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How about next G-20 Summit on good governance for sound financial markets?

By Kaufmann | November 19, 2008 No Comments »

The first G-20 summit, focused on the financial crisis, just took place this past weekend.  When measured against expectations of such gatherings, there were some accomplishments.  Such as in trade:  the collective pledge to avoid raising any trade and investment barriers, or the promise to ‘strive’ for a deal on the stalled Doha round.  And the summit’s ‘action plan’ holds promise.

The declaration includes a generic list of a plethora of financial sector  ‘principles’ and many areas of work.  But at least it is comprehensive in scope, touching on most of the right ‘buttons’.  It provides space to work concretely on real issues.

Arguably the most important achievement is that this G-20 summit did take place in the first place.  By doing so it promises to set in motion a process towards more inclusive voice for a number of important emerging country governments beyond the G-8.  The commitment to collaborate by this diverse set of governments is noteworthy, as is their shared belief that market principles, open trade, and effective financial regulation are essential for growth, employment and poverty reduction.  Yes, the devil will be in the implementation details, but it is a good start.

Of course, I would argue that better representation from the emerging world would have helped further.  The inclusion of a few smaller yet successful emerging economies, such as Botswana and Chile, can bring in good experience and example (even to some in the G-8…) on governance and policy-making standards.  [Incidentally, both countries would have enlarged the representation from Africa and South America].  Still, the G-20 is an improvement over the outmoded G-8…

On the downside, it is disappointing to see an absence of a more concerted effort to coordinated expansionary fiscal policy (while maintaining a sound monetary stance).

And in terms of diagnosing the actual causes leading to this financial crisis, what this Summit delivered was generic, glib, and politically correct.  This is understandable, given the (current) governmental constitution of the Group.  But getting a deeper diagnosis on the table is needed, in order to figure out what the actual priorities for action should be in the coming year.

Otherwise we face the ‘Christmas tree’ risk, i.e. preparing catch-all laundry lists with hundreds of disparate new measures in scores of different reform dimensions, without prioritizing (and sequencing) properly.  Strategic priorities, with an implementable action plan that focuses on attaining concrete results over the next 12 months, requires a diagnosis that can come up with the most important set of actions, setting them apart from third-order issues or decorative ‘bells and whistles’.   These may be politically expedient but are costly diversion from the more painful but priority actions.

In particular, the challenge of governance, integrity and corruption remains under-emphasized in the incipient diagnosis provided by the G-20 summit just concluded.  This downplaying is then mirrored in the action program.  Integrity, transparency and insider trading get some lip service.  But there is no explicit treatment of some of the capture, undue influence, corruption and misgovernance abuses that did play an important role in the crisis.

Further, there is no clear distinction between two very different types of regulation: those aimed at transparency and disclosure, which are ‘win-win’,  vs. regulations to control and restrain, which have tradeoffs.  The latter require cost-benefit analysis and an assessment of what is the optimal regulatory approach (so that there is no regulatory over-shooting).

It is not just that we need to understand the causes of the crisis, or only embark on regulatory reform carefully unbundling very different types of ‘regulation’.  Because there is also a larger new governance challenge afoot, which is actually due to one of the fast approaching consequences of the financial crisis.  A seismic shift is resulting in an unprecedented rapid increase in the role and scope of government in ‘market economies’ during peace time.

This new overarching role of government is occurring at three levels.  First, in shaping (and soon, in overseeing and enforcing) regulation; second, in becoming an owner of industries (such as finance, insurance, cars? — even if ‘temporary’), and, third, in doling out at lightning speed hundreds of billions of dollars directly to private institutions.  These present a whole new set of governance and integrity challenges.  Lobbyists and vested interests are already knocking at the door, as in the cases of potential bailout recipients, and of carmakers in the US and Europe.  Further, a number of international financial institutions and donor agencies are rushing to push money out of the door, fast, to selected governments.

This new reality, with its governance implications, was ignored by the first G-20 summit that just ended.  But the G-20 and multigovernmental institutions are not alone in being silent.  This new world order, with implications for various forms of misgovernance, capture and corruption, has so far been largely ignored everywhere–even by the international anticorruption movement!

But it is not too late.  Another G-20 summit will take place this coming April, with the new Obama administration fully involved.  A process to do serious work towards such summit has also been committed to, even if these tougher governance challenges are yet to be explicit.

Let us strive towards ensuring that these serious issues are not conveniently ignored, but instead concretely tackled.  In the weeks and months ahead, many may want to contribute to the debate with specific and concrete recommendations, so to help address these risks of corruption, capture and misgovernance that are brought about by this new ‘governmental’ world reality.

There is too much at stake to stay mum or politically correct.

Topics: capture, Corruption, financial crisis, G-20, Public Financial Management, Public-Private Linkages, Transparency | | Read and Submit Comments