– Robert Bench, a former Deputy Comptroller of the Currency in the Reagan administration, is a senior fellow at the Boston University School of Law Morin Center for Banking and Financial Law. The views expressed are his own. –

Financial Institutions inherently are fragile, simply because they are intermediaries exposed to both exogenous and endogenous forces.

Externally, they are vulnerable to wars, weather, or worn-out economic conditions. Internally, they always are susceptible to excessive risk takings as well as inadequate controls over operations.

Therefore, financial institutions historically have projected strength two ways. First and most obvious have been their buildings, designed of granite, with strong doors and deep vaults, to show the institution was a “fortress” against troubled times. Less obvious, but more importantly, they maintained “fortress balance sheets” comprised of high levels of capital, high levels of liquidity, and massive “hidden” and “inner” reserves.

Accounting, tax, and regulatory policies accommodated salting away profits in good times, so they would be available to draw down during bad times, which were sure to occur. The policy bias in both the private and public sectors was to preserve stability within the “public utility” that is the financial system.

But the recent history of financial policy has been to abandon these historical building blocks in the financial fort. Tax policies no longer accommodate the build-up of loan loss reserves. The Securities and Exchange Commission set policy when they complained to a major institution that it had tucked away too much money in reserves. The SEC also permitted investment banks to operate with 50 percent less capital while the banking regulators allowed the banks themselves to decide how much capital and reserves they needed.

The mantra of “maximizing shareholder value” led to religious attempts to precisely measure risks and profits without any recognition of the history as to how financial institutions are absolutely unlike commercial firms.

So we as citizens have been exposed to the procyclicality dangers of finance because the countercyclical protections we used to have were abolished. A procyclical financial system amplifies booms and busts. History shows we want a countercyclical financial system that dampens booms and cushions us against trouble.

The collapse of the procyclical financial system has required staggering taxpayer assistance to restore stability. European taxpayers have had to nationalize and/or intervene to save their financial system. According to the Federal Deposit Insurance Corporation, the American taxpayer has made available some $13.9 trillion in support facilities to U.S. financial institutions while also doubling the national debt as taxpayers were forced to take over some $5 trillion in liabilities of Freddie Mac and Fannie Mae.

The G20 initiatives to require more capital, in terms of liquidity and reserves, at financial institutions represent a return to countercyclical policies for the financial system. Indeed, the initiatives in the short term comprise a quid-pro-quo for the massive taxpayer bailout that has occurred. We have been through the rescue, are into repair, and now beginning the reform and retribution stages of recovery.

The recent public policy of privatizing profits and socializing losses is unacceptable to taxpayers. The financial and economic destabilization of the past year has been difficult for millions of households. So for the long term the G20 proposals intend to lessen the event of future instability. But when it does occur, shareholders will absorb the losses, not the taxpayers. In essence, we are transitioning from “too big to fail” to “too safe to fail.”

For sure, these new government requirements will lead to altered and perhaps less profitable business models. Financial institutions will become less dynamic and more cautious. But the financial system and the economy likely will be less volatile, more stable. Financial institutions will return to serving commerce, households, and governments — rather than serving themselves

Indeed, the fundamental question inherent with the G20 initiatives is what do societies want the financial system to do and how do financial institutions get on with the job? The invisible hand of the marketplace failed. It is being replaced with the very visible guiding hand of government. The Reagan/Thatcher period of deregulation is over. The financial system is a public good mandating robust public regulation and oversight. Expect that solid, “fit and proper” financiers will welcome the G20 initiatives.

It is in the best interest of the financial institutions themselves to fortify their financial conditions so as to restore trust in the marketplace. Normality will not return to the financial system until trust is restored in the competence of government oversight as well as in the integrity of governance exercised by directors and management of financial institutions.

– Phil Bond is President of TechAmerica, which represents 1,500 companies across the technology industry. The views expressed are his own. —

Will Pittsburgh, with its historical role in two American industrial revolutions, remain a leader in revitalization? Or will it be have to carry the extra burden of uncompetitive national policy?

The first revolution, perhaps a product of geographical chance, made the city and the nation a manufacturing powerhouse. The second, resulting from a tremendous act of will by the people, remade Pittsburgh into a great research and development (R&D) center that could help lead us out of the current recession. These hardworking Americans are going to need smart policy from Washington if their technology revolution, and efforts to emulate it across the country, are to continue.

For many years now, there has been too much talk inside the beltway about pro-innovation economic policies and too little action. Case in point: Congress has yet to take action to extend the R&D tax credit, due to expire at the end of 2009, that is so vital to the U.S. keeping its innovation edge and helping other cities do what Pittsburgh accomplished – achieve economic revitalization.

