G-20 Reality Check

The headline news out of the G-20 meeting concluded in London yesterday was that the leaders plan about $1 trillion in new spending through the International Monetary Fund. Beyond that big, easy-to-remember number, the loudest sound from the group's communique was that of 20 hands mutually patting each other's backs for a job well done.

AP

"Taken together," the 20 national leaders said in unison, "these actions will constitute the largest fiscal and monetary stimulus and the most comprehensive support program for the financial sector in modern times."

Before stepping further, let us note that some prudent soul in the G-20 process managed to insert into this grandiloquent spending statement a needed note of restraint.

Buried in the middle of the communique is a paragraph about "exit strategies" to ensure "price stability." This is reassuring. It suggests there is at least some awareness that the U.S.-led strategy of printing many trillions in dollars to pay for global stimulus carries the threat of significant future inflation -- unless central banks tighten this expansionary monetary policy before the inflation arrives.

The second-best takeaway is that most of the group's other commitments will have to be implemented not by a single unit called the G-20 but by 20 or more separate, sovereign nations. In other words, don't hold your breath waiting for Nicolas Sarkozy's new Financial Stability Forum to write global regulations for hedge funds and "all systemically important financial institutions, instruments and markets." That could take awhile. The Europeans have been working for years to create a standard system of banking supervision. They're still working on it.

The G-20 also agreed to pump "at least" $100 billion into the World Bank and its regional cousins like the African Development Bank. There's also another $50 billion for something called the Global Trade Liquidity Program, which World Bank President Robert Zoellick said will "provide trade finance to support businesses across the developing markets." Translation: Subsidies for businesses from Bangladesh to Bolivia.

Operationally, this is a tall order for the bank despite its 60 years of experience in shoveling money out the door. As for the other $100 billion, anyone who has followed our editorials on the corrupt uses to which the bank's existing $30 billion annual budget is routinely put can easily imagine that much of the G-20's financial benevolence will never reach its intended targets in poor countries.

As for near-term global growth, perhaps the communique's two most telling measures concern tax and trade policy. On taxes, the G-20 makes a forceful commitment to eliminate "tax havens." The nominal point of this effort is to ensure fairness and eliminate "banking secrecy." In fact, it looks more like a last-ditch effort by nations whose spending has reached such levels that they've become desperate for tax revenue. If the real point is to mandate "harmonization" across borders at relatively high levels of taxation, one has to ask where the world is going to find incentives for new economic growth.

One traditional answer has been trade. The primary vehicle for producing more of that is the Doha free-trade round. The G-20 commits itself to Doha and rejects protectionism and competitive currency devaluations. Good. But it pointedly did not set a date for renewing the Doha trade round. Bad.

On balance, the G-20 meeting ended as a reality check. The leaders arrived in London with the media billing it as virtually the Committee to Save the World. Led by the Obama Presidency, we are living through a period of inflated roles for government in the lives of nations. What emerged from London suggests these leaders recognize that even they are mere mortals and the real work of economic recovery will have to resume when their planes touch down back home.

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