2 April 2009
We are living through the most serious financial crisis in generations. It
has given rise to a synchronised global recession which threatens livelihoods,
jobs and social cohesion across the globe. On the African continent, sustained
progress towards the Millennium Development Goals could be reversed, and the
crisis will pose new threats to democracy, peace and progress. Since the last
G20 Summit, governments have taken actions across a broad front, inspired by
the commitments we made together on 15 November. However, these actions have
not yet achieved the needed breakthrough. Greater international cooperation and
collaboration is now required. Working together, we must respond to the
immediate crisis and build the foundation of a sustainable, balanced and
inclusive recovery into the future.
A global crisis
In the decade of economic growth that preceded the crisis, outstanding
achievements were realised in the context of stronger global integration.
Millions were lifted out of poverty as many poorer countries registered high
rates of growth and advanced their developmental goals. On the African
continent the fastest growth rates since independence brought the Millennium
Development Goals within reach and created real hope for a better future. But
these achievements were built upon an unsustainable economic model. It was a
model premised on the view, now shown to be erroneous that unregulated markets
are stable and if left to them will generate socially optimal outcomes.
Instead, the risks grew and the model became increasingly unstable, as the
mutually reinforcing elements of the current global crisis combined and fed
each other.
These included:
* the financialisation of the global economy. Transient holdings of complex
and opaque financial instruments, freed from effective regulatory constraint,
generated high private rewards out of proportion to their social
productivity.
Consequently, financial sectorâs primary function of mobilising and allocating
capital efficiently to support investment for real economic growth and
development, was seriously compromised
* unsustainable global imbalances in savings and investment. Savings
gathered from the industrious parts of developing world, with high productivity
growth and low levels of consumption, was channelled into consumption and
government deficits in the developed nations. Instead of being reinvested to
build productivity and support human development, these vast capital flows
stimulated and fed financial excess and asset price bubbles in the rich
world
* growing income inequality within nations. Inequality has widened in an era
of unprecedented prosperity. Stagnating wages, high levels of unemployment and
poverty undermined the basis of effective demand. As a consequence, levels of
consumption remained far too low in some parts of the world, while in others
stagnating wages spurred the demand for credit to sustain consumption
Weak economic co-operation between nation
Collective global action has been increasingly hamstrung by institutional
and diplomatic inertia. Despite growing integration of economies, the
institutions of multilateral collaboration have become fragmented and
ineffective. As evidence of the risks mounted and it became clear that the
trajectory of global growth was unsustainable, national authorities were
unwilling to rise above national interest and global institutions were unable
to forge a collective response. The tipping point came when asset price bubbles
burst, generating severe financial stress in the developed world. We now face a
global syndrome of mutually reinforcing crises, each of which is unprecedented
in their severity:
A systemic crisis of finance
The flow of credit remains dangerously weak, as uncertainty regarding
distressed assets prevents the restoration of market trust and the solvency of
institutions is questioned. In many developed countries, the weak supply of
credit and asset prices declines are choking off consumption and economic
activity â feeding back into financial weakness. The crisis will remain
unresolved until the legacy of past excess is expunged from the financial
system. Developing countries face acute and growing financial dangers, which
are intensified by the spill-over effects of forced responses in the developed
world.
A synchronised global recession
Developed countries face the deepest, broadest and longest recession of the
post-war era. Over-investment during the boom years is now excess capacity in
the real sector, as negative wealth effects and corporate deleveraging curb
demand. Rising unemployment and wage deflation threaten to feed into a vicious
deflationary cycle. For the developing world falling commodity prices, slowing
export demand, huge terms of trade shocks and tight financing conditions are
curtailing growth and throwing millions out of work and into poverty.
A social crisis
Job losses could reach 50 million in 2009, with the burden falling on the
most vulnerable women, the youth and migrant workers. The World Bank estimates
that rising unemployment and declining wages and remittances will push 46
million people into poverty in 2009. The ILO believes that the immediate crisis
could add over 75 million people to the ranks of the working poor, with most of
the increase in South Asia and Sub-Saharan Africa. Once they set in, these
developments will undermine social cohesion and take years to reverse.