R&D creates new industries and products, new solutions to our toughest challenges and many new jobs. In Pittsburgh, R&D and testing labs account for the second highest category of high-tech employment, generating thousands of good, high-paying jobs, according to TechAmerica’s latest Cybercities research. Nationwide, at least 70 percent of R&D investments are spent directly on employment.

This tax credit applies only to R&D performed in the United States, and it stands as the only broad incentive offered by the federal government for private-sector investments in R&D. Without it, many companies based here might not chose to make potentially risky R&D investments because the return on those investments would be insufficient. Meanwhile, other countries around the world offer much more robust incentives to lure companies to their shores.

America’s tax credit, once a world-leading policy, is now comparatively modest – especially when you consider that in the long-term, nearly two dollars are generated for every dollar of tax benefit. To bolster the U.S. economy and create jobs, Congress should strengthen the credit and make it permanent.

Certainly at a minimum, Congress should provide companies with a multi-year extension so that companies can consider it when making hiring or investment decisions. The credit has been allowed to elapse time and time again, and there appears to be little chance that it will be reauthorized before it does so again on December 31, 2009.

Just as President Obama has pointed to the re-invention of Pittsburgh, he has recognized the threat posed by our seeming indifference to R&D.

“It is only by building a new foundation that we will once again harness that incredible generative capacity of the American people,” the president said earlier this year. “All it takes are the policies to tap that potential — to ignite that spark of creativity and ingenuity — which has always been at the heart of who we are and how we succeed.”

Strong words. And now bold action is called for – we need those policies in place now, beginning with the R&D tax credit. We are not asking the government for a handout, but the means for ensuring the U.S. global competitive position so that the “ecology of innovation” flourishes in America once again. That’s just smart policy.

An Ernst & Young study found that the credit has spurred $6.4 billion in investments across 18,000 companies in all 50 states. In 2008, that should have led to $18.6 billion in new economic activity. Instead, companies were faced with a nine-month lapse of the credit, jeopardizing as much as $51 million in growth – and 388 jobs – per day.

This is not an America-first rally cry. The world has changed. It is a more inter-connected place. Not long ago there was no G20, just the G8. With the G20 nations from around the world meeting in Pittsburgh to discuss pressing economic issues, now is the time for Americans to re-examine our priorities and ask ourselves how we went from offering the most lucrative R&D tax credit in the world to the 17th most attractive, behind many of the other countries present at today’s summit.

America’s renewed leadership in R&D can help drive the economic recovery. Just as America, in cities like Pittsburgh, worked itself and the world out of the darkness of the Great Depression, a national commitment to R&D can and will allow us to innovate our way out of the current dimness into a new dawn.

–James Saft is a Reuters columnist. The opinions expressed are his own.–

The effort to rein in banking bonuses, outrageous as they may be, is akin to banning glue sniffing because you are worried about the effects of intoxication.

There are, as the kids in the alley behind the high school can tell you, other ways of getting high.

Train your regulatory fire instead on requiring more and better bank capital and you will arguably do a great deal to control excessive compensation as well as doing much more to protect taxpayers and the economy.

Financial leaders from the Group of 20 rich nations agreed the skeletal outlines of a plan to reform banking last weekend in London. Included was the idea of claw backs on bonuses if earnings evaporate, forcing more pay to be deferred for longer, and more disclosure of top pay.

This may have some effect; bankers will have to wait a while for their money and some risky bets may not be made. But the out-sized rewards are the result of people within finance having an informational advantage over their shareholders and regulators and the ability to play with huge amounts of other people’s capital. Combine this with an implied government guarantee for the too-big-to-fail and you end up with a crisis every ten years or so. Just making bankers wait longer for their money does nothing to affect the competition for deals and assets to leverage.

Besides the folks who brought you the CDO squared will be well able to find workarounds to ensure that money leaks out in one way or another.

More promising by far are proposals to force banks to increase the amount and type of capital they hold. Central bankers and regulators from the Basel Committee on Banking Supervision are calling for a host of measures to bolster capital, including saying that common shares and retained earnings must be the mainstay of capital, introducing a leverage ratio and minimum standards for funding liquidity. All three will make banking and the economy more stable. All three will also, in so far as they reduce the amount of borrowed money available for investment, tend to push asset prices lower.

LEVERAGE IN, LEVERAGE OUT

Kansas City Federal Reserve President Thomas Hoenig points out that the largest 20 U.S. banks have equity capital equal to only 3.5 percent of their assets, as against an average of 6 percent for their middle sized competitors.

“They have an implied guarantee, which affords them an enormous advantage in terms of their use of leverage and their ability to accumulate assets to unprecedented levels,” Hoenig said in a speech to bankers made in August but released last week.

The large U.S. banks, it is worth mentioning, in turn face competition from their big trans-Atlantic peers, many of whom have leverage far in excess of theirs.

