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New international economic system emerging

Mahmood Hasan
THE credit crunch and financial meltdown have severely mauled the rich countries over the past two years. With massive doses of public funding the banks and financial institutions in the West have been kept afloat and rescued. Slowly, these economies seem to be emerging out of the dark tunnel of recession.
It is against this background that 19 major countries and the EU, known as
G20, met in Pittsburgh from September 24-25. This group of 20 countries was formed in 1999, at the ministerial level, to tackle the Asian financial crisis.
In December 2008, the G8 was scheduled to meet in Washington to arrest the downward spiral of the world economy. It was at that time that 11 other leading economies and the European Union were invited to address global economic issues. Outgoing President George Bush hosted the meeting of the Group, which controls almost 85% of the world econ-
omy. The second meeting was held in London in April this year, where President Barrack Ob am a.offered to host the third: meeting in Pittsburgh, Pennsylvania.
The Pittsburgh Summit had its plate full. The focus was on international financial regulatory systems -- more specifically on bank salaries and bonuses --along with issues such as sustainable and balanced growth; reforming the mandate of development banks and the governance of IMF; climate change and energy.
The two-day deliberations produced six documents: (i) Creating a 21st century international economic architecture; (ii) a framework for strong, sustainable, and balanced growth; (iii) coordinated actions from crisis to recovery; (iv) cooperation on food security; (v) global energy and climate change challenges; and (vi) support for the most vulnerable.
The Summit has made some significant achievements. President Obama obtained agreement from the leaders "to continue implementing aggressive policies to restore economic growth and create jobs and reform financial regulation and supervision to avoid a return to the risky practices that led to the crisis."
The Summit noted that the decline in output had been arrested and the stimulus package would help create 7-11 million jobs by December this year. G20 will coordinate efforts to wind down the enormous fiscal and monetary support once the recovery is secured.
G20 members have joined the Financial Stability Board, a club of regulators based in Basel, Switzerland, which will monitor and coordinate the system of global regulation. The Global Forum on
• Transparency and Exchange of Information is expected to promote greater tax transparency. French
President Nicholas Sarkozy, a staunch proponent of transparency, said before the Summit: "Tax havens, banking secrecy, that's all over."
G20 leaders also agreed to frame strict and precise timetables for reaching international agreements and quickly implementing those regulatory steps in the global financial system. New rules will be introduced to improve both the quality and quantity of bank capital to prevent recurrence of collapses. The focus here was on the abuse and misuse of banking and financial institution rules that led to the financial crisis.
The Summit agreed to clamp down on excessive compensation of senior bank officials, even though the organisation was not making profits. Taking undue risks in derivatives trading, huge salary packages of bank officials, and their greed for enormous bonuses are seen by the Summit leaders as the main reasons for the financial disaster.
"We will not go back to the days of reckless behavior and unchecked excess, which is at the heart of this crisis," declared President Obama. Meanwhile British Chancellor of the Exchequer Alistair Darling has warned bankers that "the party is over and they must realise the world has changed."
The G20 is taking a formal shape. The most significant achievement of the Summit was the decision to establish the International Economic Council (IEC). G20 will now become the permanent council for international economic cooperation. G20 will essentially overtake the tasks of G8 as far as world economic issues are concerned. The exclusive club of G8 will continue to hold its annual consultations and concentrate on major security related issues, but will have much less influence.
Through the IEC, G8 is actually sharing responsibilities with 11 other coun--tries "to reform and sustain the global economic and financial system." Over the past years G8 had invited leaders of emerging economies, but they remained on the sidelines.
The Internationa) Economic Council will not be without power. The G20 has agreed to transfer at least 5% in quota share from those over-represented at IMF to those currently under-represented. Similarly, the voting power of emerging economies will increase by 3% in the World Bank. G20 also paid up the promised $500 billion to IMF to expand its New Arrangement to Borrow (NAB).
These realignments of voting powers will actually increase the voice of the emerging economies, commensurate with their present economic weight, in these two extremely important multilateral financial institutions. G20 hopes that the "reformed IMF and World Bank will play a leading role in responding to challenges that require global coordinated action."
Launching the Framework for Strong, Sustainable and Balanced Growth, President Obama called for the end of the "era of profound irresponsibility." G20 leaders pledged to control credit and asset price cycles from going overboard and producing destabilisation forces in the economies. Tough actions will be taken against those who would create panic in the markets.
Over the past year, the economic crisis has triggered a run on food prices around the world, with hunger staring in face of over a billion people. G20 leaders called upon the World Bank to create a "global agriculture and food security program" to assist low-income counties. A fund of $20 billion has already been
generated for the program and will be used for sustained production of food • grainsand infrastructure,development.
The Summit agreed to increase funding to the World Bank to help low-income countries to have access to affordable and reliable clean energy. G20 countries use 80 per cent of the world's energy. OECD studies have shown that by eliminating fossil fuel subsidies greenhouse gas emissions can be reduced by more than 10 per cent by 2050. Removal of the subsidies will also eliminate market distortions of fossil fuel and encourage the use of non-fossil energy.
The Pittsburgh Summit was the first for President Barrack Obama as host of such a big event. His opening speech and his skillful steering of the proceedings deserves credit. His team was on overdrive to follow-up on the decisions taken at the London Summit of April. Obama also had tabled a number of innovative proposals and made sure that the leaders attending the meeting accepted those. The next G20 and G8 meetings will be held together in Muskoka, near Toronto, Canada, in June 2010.
The enlargement of the G8 to G20 is a profound development in the management of the global economy. It appears that the days of total Western domination of the global economic and financial system are over and a new international economic system is slowly emerging. The leading emerging economies have eventually elbowed their way into the rich man's club. Not because G8 loves them, but because G8 alone is unable to keep the global financial system functioning.
Mahmood Hasan is a former Ambassador and Policy Advisor, Center for Foreign Affairs Studies.