The lead article in the Friday, March 13th Financial Times reported that Wen Jiabao, the Chinese premier, warned the United States to take measures to guarantee its “good credit,” expressing concern about China’s large holdings of US assets.  The White House felt compelled to reply promptly that Mr. Obama intends to return the country to fiscal prudence once the financial crisis passes. "There's no safer investment in the world than in the United States," said presidential spokesman Robert Gibbs. The economic reality of today dictates that the US has to pay serious attention to the views of governments of major emerging market economies, particularly those on which we will depend to continue accumulating the growing volume of US public debt. No longer is it only the views of seven advanced industrialized economies (the Group of 7 finance ministers and central bank governors of Canada, France, Germany, Italy, Japan, the UK, and the US) that “count” in international financial and economic deliberations.

This new reality was reflected in the meeting last weekend in London of the finance ministers and central bank governors of the G20 (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States of America, and the European Union) . The meeting was held to prepare for the meeting of the heads of state of these countries early next month. The G20 countries account for 85% of the world’s economic output.  The country grouping does cover most of the globe’s major players (the exclusion of Taiwan and Singapore and inclusion of Argentina and Turkey could be questioned).

Also last week the Financial Stability Forum (FSF) announced an increase in its membership to include all member countries of the G20. The current membership comprises national financial authorities from the G7 countries, plus Australia, Hong Kong, Netherlands, Singapore, and Switzerland. The additional members from the G20 will be Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa, and Turkey. In addition, Spain and the European Commission will become members. Thus the number of “countries” will more than double, from 12 to 25.  Noting that each country will have representatives from its finance ministry (or treasury), its central bank, and its other financial regulatory agencies (such as the SEC for the US) and that the major international financial institutions and international regulatory and supervisory groupings will also attend, there will be quite a crowd participating in future meetings of the FSF.  This will be a considerable challenge for those responsible for organizing effective deliberations.

These developments contrast sharply with the thirty years’ experience of this writer in the US Treasury and the Organization for Economic Cooperation and Development (1974-2005). The received wisdom in those institutions was that high-level international financial deliberations should be kept in exclusive groups that include only the key advanced economies, preferably the G7 countries, if not even smaller groupings.

Most, but not all, of the reasons for this restrictive stance are no longer valid. The Cold War is over (which accounted for some of the political considerations).  The key creditor nations with substantial foreign reserves now include countries like China, Saudi Arabia, and Korea. And the relative economic importance of the emerging market countries is now much greater. The IMF calculated that these countries accounted for some two-thirds of the growth in the global economy in 2007.  While final numbers for 2008 are not yet available, a similarly significant role is likely to be shown for last year.  The importance of emerging markets in the global market for equities has also increased. The capitalization of emerging markets’ stock markets has increased by a factor of four over the last 10 years, from 6.3% of the global stock market capitalization in 1998 to 23.2% in October of last year (even after a substantial market drop).

One reason for more limited groups which still has some validity is the practical consideration that the larger the group, the more difficult it is to have frank and efficient discussions, particularly when all participants wish to engage in the debate. If twenty countries wish to express views on a topic, the time required is substantial. Add time for some give –and –take, and the number of issues that can be covered in a meeting is very limited.  Also, the challenge of reaching a consensus on any action is likely to be greater.  For these reasons, the G7 meetings of finance ministers and central bank governors are likely to continue to be held – at least until the G20 meetings prove to be effective.

It appears that this weekend’s G20 meeting was successful in the eyes of the participants. Governments are on course to deliver a global fiscal and financial stimulus of unprecedented proportions and major financial sector reforms. US Treasury Secretary Tim Geithner applauded the strength of the G20’s “consensus on the need for both recovery and reform, so that we will never face a crisis like this again.”  Agreement was reached on an agenda for the heads-of-government meeting and for moving forward on a deal to increase substantially the funds available to the IMF to deal with financial crises and to give emerging market economies a greater voice in international financial institutions. There was also agreement on broad principles to guide the reform of the financial system, including stronger oversight of important financial institutions, increased disclosure for the derivatives markets, and registration and regulation of credit-rating institutions.

Also notable was a call by the G20 finance ministers for increased information sharing to counter tax evasion. This coincided with a remarkable number of announcements last week of concessions on tax secrecy by some of the world's leading private wealth centers, including Switzerland, Austria, Luxembourg, Hong Kong, Singapore, Liechtenstein, and Andorra. After resisting for a number of years, they have bowed to pressure to adopt OECD’s international standards on transparency – and in time to avoid criticism by the G20.

Along with their increased role in international financial discussions, emerging markets are fulfilling expectations that they will outperform advanced economies in the global equity market in 2009. Taking account of last week’s advances, the MSCI Emerging Market Equity Index is down only -4.8 % year-to-date. This is only one third as large as the decline in the MSCI Equity Index for the US market, -16%, and one fourth of the  - 21.2% decline in the MSCI EMU (Eurozone) Equity Index . The MSCI China Index has moved very similarly to the overall Emerging Market Index, -3.1 % year-to-date. Several emerging markets as measured by their corresponding MSCI indices are actually up this year, including Brazil + 8%, Chile +12.1% and Taiwan +2.4%. Cumberland’s International, Emerging Market, and Global Multi-Asset Class portfolios have over-weight positions in these markets.