Amid serious challenges to the world economy and financial markets, the leaders of the G20 countries gathered in Washington in November 2008. This first-ever G20 leaders’ summit was seen as a historic breakthrough: a new, more inclusive architecture in global governance and financial and economic cooperation. Heads of government of major developing-market economies took part not as observers but as full participants alongside the leaders of major industrialized countries. The initial resolve shown by the G20 in the first meeting was followed by unprecedented, swift and coordinated policy responses in successive summits in London (April 2009) and Pittsburgh (September 2009). Such bold action brought the global economy back from the brink of collapse and stabilized the world’s financial system.
The G20’s success and spirit of cooperation have made it the premier forum for international economic cooperation. Now it will be judged by whether it can nurture economic recovery and lay the foundation for sustainable and balanced growth. Achieving this goal will entail finding a way forward on correcting trade, fiscal and structural imbalances, strengthening financial regulatory systems and pressing for open and rules-based trade. It will also require well-timed, clearly communicated and credible strategies for exiting from crisis-related intervention policies.
The G8, smaller but still influential, will advance issues related to peace, security, democratic governance and development — areas in which Canada makes an important contribution. Canada will champion a major initiative to improve the health of women and children in the world’s poorest regions. The G8 leaders recognize that tackling global hunger and poverty is crucial to a more prosperous and secure world. Now we need leadership to bridge the gap between advanced and developing countries.
The G20’s challenge is to formulate well-timed and coordinated exit strategies to wean economies off enormous monetary and fiscal stimulus. Sustained growth will require the private sector to resume its role as the primary driver of economic growth. The timing and pace at which governments can withdraw stimulus will depend on the strength of the economic recovery in each country. Moving too quickly could kill a frail recovery, while doing too little too late could lead to budgetary crises and inflation.
Many advanced economies emerged from the recession with the highest deficits and debt-to-GDP ratios since the Second World War. The International Monetary Fund (IMF) estimates the average overall deficit among advanced G20 economies will reach 8.7 percent of GDP in 2010, well above the precrisis level (2007) of 1.9 percent. The IMF projects that, in 2014, government debt in advanced G20 economies will hit 118.4 percent of GDP on average, compared with a pre-crisis level of 78.2 percent.
Large deficits are not sustainable for long, especially when nervous markets drive up the cost of servicing the growing debt. The crisis in Greece has made clear the peril of public finances that have spun out of control.
Keeping the confidence of financial markets requires governments to unveil clear, credible plans for significantly reducing their deficits over the medium term. Difficult decisions will need to be made. Cutting spending, improving the efficiency and effectiveness of government programs and services, and embracing public-private partnerships are necessary to ensure longer-term fiscal sustainability. The very worst way to encourage businesses to create jobs and contribute to social welfare would be by increasing taxes.
The G20 will also have to reckon with global imbalances in trade and capital flows, the most visible being the large and persistent current-account deficit in the United States, mirrored by sizable current-account surpluses elsewhere, notably in rapidly growing East Asian economies and oil-producing countries. These imbalances threaten global economic and financial stability. They require fiscal consolidation in advanced countries, and an increase in domestic consumption and real exchange rate adjustments in countries with large current-account surpluses.
The G20 leaders must also embrace an effective and efficient rules-based trading system, and champion unencumbered global commerce. They must reaffirm their commitment to open markets through new free trade and foreign investment agreements, and remove existing barriers to trade and capital flows. They must set an example by quickly removing protectionist measures adopted during the downturn, including barriers contained in stimulus packages.
The G20 leaders must closely coordinate efforts to combat illicit activities like counterfeiting, trademark infringement and piracy. The OECD estimates that international trade in counterfeit and pirated goods was worth up to US$250 billion in 2007.
The impulse for protectionism may be understandable when governments want to show they are doing everything possible to preserve their citizens’ businesses and jobs. However, beggar-thy-neighbour policies can derail the recovery, drag down future growth and undercut the ability to increase incomes. They inflict the greatest damage on the world’s most vulnerable. The politics may be appealling in the short term, but it is bad economics, bad morality and bad policy. It will only make matters worse. The stakes for Canada are high. When so much of our prosperity depends upon trade, protectionism can create devastation in communities throughout the country.
The Global Trade Alert listed 220 protectionist policies imposed by G20 countries between November 2008 and January 2010. G20 members also implemented another 38 measures likely to harm some foreign commercial interests.
It is alarming that as of January 2010, there were 198 suspicious protectionist measures in the pipeline — publicly announced but yet to be implemented — by world governments.
In the face of unrelenting protectionist pressures, Canada provides an example the rest of the world should emulate. We have taken significant steps to open markets and keep them open.