A global response
A co-ordinated and credible global response is now needed even more
urgently. As the crisis deepens and challenges spread from finance to the real
economy, from the developed world to the developing countries, so must the
corresponding breadth of our collective answer. This global response must
address the immediate dangers posed by financial paralysis and global
recession, particularly the threat of contagion to emerging markets and
developing countries. The Washington Summit built a solid foundation for
action, including a combined stimulus to demand, support to developing
countries, a standstill on protectionism and far reaching regulatory reforms.
London must see the culmination of our actions and deliver on these
commitments.
But a global recovery on a sustainable basis requires collective action
beyond the horizon agreed in Washington. Therefore, the London Summit must turn
our attention to the road ahead:
Building a sustainable, inclusive and balanced trajectory of global economic
growth. This is necessary not only because the crisis is an opportunity for
change that is too important to be wasted, but also because short-term
responses dictated by national necessity must not be allowed to block the
avenues for our collective advancement in the future. South Africa therefore
believes that the G20 London Summit should agree on a plan to restore global
growth development based on four pillars:
* Stabilise global finance, by unblocking credit and taking decisive,
co-ordinated and temporary national action to restore confidence in the
financial system.
* Counter the global recession by boosting domestic demand through coordinated
fiscal and monetary policy actions that take account of medium term
sustainability and ensuring that the global economy remains open for trade and
capital flows.
* Deploy resources to support demand and sustain investment in developing
countries, in order to prevent a further deepening of the global recession and
provide a more effective boost to counter-cyclical efforts on a global scale.
Resources must also be mobilised to respond to the incipient development
emergency including, the growing crisis of unemployment and poverty -
particularly in Africa
* Lay the foundation for a sustainable recovery on the basis of a more balanced
and inclusive world economy premised on a stronger and more equitable system of
global economic multilateralism. This will require consideration of the social
and economic architecture of a sustainable recovery by rebalancing global
demand, strengthening social safety nets and protecting employment.
Stabilising finance
In part we face a crisis of confidence, and the G20 must help to rebuild
trust.
Building confidence in the future includes making the world safe from the
potential of disruption caused by unregulated finance. A new regulatory and
supervisory architecture must balance innovation and responsibility and aim to
prevent a recurrence of those aspects of the crisis which are rooted in
financial excess. The most urgent priority must be decisive, co-ordinated and
time bound interventions by national authorities to deal with insolvent
institutions and address the toxic assets that still pose a threat to financial
systems in the United State of America (USA), United Kingdom (UK) and several
European states and continue to constrain the extension of credit globally.
* Action should be decisive. Insolvency must be resolved urgently through
strong public sector action, and governments must not shrink from taking over
failing institutions.
* Action should be coordinated. Emerging markets are paying the price of
adverse capital movements and other spill-overs as a consequence of
interventions that are announced without forewarning. It is time to establish
stronger mechanisms for sharing information and collaborating on financial
sector interventions that have global repercussions.
* Action should be temporary and reject financial protectionism: Open global
capital markets must not become the victim of short term actions taken out of
vital necessity. Clear exit strategies should be made explicit and global
collaboration planned to unwind positions that national authorities have taken
in their financial systems. New and stronger mechanisms to monitor and report
on financial protectionism should also be considered.
Over the longer term, we must build confidence around a new global financial
architecture. This requires closer cooperation of national authorities. But a
system based solely around the coordination of national regulators will, in
times of crisis, face the danger of collapse, as national authorities scramble
to protect their own interest. There is therefore an obvious need to
rationalise the array of institutions and country groupings concerned with the
various aspects of international financial regulation and supervision, and to
strengthen the multilateral centre. This rationalisation should strengthen
institutions that have broad multilateral legitimacy and endow them with the
flexibility, expertise and responsiveness to play a leading role in a new
global financial system.
Countering recession
Macroeconomic policy
As the crisis unfolded, the first line of defence was monetary policy.