Forcing large banks around the world to raise enough capital, or dump enough assets, to put them on a level with their smaller peers would do a great deal to put an end to the rolling bubbles and bailouts.

The Basel committee also said it would consider the need for a capital surcharge to “mitigate the risk of systemic banks.” If by this they mean a tax on size above a certain level, this would be a fantastic start to counterbalancing the unfair advantage enjoyed by the too-big-to-fail, not to mention the threat they pose to the public purse. It would make good sense to impose a tax on size and to phase it in over several years, so that banks would have both the time and the incentive to shed assets without resorting to a fire sale.

Control leverage and size and you will do more to control destructive risk taking than any programme can which simply makes bankers wait a few years until they can get their payouts.

If you are really worried about unfair compensation in banking you have to define who is being badly treated by it. Moderating the effect of a taxpayer subsidy by limiting size and controlling risk taking is a start, but there are still shareholders and consumers of financial services to be protected. Both of these groups suffer because they don’t really understand the complex products being produced and sold by the industry. This allows consumers to be overcharged or oversold and shareholders to be chiseled out of part of their portion of the gains generated.

It is strange to say, but bank customers and owners may want to make common cause over the issue of simplicity in financial services. Simple banks with simple products might in the long run generate better outcomes for their owners and clients, just as simple index funds now do for investors. Will regulators be able to accomplish all of this? Probably not, but they would do well to concentrate their limited resources and creativity on the foundations of banking rather than the salaries on the top floor.

–At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. –

- Jorge Maia is head of Research and Information for Industrial Development Corporation of South Africa, established in 1940 to promote economic growth and industrial development. The opinions expressed are his own -

Serious shockwaves are hitting Africa’s shores as the global economic crisis unfolds.

The extent and depth of the damage is extremely difficult to assess or project, but it is clear that the pattern of financial flows associated with investment, lending and trading activity has been dramatically altered, with detrimental economic and social implications for the continent at large. The adverse impact has been gradually spreading from a regional perspective - a serious setback to Africa’s recent growth performance, which had averaged 6 percent a year from 2003 to 2008.

The effects will vary widely, depending on each country’s integration within the global financial system, its dependency on exports and tourism receipts, official development assistance and remittances from African citizens working overseas, among other factors.

Access to trade credit lines used to finance imports and investments is under threat due to the global credit crunch, while portfolio flows have been reversed and remain weak due to institutional deleveraging, pessimistic investor sentiment or extreme risk aversion.

Foreign direct investment flows are also expected to contract, although the rather long lead-time of typical projects could imply that some of the capital may have already been committed. The African banking sector is feeling the freeze in interbank lending worldwide from a funding standpoint, and may come under substantial pressure through its customer base should the economic slowdown intensify on the home front.

Where capital is still available, its cost is likely to have risen substantially, with implications for the viability of projects and for the debt repayment obligations of African countries. Such adverse trends are not only impacting negatively on capital inflows and national balances of payments, but also are resulting in greater volatility in foreign exchange markets.

The productive sectors of Africa’s economies are being progressively affected by a fast deteriorating global environment as demand weakens, unfavourable terms of trade develop, corporate earnings decline, investment activity slows down and jobs are shed. As elsewhere in the globe, this has led to continuous downward revisions in economic growth projections. For instance, the latest IMF forecast of 3.4 percent growth for the African continent in 2009 is now considered optimistic by the IMF’s own leadership.

The African economies that will contain the adversity are likely to be those that remain highly vigilant in managing the downside potential, those that are in a position to adopt counter-cyclical measures and that make an effort to seek new opportunities and competitive gains. However, liquidity or fiscal constraints are likely to prevent the majority of African countries from adopting economic stimulus packages. In order to preserve productive capacity, it is absolutely essential that a concerted effort be made to sustain private sector access to credit, including development funding.

Major crises bring to the fore not only comparative weaknesses but also comparative strengths. Thus, economies that manage downturns more successfully are those that exploit their comparative strengths instead of focusing on their weaknesses. The African continent is richly endowed with commodities and other resources, including an enormous, yet largely unexploited agricultural potential. Forecasts for most commodity prices point, at best, towards a very modest recovery in 2009. However, considering the demand and supply forces at play in the medium- to long-term, commodity prices should resume an upward trend. This will be underpinned by the roll-out of massive stimulus packages focusing on infrastructure investment throughout the globe, by the eventual recovery of the world’s economies and by the resumption of growth in income levels, particularly in emerging regions. After all, the long-term demand for commodities from the fast-growing and very large emerging economies such as China and India has certainly not evaporated.