The 2010 federal budget eliminated all remaining tariffs on manufacturing inputs and machinery and equipment, making Canada the first tariff-free zone for manufacturers in the G20. Canada has recently negotiated a number of bilateral trade and investment agreements. In April 2010, it concluded third-round free trade negotiations with the European Union. The proposed Comprehensive Economic and Trade Agreement, the most ambitious since NAFTA, could provide a $40-billion boost to the two economies. A Canada-EU agreement would send a resounding message to the rest of the world that, instead of turning inward, Canada has a confident view of the role it can play in the global economy. It would demonstrate both to the world and to our own citizens that we are looking beyond the recession to create greater future prosperity.
Canada is also working with countries like India and China to enhance trade and investment ties. Canada and India are making good progress in scoping the content of comprehensive economic partnership agreement negotiations between our two countries, and Canada is currently negotiating high-standard foreign investment protection agreements with both China and India. According to UNCTAD, the United Nations Conference on Trade and Development, “After almost two decades of nearly unequivocal support for investment liberalization, many countries have started to re-evaluate these policies, and some have introduced adjustment, thereby exercising their right to regulate foreign investment to pursue domestic policy objectives. One of the main areas where a more restrictive approach towards foreign investment has become manifest relates to national security, and to the protection of strategic industries and critical infrastructure.” UNCTAD warns that if the defence of so-called “strategic industries” becomes more widespread, it “could have severe effects on economic growth, hinder an optimal resource allocation, and result in significant investment distortion.”
G20 countries must set an example by not raising existing investment barriers or imposing new ones. The criteria for blocking foreign investment in the defence of “national security” or of a “strategic industry” should be narrowly defined and applied only under exceptional circumstances. At the same time, all international agreements must include high standards of investment protection, including nondiscrimination, national treatment, and fair and equitable treatment. They must afford prompt and adequate appeal mechanisms, effective compensation in the event of discrimination or expropriation, and access to international arbitration to resolve disputes.
Additionally, it is vital to Canada’s economic prosperity that national borders not impede the safe and efficient flow of legitimate goods and travellers. The strong link between security and trade must be recognized, and a proper balance struck.
The G20 leaders must closely coordinate efforts to combat illicit activities like counterfeiting, trademark infringement and piracy. The OECD estimates that international trade in counterfeit and pirated goods was worth up to US$250 billion in 2007. Leaders must give particular attention to enforcing the World Trade Organization (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights and advancing negotiations on the Anti-Counterfeiting Trade Agreement.
Finally, now is the time to complete the WTO’s Doha Development Round of trade talks. With a concerted push by the G20 leaders, WTO countries can put together an ambitious and balanced package that helps both developed and developing countries. They can inject new political energy to bridge gaps and ensure the final agreement generates new trade flows, reduces the cost of doing business across national borders and increases predictability for companies.
The Washington-based Peterson Institute for International Economics estimates that a successful conclusion of the Doha Round could increase world GDP by between $165 billion and $283 billion annually. Potential global GDP gains from agriculture and non-agricultural trade liberalization could amount to about $63 billion a year.
Canada’s export-oriented farmers and manufacturers have much to gain. Sector-specific agreements in chemicals, electronics/electrical goods and environmental goods offer the possibility of even greater global access for Canadian businesses. They could boost global GDP by an additional $56 billion per year. Meaningful liberalization of services could raise world GDP by $46 billion annually and further expose Canada’s services sector to international markets. Trade facilitation improvements, including reforming customs procedures, slashing red tape, reducing transaction costs for imports and exports of goods and services, and publications standards could increase annual global GDP by roughly $118 billion. Surely, that is a goal that’s worth pursuing.
When the G20 leaders first met in Washington in November 2008, they focused almost exclusively on financial regulatory reform. This topic has remained at centre stage in the summits that followed. It will be a major focus of the June summit, and rightfully so.
Richard Fisher, President and CEO of the Federal Reserve Bank of Dallas, wrote, “In an economy, the central bank is the heart, money is the lifeblood, and financial markets are the arteries and capillaries that provide critical sustenance to the muscles — the makers of goods and services and creators of employment. A properly functioning cardiovascular system fosters healthy growth; if that system fails, the muscles atrophy and the body breaks down.”
A well-functioning financial system is critical. Entrepreneurs must tap financial capital to transform their ideas into a successful venture. Businesses require capital to expand and modernize plants and equipment. Families rely on lending institutions to finance their homes and their children’s education.
In April 2009, the Brookings Institution published “Know Thy Neighbor: What Canada Can Tell Us about Financial Regulation.” The article notes, “The Canadian banking system has long been regarded by the IMF as a paragon of international best practices. The World Economic Forum recently ranked it the soundest in the world. And it looks better with every passing day. As during the Great
Depression, when only a few inconsequential banks failed in Canada, the overall system has remained solvent and solid amid the current global crisis.”
The article concluded: “Clearly, there is something to be said for studying Canada’s more centralized, and apparently better-coordinated, regulatory bodies.”