Central banks have acted aggressively to bring down interest rates, in many
cases close to zero. Given the limitations now faced by traditional monetary
policy many are entering the largely uncharted waters of unconventional policy
interventions, such as credit and quantitative easing. Fiscal policy must now
take the lead in boosting demand, especially in developed economies. The IMF
has recommended a fiscal stimulus equivalent to 2% of global Gross Domestic
Products (GDP) and South Africa believes that G20 members as a whole could do
more to meet this objective. However, it is critical that the longer term
objectives of fiscal sustainability are not undermined, as our solutions to the
current crisis should not recklessly sow the seeds of the next. It is also
important to examine the varying degrees of policy space and the effectiveness
of fiscal action in different settings, so that global goals are interpreted in
a manner that reflects national circumstances.
In the current fiscal year South Africaâs discretionary fiscal measures
amount to at least 1,8% of GDP and increased capital expenditure by state owned
enterprises will add a further 2% to our fiscal effort. Interest rates are also
on a downward trajectory. However, as with many developing countries, the
policy space available for a sustained fiscal expansion is limited. Current
conditions on global markets have seen a significant increase in financing
costs, and the volume of sovereign debt issued by large developed countries
could crowd out emerging market issuers. Monetary policy is also constrained by
the need to balance the imperative of demand stimulus against the risk of
accentuating capital outflows.
Therefore, while South Africa stands ready to contribute to the collective
global effort to boost demand, we believe that a co-ordinated global response
requires rapid and innovative means to support counter-cyclical responses in
developing countries. Countering Protectionism in Trade and Finance
A second element in preventing a worsening of the recession is action to defend
open markets and prevent a cycle of protectionist responses. The G20 needs to
maintain openness, defend the multi-lateral, rules-based trading system and
underscore the developmental objectives of the Doha trade negotiations.
G20 leaders made well-known commitments at their last summit. It may be that
G20 countries have complied with the letter of this commitment, but their
adherence to the spirit of their declaration is in doubt. Virtually all G20
members with South Africa among the few exceptions have introduced new policy
measures with trade distorting or protectionist consequences.
Tariff increases comprise a third of these measures, while a number of G20
members have introduced new export subsidies. But the most significant actions
have been large increases in state support to targeted economic sectors and
industries. For instance, new subsidies proposed for the auto industry have
grown to almost $50 billion. In general, developed countries have relied on
subsidies rather than border barriers, while developing countries have more
often resorted to tariffs reflecting their weaker fiscal base and thus greater
dependence on non-financial measures.
South Africa agrees on the importance of an early conclusion to the Doha
negotiations, but the lesson of the Washington Summit is that unrealistic
timetables are a risky strategy. Rather than establish a deadline or repeat our
commitments on protectionism, the London Summit could more usefully re-affirm
the basic objective of the Doha Development Round, which is to rebalance the
global trading system so that it no longer favours the most developed
countries.
A reaffirmation by Leaders of the need to place the needs and interests of
developing countries at the heart of the Doha work programme would give
significant momentum to a conclusion of the round. G20 members should also
commit to stronger and more stringent monitoring of the commitments we made in
Washington. We should invite the WTO to work with other international
organisations to report on a quarterly basis on trade distorting measures
announced by members of the group, and other large economies.
Resources to sustain global growth and development
Not only are emerging economies home to the majority of the worldâs poor,
they are also the only counterweight to declining global growth. Over the last
decade they have functioned as the engines of global expansion, and in 2009
they will be the only sources of growth. The danger of financial contagion to
emerging markets resulting in a sharp further sharp contraction of global
growth is the largest preventable risk facing the global economy today.
Such a scenario where balance of payments and fiscal constraint force
developing countries into a pro-cyclical response, would trigger a vicious
spiral, further undermines growth in advanced economies. Conversely, the
marginal benefits to global growth of stimulus directed at developing countries
far outweighs the returns that are likely from the developed countries1. This
is because counter-cyclical responses and infrastructure investment can be more
effectively utilized in developing countries, yielding greater returns for
global growth and positive feedback to advanced economies.
