G20 Reached a Deal on Measuring Global Imbalances

Sources:
FT: G20 Strikes Compromise on Global Imbalances
WSJ: G-20 Deal Reached, but Outcome Open to Interpretation
NYT: As G20 Leaders Set Deal, Geithner Criticizes China
Reuters: G20 Ministers Fudge Deal on Imbalance Indicators

Last Saturday, finance ministers and central bank governors of the Group of 20 came to an agreement on how to measure imbalances in the global economy at the Paris Summit. The G20 did not include real effective exchange rates and foreign currency as indicators of imbalances in the communiqué due to China's opposition. Nevertheless, it was "a significant step toward better coordination of economic policies worldwide to help prevent another financial crisis," said French Finance Minister Christine Lagarde.

The agreed indicators include public debt and fiscal deficits, private savings rate and private debt, and external imbalances such as the trade balance and net investment income flows. Many countries including the United States believe China's undervalued currency, which helped it accumulate huge foreign reserves, has been contributing to global imbalances. Facing China's intense opposition, however, the G20 excluded exchange rates and foreign reserves as indicators in order to reach a deal. Instead, as a compromise, the G20 agreed that it would take "due consideration" of exchange rates in assessing imbalances.

The Paris Summit showed that a G20 negotiation process had become increasingly difficult. Any deals reached must have unanimous agreement among all G20 member countries. As some countries such as Brazil and China recover from the financial crisis faster than others, it could be more complicated for members with different positions and interests to agree on specific details.

There will be no specific numerical goals for each indicator, instead, each will "test economic policies and determine how good they are for all member states, and not only for the domestic policy of a given country," said Ms. Lagarde. By April, the G20 will prepare guidelines for the agreed indicators. The International Monetary Fund is scheduled to assess policies of the G20 countries by October.

Discussion: The global economy requires policy coordination among countries. However, as Jacob Frenkel, the Chairman of JPMorgan Chase International says, “it’s very difficult to see any government doing something in its fiscal affairs just to benefit the broader system.” How can the G20 be effective in coordinating policies and tackling the global economic problems if member countries are predominantly self-interested?