As credit starts flowing again through the global financial system, several emerging economies are likely to exhibit signs of recovery first, including China, India and Brazil. This should support a recovery in commodity markets and renewed investor interest in Africa for its resource wealth. The challenge remains for African countries to make the most of a future recovery, tirelessly encouraging the beneficiation of their resources instead of continuing to export value-adding opportunities, missing out on massive export earnings potential.

The impact of ongoing international efforts to thaw global credit markets and stimulate economic activity worldwide will, however, take time to bear results. In the meantime, competitive forces scrambling for a diminished global pie will pose unprecedented threats to African enterprises. Such challenges may include aggressive market penetration efforts and even protectionist measures on the part of foreign businesses and governments. African enterprises will have to adopt tough, well-formulated strategic decisions, as their present strategies may not hold them in good stead under rapidly deteriorating market conditions. They should be seriously vigilant, managing downside potential, adopting counter-cyclical measures, including appropriate cost-cutting measures and efficiency improvements, while constantly seeking opportunities for the development of new/niche markets.

African countries that remain committed to sound economic management will tend to restore investor confidence faster and mitigate the impact of the downturn more successfully. The momentum exhibited in improving the investment environment in numerous African countries must be maintained, so as to grow vibrant and competitive business sectors that will create employment and sustain broad-based economic growth. All feasible forms of support should be provided to the private sector at large, so as to sustain its growth potential and developmental impact. This should include strong and concerted governmental opposition to protectionist tendencies emerging globally, and insistence on greater participation in international governance.

On the business front, African enterprises that remain sharply focused on competitiveness improvements should be relatively successful in domestic and/or global markets, stand a better chance of surviving the crisis and should prosper in the long-run.

World Bank President Robert Zoellick spoke at a Thomson Reuters Newsmaker on March 31st  in front of an invited audience and announced a $50 billion programme to counter a decline in global trade.

Zoellick, who once called for a  “Facebook for multilateral economic diplomacy”, also agreed to answer questions from bloggers, which our social media team had collected via Twitter and on this blog ahead of the Newsmaker.

You can watch video of the social media session here and follow the Newsmaker chatter on our Great Debate Twitter channel.

– Lena Komileva is Head of G7 Market Economics, Tullett Prebon –

One of the big historical lessons of this crisis for economic policy is that bringing down the risk-free cost of money - central bank rates or government bond yields - and injecting liquidity into the banking system cannot on their own fix broken credit markets.

Quantitative easing by central banks may help to solve short-term liquidity problems for domestic borrowers and lenders, by going around broken markets during times of extreme financial and economic uncertainty. However, this is no substitute for efforts to restore international credit markets back to health.

Effective policy measures would contain the economic fear and channel private sector incentives – the foundation of free markets - in a way that alters the behaviour of lenders, companies and consumers. The end-game policy strategy cannot be to replace free markets.

So why have traditional monetary stimuli failed to end this crisis? And what should be done next?

The textbook understanding of the relationship between easier central bank money and the supply of liquidity in the broader economy assumes that there is a direct, causal link between banks’ capacity to generate credit and actual lending growth.

However this assumption ignores two important factors – 1) lenders’ incentives and 2) the role of international credit markets, which have come to dwarf traditional bank lending over the past decade.

Credit generation is linked directly to lenders’ perceptions of their profitability, i.e. their risk-adjusted returns. This in turn is determined by borrowers’ financial viability and the value of private sector collateral, provided as insurance for loans, both of which have suffered unprecedented erosion since asset-backed securities (ABS) markets broke down in 2007.

Hence policy efforts focused on the cost of money or lenders’ liquidity have helped to alleviate the effects of the crisis in the financial sector but have so far failed to resolve the causes - fragile investor sentiment and illiquid and dislocated interbank and credit markets. Since these are the forces behind the recessionary disruption of confidence and liquidity in the real economy policy carries a big responsibility.

Over the past several months, liquid and recapitalised banks have continued to shed risk and limit loan growth, despite historically low Libor rates and government bond yields. Even with government efforts to underwrite bank capital and toxic assets, disrupted international investment flows, a global recession and falling credit ratings continue to depress the value of bank assets. Hence lenders and investors have remained exceptionally cautious about the risks that they take on their books.

A glance at G7 monetary statistics reveals the limitations of quantitative easing. In the UK, the voluntary reserves held by banks at the Bank of England surged by 73% year-on-year in February. Yet lending to the household sector contracted by 5.5% and loans to private non-financial corporations rose just 2.1%, the lowest pace in over 6 years. If the uncertainty about credit markets and the economy continues, then corporates and consumers will also adopt lenders’ tendency to build up excessively high levels of precautionary savings.

The risks attached to quantitative easing in an international crisis are not immaterial. Failure to restore the confidence of financial institutions to lend and of companies to invest and hire would lead down the road to a liquidity trap, an environment in which excessive monetary liquidity coincides with a depression in the real economy.

