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The G-20 Summit: Recovery and New Beginnings

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by Tina Kremmidas - The Canadian Chamber of Commerce

The Group of Twenty (G-20) countries delivered unprecedented, swift and coordinated measures to pull the global economy from the brink of collapse and stabilize the world’s financial system. The G-20’s success and spirit of cooperation have made it the premier international economic forum. Now it will be judged by whether it can nurture economic recovery and lay the foundation for sustainable and balanced growth.

When the G-20 leaders meet in Toronto on June 26-27, they will tackle an ambitious agenda that includes mapping out a strategy for countries to withdraw enormous economic stimulus, pressing for an open and rules-based trading regime, and strengthening the global financial regulatory system.

The summit is an opportunity for Canadian leadership. Canada stands proud through its actions and example. Amidst global financial turbulence, our banking sector was recognized as the world’s soundest thanks in good part to strong regulation and supervision. Canada has the best fiscal position among major industrialized countries. As other nations erected walls, Canada rejected protectionism and embraced trade liberalization. Our success provides political capital we can expend to influence reforms and present solutions on a spectrum of global issues.

Exit strategies

The G-20 countries committed five-trillion dollars in fiscal stimulus by the end of 2010 to revive the global economy. They must now formulate strategies to wean economies off this massive injection. Sustained growth hinges on the private sector resuming its role as the primary driver of economic growth.

Many advanced economies emerged from the recession with the highest deficit- and debt-to-GDP ratios in peacetime. 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 develop and communicate clear, credible plans for significantly reducing their deficits over the medium term. Cutting spending, improving the efficiency of government programs and services, and embracing public-private partnerships are necessary to ensure longer-term fiscal sustainability. The ability of businesses to create jobs and innovate would be severely shackled by increasing taxes.

Promoting Global Trade and Commerce

The G-20 leaders must embrace an effective and efficient rules-based trading system, and champion unencumbered global commerce. They must set an example by quickly removing protectionist measures adopted during the downturn, including barriers contained in stimulus packages.

According to the Global Trade Alert, 220 beggar-thy-neighbour policies were imposed by G-20 countries between November 2008 and January 2010. Another 38 measures were implemented that are likely to have harmed 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.

Beggar-thy-neighbour policies threaten to derail the recovery, drag down future growth, and reduce income potential for everyone. They inflict the greatest damage on the world’s most vulnerable. The stakes for Canada are high. When so much of our prosperity depends upon trade, protectionism can have a devastating impact on communities throughout the country.

Canada provides an example the rest of the world should emulate. The 2010 federal budget eliminated all remaining tariffs on manufacturing inputs and machinery and equipment. In April 2010, Canada concluded third-round free trade negotiations with the European Union. Canada and India are making good progress in scoping the content of a Comprehensive Economic Partnership Agreement (CEPA), and Canada is negotiating high standard Foreign Investment Promotion and Protection Agreements (FIPAs) with China and India. These initiatives are sending a resounding message to the rest of the world that, instead of turning inwards, Canada has a confident view of the role it can play in the global economy. It demonstrates both to the world and to our own citizens that we are looking beyond the recession with an eye on creating greater future prosperity.

Financial regulatory reform

Financial regulatory reform has remained at centre stage with good reason. 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.”

In an April 2009 article, the Brookings Institution noted, “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.” The Institution 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. As part of an international financial reform agenda, leaders need to ensure adequate capital and liquidity standards, and build a principles-based framework for global financial supervision through better collaboration and coordination among regulators. Achieving a commitment to ambitious peer review will be an important milestone. In the end, new standards for banking regulation and supervision must be sufficiently strong and responsive to avoid another financial crisis while still encouraging growth and financial innovation.

A proposal being discussed in advance of the G-20 summit is a global tax on financial institutions to cover the cost of any future bailouts. Canada rightfully opposes the idea because there were no taxpayer bailouts of financial institutions in Canada. Additionally, a tax levy would remove capital from financial institutions, lessening their ability to absorb losses. It could trigger more risk-taking because of the perception 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 they will be bailed out by the taxpayer.

A global tax on financial transactions (for example, foreign exchange, bonds, equities, and derivative trades) has also been proposed as a form of bailout policy insurance. Such a tax would lower market liquidity and seriously harm investment and global economic growth.

Conclusion

As a small, open and export-dependent economy, it is in Canada’s interest to ensure 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 G-20 summit in Toronto gives Prime Minister Harper an opportunity to promote Canadian values and present solutions that serve our own interests and the global community’s in a balanced way. The Prime Minister must call on world leaders to not simply talk about their opposition to protectionism, but to demonstrate it in their actions. He must 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 Canada to have an impact far greater than the size of our population or of our economy would suggest.