At the same time, many developing countries face a development emergency.
Social safety nets are thinner, while the limits of debt sustainability
constrain effective responses. Action to boost social spending, create
employment, sustain infrastructure investment are vital to the future. Renewed
efforts are required to keep us on track towards the Millennium Development
Goals (MDGs), cognisant of the reality that poverty anywhere constitutes a
danger to prosperity everywhere.
Resources are required in four areas:
* Balance of payments support in the case of a sudden stop of capital flows.
Lending capacity and instruments must be of a quantity and quality that can
effectively backstop confidence in developing countries. Estimates of the size
of resources required range from $500 to $1,000 billion. South Africa welcomes
the proposals currently on the table to boost the IMFs resources, and believes
that the fundâs new approach to lending instruments and conditionality
frameworks goes a long way towards meeting the needs of development
countries.
* Counter-cyclical policy and investment financing. It is estimated that
$150 billion may be required to support additional financing needs in the
current fiscal year. Clearly Multilateral Development Banks (MDBs) have a
leading role to play in mobilising and deploying these resources. However,
institutional inertia continues to hamper innovative responses to this new
role. South Africa supports an urgent review of the resources and instruments
available to the African Development Bank and other MDBs to respond effectively
to the crisis and fulfil their new counter-cyclical obligations. More
flexibility by the IFIs on how they implement lending conditions and the
associated pro-cyclical consequences also needs more consideration.
* Trade finance, roll-over risk and to domestic banking crises: Should
financial contagion lead to domestic financial crisis, developing countries
will be unable to resort to most of the innovative responses engineered in the
developed economies. The International Finance Corporation (IFC), the African
Development Bank and other agencies has moved to address the gap in trade
finance and South Africa supports these initiatives.
* Boosting concessional support to low income countries: The World Bank has
proposed that 0,7% of fiscal stimulus packages be earmarked for the
vulnerability fund. The IMF has called for a doubling of the Fundâs
concessional resources. Commitments to both these initiatives would be
important outcomes of the G20 London Summit.
Special attention must be paid to ensure that all these elements are
realised on the African continent. African countries remain committed to the
implementation of sound Institute of International Finance calculations
indicate that if â instead of falling by $165 billion this year net capital
flows to emerging markets were restored to the average of recent years ($500
billion), significant benefits would accrue to both emerging and developed
economies. An addition of $350 billion in net capital over the next year and
half could boost growth in emerging economies by up to two percentage points,
and meaningfully offset the contraction in developed economies.
Moreover, Justin Lin, the World Banks Chief Economist argues that
âdeveloping countries have more of the type of projects that remove bottlenecks
to growth than developed countries. High-return shovel ready opportunities may
be limited in developed countries where a large share of effective investment
and consumption demands have already been realised under the market system
(especially thanks to the easy credit in the previous years). By contrast, they
tend to abound in developing countries, economic policies and the establishment
of strong institutions that are consistent with their long-term development
goals. But global action is needed to ensure that the hard won gains of the
last decade are preserved and that conditions for future progress are
restored.
In particular, Africa will require:
* resources to sustain investment, especially in infrastructure. The financing
gap is estimated at $50 billion in 2009 and $56 billion in 2010
* long made and oft-repeated commitments to increase aid to Africa must be
delivered quickly. This includes the G8âs Gleneagles commitment to double
annual aid budgets to Africa to $50billion by 2010
* new and additional resources must be unlocked to enable African economies to
sustain growth and maintain social safety nets through strong counter-cyclical
measures. In this regard, the African Development Bank must have the resources,
instruments and will to support continued growth and development.
At minimum, $1,000 billion will be required to finance counter cyclical
spending, sustain infrastructure investment, enhance social safety nets and
backstop confidence in the balance of payments of developing countries. This
investment is vital to sustain growth and development in the global economy.
Therefore, all financing options must be on the table. In respect of the IMF,
this includes bilateral borrowing, temporary multilateral arrangements (such as
the new arrangement to borrow), and the allocation of new special drawing
rights.