As always, where there are economic risks there are also financial risks, and vice versa. If central banks’ interventions to change private sector financial valuations, for example corporate bond spreads, through asset purchases do not improve the fundamental position of the borrowers, i.e. their ability to raise finance freely in the markets and their economic environment, then investor concerns about a new asset bubble will  follow. In a worst case scenario this could lead to a currency crisis as investors flee the domestic market.

A NEW POLICY TOOL NEEDED

The most important lesson from this is that the causal links between depressed lender incentives, disrupted financial liquidity and the international economic turmoil are the forces at the heart of this crisis. An effective policy strategy would go directly to the root of the problem by reducing borrowers’ default risk and so support the regeneration of healthy asset-backed securities markets. This in turn would reduce financial asset volatility and strengthen lenders’ balance sheets. Reduced counterparty credit risk and enhanced market transparency would boost investor confidence and involvement in credit markets and lower private sector borrowing costs.

The way to build this new economic equilibrium is for governments to insure ex ante the “excess” portion of borrowers’ risk associated with the disruption of national and international financial flows. This is about a blanket guarantee scheme which eliminates financial illiquidity risk premia attached by lenders to new private sector loans in cases where markets are malfunctioning.

Central banks can support this credit easing strategy by acting as market makers for structured notes, i.e. bundles of new “insured” corporate and consumer loans. This would ensure liquidity in secondary markets.

Since we first made this argument at the start of 2009, Western governments have announced a constellation of schemes that seek to free up finance in the real economy. The Fed has launched a $1trn Term Asset-Backed Securities Loan Facility (TALF) scheme and the Bank of England has launched credit quantitative easing. There are important steps that will materially improve market conditions, but more is needed.

On a G20 scale, the global crisis requires coordinated policy measures that effectively stimulate balanced international capital flows. These cannot come from stabilizing national banking sectors alone. What are needed are measures to open domestic credit markets to international investors.

THE BENEFITS

The primary benefit of this strategy would be the restoration of market liquidity through incentives that mobilise private sector funds, rather than through increased government borrowing or central banks printing money.

Government guarantees to new loans would have the dual effect of reducing private sector borrowing costs and improving lenders’ expected asset quality and profitability. This would support liquidity in a wide range of correlated markets, from equities to interbank lending.

Since this strategy would also support healthy securitisation activity, it would help to re-open domestic credit markets to the international investor community. This would improve domestic market liquidity and propagate the role of markets rather than individual institutions in the credit cycle.

This would also help to insulate economies from future disruptions in the domestic banking sectors and begin to tackle the problem of banks that are “too big to fail or save”, reducing the cost to the taxpayer.

This strategy focuses on fixing private sector incentives, not on crowding out free markets with public funds. By leaving a manageable portion of risk in the markets, governments can reduce the moral hazard associated with guaranteeing private sector risk and reinforce the incentives for banks to introduce stringent risk monitoring controls, in effect strengthening macro-prudential regulation.

Governments’ claims on borrowers’ collateral in the event of default (and in exchange for a cash payout to the lender) would also serve the purpose to deter asset fire-sales by lenders and hence reduce future risks to market liquidity. Since government insurance conditionality would not prevent irresponsible borrowers from failing, this would also strengthen the structural foundation of the economy by purging private sector balance sheets.

A big advantage to this scheme is that there is no a priori commitment to government borrowing. Reduced systemic risks, a repaired monetary transmission mechanism, and restored investor and producer confidence would instead reduce public sector liabilities.

Another significant benefit of this strategy is that it contains the seeds of its own destruction - once market illiquidity premia have dropped to zero and borrower default rates have stabilized government guarantees will, by default, become redundant. That said, an enhanced policy framework that recognizes both the fundamental (growth and inflation) and the financial (momentum and liquidity) factors in the credit cycle would strengthen confidence in economic policy and act as an “automatic stabiliser” for the economic cycle, reducing the chances that future market corrections will mutate into crises. Continued focus on financial risk premia would send a signal that policy is monitoring and prepared to intervene in both future credit “bubbles” and “anti-bubbles”.

G20 governments have a golden opportunity to address the root cause of the current credit crisis at their London summit. It is time for them to extend asset insurance schemes to new private sector loans to bring the international credit crisis to an end, limit the costs of their bank bailout programmes and reduce the probability and damage associated with future financial crises.

Jaspal Bindra is Chief Executive, Asia, for Standard Chartered Bank. The views expressed are his own.

Asia has come of age. When leaders from the Group of 20 nations converge in London, Asia’s rising powers - China, India,  Korea and Indonesia - will be sitting at the global high table to decide on ways to reshape the world’s financial and economic order.

