The second G-20 Summit meeting was held in Pittsburgh last week. There were no market-moving surprises in the outcome. The decisions taken were largely signaled by the preparatory meeting of finance ministers and central bank governors on September 4 and 5 in London.  While the press accounts suggest the results were modest, perhaps because of the absence of big surprises or visible sharp disagreements, the accomplishments were, in fact, substantial and in some aspects unprecedented in the post-War history of international economic policy discussions. We agree with the September 28th Financial Times editorial on the G-20 outcome, when they state that “… it would be a mistake to indulge in cynicism.  The G20 has shown a real will to act…”

The Leaders' Statement, which can be obtained at http://www.ft.com/cms/s/0/5378959c-aa1d-11de-a3ce-00144feabdc0.html , is unusually long and detailed for a text agreed by heads of state.  These include not only the leaders of the most advanced economies, who have considerable experience in working together, but also the leaders of major emerging-market economies such as China, India, Brazil, and Russia.1  The list of decisions is too long to discuss here. It is the result of considerable preparatory work by central banks and finance ministries/treasury departments. We will discuss below just the central economic conclusions and the future prospects for policy coordination. Some of the other actions included commitments to strengthen financial regulation, via reformed rules on capital adequacy and the remuneration of bank employees; to reform the global institutional architecture, including a needed reallocation of quotas in the IMF; to phase out fossil fuel subsidies; to “bring the Doha round to a successful conclusion in 2010”; and to reach agreement in Copenhagen on climate change.

The leaders agreed that the unprecedented coordinated policy stimulus they had agreed at earlier meetings and subsequently implemented had worked to bring about a recovery in the global economy, which is now underway in most economies.  They recognized, however, that the strength and durability of the recovery is still unclear. They agreed that all would avoid premature withdrawal of that stimulus. This possibly is the only element of the communiqué that has immediate market implications, as it is a further confirmation that policy interest rates will not be raised from their current very low rates, at least during the near term. This has bearish implications for the US dollar and the Japanese yen, which will continue to be used as carry currencies.  There were no specific statements on exchange rates, an issue the leaders wisely left to finance ministers and central bank governors.

We give particular importance to the agreement of the G-20 leaders that they will plan together their eventual “exit strategies” and launch a “framework for strong sustainable and balanced growth.”  That framework is discussed below. While some had been looking for more details on future exit strategies, such an action at this time evidently would have been premature. In any event we would expect any future statement by the G-20 on exit strategies to be worded pretty broadly, as individual central banks in particular will not wish to lay out future possible steps in much detail. The two important take-aways are the consensus that it is still too soon to start withdrawing liquidity from the global economy and that these countries and their central banks are committed to coordinate their eventual exit strategies.

This latter commitment was made in the context of the following statement, which marks a milestone in international relations: “We designate the G-20 to be the premier forum for our international economic cooperation.” The US and the governments of other advanced economies have finally and formally recognized that the global economy has changed, that in the 21st century it is no longer practical for the G-8  (the G-7 advanced economies plus Russia) to seek to “manage” the global economy. The G-20 is probably larger than ideal, but its inclusion of the major emerging-market economies is a critical plus.  Particularly important is the evident commitment of China to this forum. The Chinese delegation to the Pittsburgh Summit was second in numbers only to that of the US and was reported to be highly sophisticated. We are seeing increasing evidence of the so-called G-2 (US and China) playing a leading role on the international stage.

We note also that the G-20 has taken over the Financial Stability Forum, a G-8 creation, and has upgraded its status, increased its membership to that of the G-20, and renamed it the Financial Stability Board (FSB). G-20 has mandated the FSB to assist it by coordinating and monitoring progress in strengthening financial regulation.

The G-20 members have agreed to develop shared economic and financial policy objectives, set out their medium-term policy frameworks, and “…work together to assess the collective implications of our national policy frameworks for the level and pattern of global growth, and to identify potential risks to financial stability.”  This will be done through a process of “mutual assessment to evaluate the collective implications of national policies for the world economy.”  The IMF will provide analytical assistance to this process.

Some have questioned the value of this commitment of the G-20 governments to vet each others policies, citing the absence of sanctions in case a country does not heed the advice of the group.  This writer’s experience in the OECD, which has pioneered the approach of peer reviews in promoting economic reforms and monitoring international commitments, suggests such comments misjudge the power of moral suasion in encouraging international cooperation.  Adding sanctions to such a process in the economic and financial policy area would never be acceptable to the US or the other G-20 members.  All governments, including that of the US, are highly reluctant to circumscribe their national sovereignty.  But they do respond to moral suasion to adhere to political commitments taken jointly in a group with agreed, shared policy objectives and principles.  In the OECD, to take one example, such a process underpinned the lengthy but eventually fully successful process of liberalizing capital movements. Often, it was the pressure of other members that assisted governments in overcoming the resistance of vested interests to needed reforms. Time will tell if such a process will be successful within the G-20, but it is noteworthy to see countries like China, India, and Brazil accept to have their policies vetted by the G-20 membership.

The next meeting of the G-20 leaders will take place in Canada in June 2010.  By then we should have a considerably clearer view of the development of the “Framework,” as well as progress on the many action items in the Pittsburgh communiqué, including notably the coordination of “exit strategies.”

¹ The members of the G-20 are the finance ministers and central bank governors of 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the U.K. and the U.S., as well as the European Union, represented by the rotating council presidency and the European Central Bank.