Without a doubt, Canada has credibility and will bring to the table a unique and important perspective on financial reform. At the same time, we need to understand that Canada is not an island. The recent crisis clearly illustrated that financial shocks in one region move with lightning speed globally. That is why Canada supports an international framework of financial system reform and considers reform an important precondition for sustainable and balanced growth.
As part of an international financial reform agenda, leaders need to ensure stronger capital and liquidity standards, and build a principles-based framework for global financial supervision through better collaboration among regulators. Achieving a commitment to ambitious peer review will be an important milestone.
As Bank of Canada Governor Mark Carney has stated, “The financial system will be more stable if market infrastructure is substantially improved, products are more standardized and transparent, and banks are adequately capitalized to fulfill their market-making and credit intermediation roles.” Carney added that the ultimate goal of financial sector reform is make each financial institution individually and the financial system as whole more resilient.
Policy-makers must assess all regulatory proposals to determine their impact on availability of credit/financing. And it is not sufficient to analyze each regulation in isolation. Policy-makers must also consider the cumulative impact of proposed regulations.
In the end, new standards for banking regulation and supervision must be able to avoid another financial crisis while still encouraging growth and innovation. In US Federal Reserve Chairman Ben Bernanke’s words, “When proposing or implementing regulation, we must seek to preserve the benefits of financial innovation even as we address the risks that may accompany that innovation.”
A proposal being discussed in advance of the G20 Summit is a global tax on financial institutions’ liabilities (except insured deposits and equity), or on profits and remuneration, to cover the cost of any future bailouts of the industry. Canada is rightfully opposed to the idea, first and foremost, because there were no taxpayer bailouts of financial institutions in Canada. Additionally, such a tax levy would remove capital from financial institutions, lessening their ability to absorb losses. It could potentially trigger more risk-taking because of the perception that financial institutions will be bailed out, much as the “too big to fail” mentality gives banks a potentially dangerous incentive to get bigger and riskier because they are nestled under implicit guarantees that they will be bailed out by the taxpayer.
Climate change is not a focus of the G8/G20 discussions. However, it is too important an issue to ignore. While the United Nations Framework Convention on Climate Change has been the primary forum for these discussions, the G8/G20 can play an important role in bringing the largest economies together to advance an agreement leading to a low-carbon economy.
Building on the Copenhagen Accord, the agreement must include all major greenhouse gas (GHG) emitters with binding reduction commitments that establish a level playing field. Both the private and public sectors share the responsibility to act, with advanced economies working with emerging-market nations to achieve balanced and sustainable economic growth. Since many developing countries are struggling to provide even the most basic necessities to their citizens, a global approach to addressing climate change will require innovative financing mechanisms to ensure their participation. An effective compliance system must be developed to enable measurable, transparent and verifiable comparison of the climate change efforts among countries.
Many businesses are meeting or exceeding regulatory requirements and are investing in research and technology to reduce their environmental footprints. They recognize that addressing environmental issues is good business.
Without a doubt, Canada has credibility and will bring to the table a unique and important perspective on financial reform. At the same time, we need to understand that Canada is not an island. The recent crisis clearly illustrated that financial shocks in one region move with lightning speed globally.
An effective program to reduce GHG emissions hinges on a range of factors, including the speed of developing, commercializing and deploying low-carbon and near-net-zero-carbon energy technologies and technologies that increase end-use energy efficiency. Some advanced technologies may not be sufficiently attractive to penetrate the market on a large scale without supporting policy or incentives. Other technologies, like those that capture or sequester carbon dioxide, are still in the early stages of development.
Ultimately, no single technology will meet the challenge by itself. We will need significant investment in research and development to develop a portfolio of advanced technologies. Since many technologies will take decades to move from R&D to widespread implementation, governments must commit to programs that support new technology development by the private sector.
Energy security and climate change policies must be mutually reinforcing. Increasing energy efficiency, diversifying the mix of energy sources and eliminating wasteful energy subsidies are vital for any future climate strategy.
That is a heavy agenda for leaders to consider, but what does it mean for Canada? As a small, open and export-dependent economy, Canada needs a well-functioning global governance architecture that promotes stable and sustainable economic growth, a sound financial system, and open and transparent trade and investment policies. The June summits in Huntsville and Toronto give Prime Minister Harper an opportunity to promote Canadian values and present solutions that serve both our interests and the global community’s in a balanced way. The Prime Minister should call on world leaders to not simply talk about opposing protectionism, but demonstrate their commitment through their actions. He should make it clear that Canada is prepared to match its deeds to its principles, both in the Doha negotiations and in dismantling barriers here at home. Prime Minister Harper should urge world leaders to emulate Canadian financial system practices and regulations.
Although we are but one voice, and a relatively small one at that, this is an opportunity for us to have an impact far greater than the size of our population or of our economy.
We must seize the moment.