There are expectations that the meeting will include concrete steps to revive economic growth, a boost in funding for the International Monetary Fund, and an understanding on the new financial architecture to restore trust in the financial system.

Asian policy makers are looking for two other critical assurances from the meeting: one, that the developed countries will keep their markets open; and two, that global capital flows needed to finance trade and investment will remain unchecked.

No one doubts the difficulty of reaching consensus. But the stakes have never been higher.

Amidst the frenetic attempts by individual governments to tackle the biggest economic crisis since the Great Depression, it is easy to forget that the progressive dismantling of barriers against international trade and investment contributed to the biggest economic boom the world has seen.

More than 200 million jobs were created worldwide between 2000 and 2007, according to the Institute of International Finance, and millions of people in the developing world were lifted out of poverty, as a result of free flow of capital, goods and services.

Yet, as the crisis continues, governments and businesses in Asia are increasingly worried that the world’s biggest and most developed economies will explicitly or implicitly legislate to encourage manufacturers to keep production onshore and, banks and insurance companies to keep money within their borders.

Any such protectionism comes at a dark time. Although Asia remains fundamentally robust, thanks to high private savings, conservative balance sheets of companies and financial institutions and mammoth foreign reserves, the ongoing financial turmoil has caused consumers and lenders in developed countries to tighten their purse strings.

Steps to ensure that trade and capital keep flowing ought to be at the top of the agenda for the G20 leaders.

A good start

Getting developing nations to the table with the Group of Seven developed countries is a good start. The G20 was born as a response to the Asian financial crisis of the late 1990s and, although a G20 group of finance ministers and central bank governors has been meeting since 1999, it is in this financial crisis that its role has taken center stage.

The G20, whose member countries account for over 80 per cent of the world’s output and two-thirds of the world’s population, is a forum which truly represents the global economy. But will it produce real benefits for Asia?

At this summit, the emerging Asian powerhouses are expected to assert more leverage due to the relative strength of their position. Though weakened, the economies of China, India and Indonesia are still expected to show reasonable GDP growth this year of 6.8 per cent, 5 per cent and 4 per cent respectively, according to Standard Chartered economists’ forecasts.

The emerging powers have already notched up some gains. The G20 finance ministers, meeting in London in March, agreed to expand the Financial Stability Forum - a body which will set new standards for global financial institutions — to include developing country members. These countries will also join global forums that will set new international accounting and risk regulatory frameworks.

Greater participation of the rising powers in such key decision-making bodies should help resolve potential conflicts and go a long way in helping to rebalance the world economic order.

Ironically, it is the financial upheaval in the West which has brought the systemic importance of the emerging markets to the forefront. It is now clear that the imbalances between the high saving nations in the East and overspending economies of the West led to the asset bubbles in the United States and Europe.

To correct the imbalances, the big savers, particularly in Asia, will have to find ways to spend more to boost domestic economies. Higher local consumption will help the economies reduce their dependence on exports. Domestic spending will also help ameliorate the slowdown in investments from the West.

China has made a decisive move on this front, with its stimulus plan to spend almost $600 billion, largely in infrastructure projects. It has also pulled out all stops to make foreign direct investments easier for domestic companies.

New trade routes

Asian economies will also need to trade more between themselves and with the Middle East and Africa. That is already happening in some trade corridors. Trade between China and Africa has expanded 20-fold in just over a decade. For some countries in the region, China has replaced the U.S. and Europe as the biggest export market. This process is likely to accelerate as western consumers cut back on spending and increase savings.

Asian members of G20 are also looking to the international financial institutions such as the IMF and the World Bank to revive investments into the region’s developing economies. But the IMF is cash-strapped after bailing out several East European economies. It is hardly in any position to rescue another medium-sized economy in Asia, Africa or Latin America should the need arise.

The meeting of G20 finance ministers made some headway on this issue. The ministers agreed to substantially expand the IMF’s resources, possibly increasing the Fund’s emergency borrowing program by $500 billion, so that the institution can once again play its role as a lender of last resort in times of international crisis.

The Asian Development Bank also plans to triple its capital base to $165 billion, enabling it serve the poorest and most vulnerable sections of population in the region.

Emerging Asian powerhouses such as China and Korea, apart from the established members like Japan, are now expected to provide a significant part of the funding required to recapitalize these global financial institutions.

However, greater monetary contribution from the rising powers would have to be accompanied by giving them a greater say in the running of these institutions. For instance, today, Korea has more than twice the economic output of Belgium, but Belgium’s representation in the IMF is 50 per cent greater than Korea’s. This is where the developed countries will have to give up some more ground.

G20 leaders must accelerate the process of revising the quota allotted to IMF member countries so that the emerging markets can get voting rights in the Fund which reflect their financial weight.