At the same time, the urgency of the situation is no reason to delay
consideration of a permanent increase in the Fundâs resources through a general
quota increase. The crisis has clearly demonstrated the need for a well endowed
global Fund, able to respond effectively in times of crisis. Shareholders
should also support the recapitalisation of the multilateral development banks.
South Africa stands ready to make whatever contribution it can, within its
means, to support the G20âs collective commitments. This includes participation
in an expanded New Arrangement to Borrow and contributions to the
recapitalisation of the African Development Bank.
A foundation for the future
Given the systemic nature of the crisis, and its roots in a flawed model of
globalisation, it is unlikely that a recovery can be achieved without
collective global action to address the weaknesses of the past. As a first
step, the G20 should begin to work on a plan for a sustainable path out of the
crisis premised on collective action to build a more balanced and inclusive
trajectory of global economic growth.
Addressing global imbalances
A key element underlying the crisis was the build up of unsustainable global
imbalances. Preventing a future crisis and working for a sustainable recovery
will therefore require a global economy that is more balanced. Rather than
financing excessive consumption in the rich world, surplus savings must invest
in productivity, development and growing consumption by the worldâs poor.
Trade imbalances reflect underlying economic structures that are in need of
reform. Absorption of resources will need to rise in China and other surplus
economies, while consumption growth in the United State (US) and other rich
countries must moderate. Rising wages are required to boost consumption in the
surplus countries, while a flattening of earning differentials and an end to
the culture of debt-fuelled consumption is required in many western nations.
One factor behind the build up of global imbalances was the perceived need for
developing countries to accumulate precautionary reserves in order to insure
themselves against the type of crisis that took place in 1997 to 1998. A
sustainable rebalancing of demand therefore requires the creation of credible
insurance mechanisms that are built on multilateral financial institutions
which enjoy the legitimacy and ownership required to act as trusted stewards of
global public resources.
Reform of global institutions is therefore urgently required, not least so
that further consideration can be given to the creation of an international
monetary system that removes incentives for the build up of reserves,
encourages stability and serves the needs of global growth and development.
Building a new economic multilateralism
Stronger institutions for international partnership are required,
recognising that global cooperation involves both engagement between sovereign
nations and increasingly robust commercial and non-governmental networks.
London must deliver tangible progress and bold commitments towards a new
economic multilateralism. Without such action we will delay establishing the
conditions for sustainable, inclusive and balanced global growth. This means
reassessing the role and contribution of a range of global institutions,
including the UN system, the International Labour Organisation (ILO) as well as
the Bretton Woods Institutions. The G20 can play a useful role in facilitating
consideration of these issues, which include the future of the global monetary
and financial system and the type of institutions that would support global
economic cooperation. However, by their very nature, these matters can only be
decided in more inclusive fora that have broad acceptance.
Certainly, we cannot afford a situation where established, treaty based
organisations which provide the foundation of multilateralism are eclipsed by
self-selected groups.
As a first step down a path that renews our commitment to a shared global
economy built on mutual accountability and partnership, the G20 London Summit
must send clear and unambiguous signals on the reform of the International
Financial Institutions. The most important signals need to come from the USA
and Europe the major shareholders in these bodies.
They must take the opportunity provided by the London Summit to make clear,
credible and unambiguous commitments to:
* enhancing the voice and representation of developing countries, including the
poorest, through an urgent review of quota shares in the World Bank and
IMF
* rebalance and reconfigure the composition of the Executive Boards to address
the under-representation of emerging markets, while ensuring that low income
countries have adequate voice
* lowering the voting thresholds on critical decisions and extending double
majorities to a wider range of decisions, with a view to ensuring that decision
making processes build consensus and command the support of the majority of
members
* end the practice of appointing heads of institutions exclusively from Europe
and the United State of America (USA), and commit to a transparent process open
to nationals of all countries for the next round of appointments.
We should also consider greater police engagement in IMFs strategic
deliberations. This would include a greater role for the G20 and the activation
of a Council of Ministers - as envisaged in the Articles of Agreement, albeit
on the basis of a reconfigured composition that provides strategic and policy
direction, and more openly discusses macroeconomic and financial policy
coordination. These reforms would be complemented by a new approach to the
fundâs governance arrangements that builds accountability, representivity and
diversity.
