commodity futures markets and calling on relevant regulators to collect data on large concentrations of trader positions on oil in our national commodities futures markets.”
- "Rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption," while "providing those in need with essential energy services, including through the use of targeted cash transfers and other appropriate mechanisms."
- Support and “stimulate investment in clean energy, renewables, and energy efficiency and provide financial and technical support for such projects in developing countries.”
Supporting the Most Vulnerable
The crisis has threatened and had an adverse effect on the economic viability of many emerging and developing and low income countries. The leaders stated that collectively governments share a “responsibility to mitigate the social impact of the crisis and to assure that all parts of the globe participate in the recovery” and expressed support for the ongoing efforts of the IMF, World Bank, UN, the African Development Bank Food and other international organizations. The leaders also committed “to improving access to financial services for the poor” by “support[ing] the safe and sound spread of new modes of financial service delivery capable of reaching the poor and, building on the example of micro finance.” To meet these objectives the G-20 will launch a Small and Medium-sized Enterprise Finance Challenge, in which it will request proposals from the private sector for recommendations as to how best “maximize the deployment of private finance on a sustainable and scalable basis.”
Creating and Maintaining Jobs
The leaders noted that “[w]ithout sustained action, unemployment is likely to continue rising in many of our countries even after economies stabilize, with a disproportionate impact on the most vulnerable segments of our population.” The leaders committed to support and preserve employment by implementing recovery plans that include:
- Measures to help strengthen the ability of workers to adapt to changing market demands and to benefit from innovation and investments in new technologies, clean energy, environment, health, and infrastructure through national policies
- Better access to training programs that support lifelong skills development and focus on future market needs.
- Support for robust training efforts in growth strategies and investments with the assistance of International Labor Organization and other labor oriented NGOs.
An Open Global Economy
Noting that “[c]ontinuing the revival in world trade and investment is essential to restoring global growth" and that "[i]t is imperative we stand together to fight against protectionism,” the leaders agreed to:
- Maintain open and free markets and reaffirm the commitments previously made in Washington and London to refrain from increasing or imposing additional trade barriers, export restrictions or from “implementing World Trade Organization (WTO) inconsistent measures to stimulate exports and commit to rectify such measures as they arise.”
- Minimize negative impacts on trade and investment in domestic policy actions, “including fiscal policy and action to support the financial sector.”
- Refrain from “retreat[ing] into financial protectionism, particularly measures that constrain worldwide capital flows, especially to developing countries.”
- Remain committed to future trade liberalization and “seek an ambitious and balanced conclusion to the Doha Development Round in 2010, consistent with its mandate, based on the progress already made, including with regard to modalities.”
The G-20 will next meet in Canada in June 2010 and in Korea in November 2010.
The IMF in a separate statement today acknowledged and supported the commitments made at the Pittsburgh summit. Mr. Dominique Strauss-Kahn, Managing Director welcomed the G20’s ongoing support of the IMF, “[i]ncluding delivering on the pledge made in London to raise $500 billion in order to stem the spread of the crisis” and the leaders’ “reaffirmation of their London Summit initiative to reach agreement on IMF quotas by January 2011.”