Progress has been made since the G20 leaders first met in Washington in November with the aim to restore normalcy to the global economy and markets. But risks remain.

It was the progressively free movement of capital, goods, people and services across borders that fueled the economic rise of the emerging markets and raised affluence in the developed world. The risk is that this could unravel if the current financial turmoil leads to heightened protectionism, curbed capital flows and fragmentation of the global economy. The G20 has the duty to ensure this does not happen.

– Robin Shepherd is Director, International Affairs at the Henry Jackson Society. His areas of expertise are transatlantic relations, American foreign policy, Middle Eastern relations with the West, Russia, eastern Europe, NATO and the European Union. The views expressed are his own. –

It is to be hoped that President Obama has a developed sense of humour. The man heralded by many as the new Messiah of political renewal lands in London this week not to the chorus of approval he might have expected on his first official trip to Europe but to crowds roaring with anger and frustration at the global economic system which his country underpins.

It isn’t personal – yet. Few but the most unreasonable would hold the new American president responsible for woes that he inherited. Nonetheless, Obama campaigned on a platform of change. The implicit claim that his election was a grand, indeed poetic, instance of the time finding the man will be explicitly rejected – in Europe as well as at home – if he fails to deliver. We know he can give a pretty speech. But at the G-20 summit in London this week, that simply won’t be enough. For the first time at a major international gathering the blinding lights of international scrutiny will pour over Obama’s credentials on substance. His mettle is about to be tested.

It is true, of course, that there is tremendous accumulated goodwill towards the new American president in Europe. But time may yet show that much of that was merely the counterpoint to a hostility felt by so many against his predecessor. That, at least, is the risk. Obama can no longer play good cop to George Bush’s bad cop. He alone now has the stage, and when people are losing their jobs and homes they will want to see results. As leader of the Western world, the buck stops with him.

What applies to the economy will also apply to the great issues of international affairs. Obama will be given a chance over his new strategy on Afghanistan, though murmurings of discontent are not hard to detect in liberal-Left circles across the continent even now.

The idea that the war is unwinnable is gaining currency, especially in Britain. If, as the veteran political commentator Simon Jenkins put it in the Guardian this week, Afghanistan comes to be perceived as a “Vietnam for slow learners”, then it is Obama who will be handed the dunce’s cap if things do not improve. The president’s sensible and predictable modifications to earlier intimations about a complete and quick withdrawal from Iraq have also raised eyebrows. America’s critics did not die with Bush.

The NATO summit which follows the G-20 will provide a welcome opportunity to grandstand, especially with the re-incorporation of France into the alliance’s strategic command. The new deal with Paris marks an important symbolic turnaround with a country which more than any other symbolised transatlantic rifts under Bush. Obama will bask in it.

But even at NATO, he will have to tread carefully. As relations with the western part of Europe improve, there are rising concerns in some parts that the administration’s mooted new deal with Russia could herald a partial climb down from some long-standing American strategies, not least to expand the sphere of democracy in Europe’s east. Appeasement of Putin and Medvedev is not the kind of change the Poles and the Balts are looking for.

But that, of course, is the nature of the beast. You can’t please all of the people all of the time. Sometimes it really is a zero sum game, even for a leader with the charisma of Barack Obama.

The honeymoon is definitively over. Obama’s trip across the Atlantic marks the end of his transition from symbol of change to politician with a job to do. In the end, he will be judged like all the rest of them.

- Johannes Linn is a Senior Fellow and the Executive Director of the Wolfensohn Center for Development at the Brookings Institution. The views expressed are his own. —

One of the tasks for the G20 Summit in London is the reform of the IMF and the World Bank, key global institutions to help address the current crisis and to prevent the occurrence of future crises. Reform of the IMF is more urgent both in the short and medium term while reform of the World Bank, although equally important, is less pressing.

The G20 faces a few immediate priorities related to the IMF:  First, G20 leaders should agree to triple IMF resources from the current level of $250 billion to $750 billion to help meet the financing needs of developing countries. This is critical because the World Bank has estimated that these countries may face a shortfall of up to $700 billion in 2009 alone.  Second, G20 leaders should request that the IMF monitor and report transparently on the commitments and implementation of G20 national stimulus plans and efforts to repair their banking sectors. Third, G20 leaders should commit to a far-reaching reform of the IMF by 2010.

While this third step may seem like a lesser priority for leaders as they face a global recession, reform of the IMF must be accomplished in order to restore the legitimacy and effectiveness of the institution.  Reform would introduce the merit-based selection of the head of the IMF, irrespective of nationality, eliminate the veto of the U.S. in key decisions and would broaden the application of double-majority voting as a way to increase the role of smaller members. It would also substantially revise the rule of quota and vote distribution to reflect accurately and fairly the current and future economic weight of the members.

Reform would also transform the current IMF’s Board of Directors from a bureaucratic body to a high-level policy decision-making forum of ministers.  Many of these measures were proposed by a committee chaired by Trevor Manuel, Minister of Finance of South Africa, which comprised a distinguished cast of international experts. The G20 should endorse those recommendations in full.

Together, these three steps serve as a critical foundational action to ensure that the IMF can stand ready to fight the immediate crisis, as well as help prevent future crises from forming.

The impact of the financial crisis on developing countries underscores the need for the World Bank and the regional development banks to do even more—and immediately—to help prevent the worst effects of the crisis from seriously reversing long-term gains in economic and human development.

Shareholders of these development banks must replenish the capital base (especially urgent in the case of the Asian Development Bank) and make a commitment to replenish the resources for the banks’ soft-loan windows. And the World Bank and the regional development banks must make an even greater push to overcome traditional bureaucratic and policy barriers to ensure quick and efficient crisis response.

Longer term, the reform of the World Bank should tackle the merit-based selection of the World Bank president—without regard to nationality; a revamping of shareholdings and voting rights in the executive boards of the institution to give a greater voice to emerging market economies and to borrowers more generally; and an overhaul of the Bank’s operational modalities so it can react with less bureaucratic and time-consuming burdens to the legitimate needs of its borrowers.

These reforms of both the IMF and World Bank will require a readiness by the U.S. and Europeans to forgo long-standing prerogatives and strongly held positions, but action will help ensure early recovery from the current global financial crisis and the future capabilities of these institutions, which are needed to foster global financial stability and reduce global poverty.

– Paul Blustein is a journalist-in-residence at the Brookings Institution. He is writing a book on the World Trade Organization, which will be published in September. The views expressed are his own. —

Telling young people to abstain from sex is “not realistic at all” — new mother Bristol Palin, 18.

The wisdom of Ms. Palin should be borne in mind by the leaders of the Group of 20 nations at their April 2 summit when they turn to trade.

The meeting comes at a time when worries about protectionism are mounting, because a number of countries have raised trade barriers and enacted other quasi-protectionist measures.

It is tempting to say, as many commentators have, that the G20 should vow to shun all new acts of protectionism, including any tariff-raising or more subtle actions such as “buy local” provisions in government stimulus programs. Unfortunately, such blanket pledges will be no more credible than teenage abstinence campaigns. The G20 must be ambitious on trade, but it must also be practical. Minimizing long-term damage to the trading system should be the overarching goal.

The G20’s effort on trade at its first summit last November was loaded with high-mindedness—and, as it turned out, hot air. The leaders said they would “strive to reach agreement” in 2008 in the World Trade Organization’s Doha Round of trade negotiations, which have dragged on for seven years. And they promised to “refrain from raising new barriers” for 12 months.

Alas, violations of both the spirit and letter of the declaration materialized within days of its promulgation.

An effort to convene a meeting to advance the Doha talks fell apart. Meanwhile, Russia raised duties on cars, pork and poultry; India raised tariffs on steel products; Indonesia imposed onerous customs requirements on certain imports. The U.S. Congress included a “Buy American” provision in its economic stimulus package, and Washington has started to bail out the U.S. auto industry, which helps domestic firms at the expense of foreign ones. Other nations are following suit.

As a result, proposals abound for the G20 to approve not only a “standstill” on all tariff hikes but a ban on buy-local preferences and subsidies that favor national producers. Also widespread are exhortations for the G20 to take a “just do it” stance on the Doha Round.

Desirable though it would be to see such an approach endorsed and implemented, the G20 needs to guard against another blow to its credibility. Let’s face some lamentable facts: Auto industries are going to be bailed out, and in an discriminatory fashion. (Congress simply isn’t going to grant loans to Toyota, even though Toyota has large plants in the U.S.) Anti-dumping cases are going to soar. More righteous verbiage from heads of state will do nothing to close gaps in the Doha talks.

So the principles guiding the G20 should be these: Make sure that the rules-based trading system survives. Don’t try now to open markets further; rather, focus on keeping protectionism, and quasi-protectionism, from becoming long-lasting features of the international economy, so that globalized trade can help the world recover and prosper anew. To the extent that anti-market policies are adopted, keep them temporary and limited in scope.

This means first of all shoring up the WTO, which is the ultimate guardian of open markets. The WTO keeps a lid on tariffs of its 153 member countries and adjudicates trade disputes that might otherwise flare into trade wars.

Specifically, the G20 should recast the Doha talks as an emergency anti-protectionism round. The partial deal that is currently on the table, though not at all far-reaching, would lower the legal caps on tariffs that many countries can impose. Adopting a package like that, while postponing action on other, more contentious issues, would help toward insuring against protectionism in the years ahead.