The Social Architecture of Recovery
The model of economic globalisation that led to the current crisis must be
addressed. A new and inclusive social architecture of globalisation should
drive the recovery. For too long we have allowed an exaggerated faith in market
incentives to dominate social regulatory imperatives. The imperative of
financial gain has overwhelmed the discipline of public purpose and
accountability. Pursuit of corporate advantage has won out over the promotion
of competitive fairness. It is time to construct a shared vision of a new model
of the global economic order that builds on the dynamic impetus of market
forces, but tames the corrupting influence of power and self-interest.
As a first step, the most effective path out of the global recession must
avoid a generalised wage deflation, an outcome that could aggravate the crisis
even more than a wave of competitive devaluations. Wage deflation would
undercut global demand and undermine popular confidence in global solutions,
generating potentially counter productive responses from workers. As we move
forward, it is important that the global effort supports a recovery that
minimises the loss of employment. This requires greater emphasis on decent and
productive employment, especially for women, migrants and the youth.
In the medium term, we will face the challenge of social security reform,
which in turn contributes to income stabilisation and the institutional
resilience of labour markets. Co-operative work is required to enhance social
protection across the globe, in a manner that is sustainable and adapted to
national circumstances. The recovery must also be designed to avert
environmental deterioration. South Africa is committed to making a fair and
meaningful contribution to global efforts to mitigate greenhouse gas emissions
and to adapt to its inevitable impacts.
To this end, enabled by new and additional international funding, technology
and capacity building, we intend to lay the basis for measurable, reportable
and verifiable nationally appropriate mitigation actions, and we have adopted a
strategic vision for our emissions to peak between 2020 and 2025, stabilise for
a decade thereafter, before declining in absolute terms towards mid-century. We
are also convinced that acting now on climate change presents us with a
critical opportunity to overcome some of the challenges of the global economic
crisis.
We intend to increase our investment in pro-poor, job creating and
sustainable green growth that supports the transition to a low carbon and
climate resilient economy and society. We hope other G20 leaders will use the
opportunity of the London Summit to make similar national commitments to
act.
However, it is also crucial that the G20 London Summit build political
momentum towards Copenhagen, without prejudging the formal negotiations under
the United Nations Framework Convention on Climate Change (UNFCCCâs) Bali
Roadmap. The agreement we reach should address, in a fair, effective and
inclusive manner the four building blocks of a future climate regime:
adaptation, mitigation, technology and funding. Clearly, the G20 London Summit
will not be able to resolve these deep rooted problems in one day. But it is
critical that the signal that emerges from global leaders is one that indicates
willingness to re-think the fundamentals of the world economy. These can be no
business as usual. Going back to the status quo ante will generate at best a
short and unsustainable recovery that simply postpones the crisis to a latter
and more fraught day of reckoning.
Taking forward our commitments
The mandate agreed at Washington extends far beyond 31 March. The G20 has
agreed to specific time frames to address a number of issues, including the
realisation of meaningful reform of the Bretton Woods institutions during the
course of next year. South Africa is of the view that the G20 summit process
should continue. In addition to providing a point of reference against which
the implementation of the Washington action plan can be monitored, the G20
should turn its attention to the issues underpinning a longer term sustainable
recovery. This includes the issues of reforms to the global monetary system,
the creation of a more equitable system of global economic governance, and the
social and economic architecture of a more inclusive globalisation.
As confidence is rebuilt it is important that we remain focused on the
future and how we will continue to engage. It will therefore be important for
Leaders in London to reach agreement on the date and location of the next
summit. The next G20 Summit should be held later this year, while the
composition and role of the group must become more formalised. We should never
lose sight of the fact that the actions we take and the outcomes they generate
are far more important than any number of Summits, and that the success of our
meeting in London will be judged not by what we agree on 2 April, but what we
are seen to do thereafter.
Issued by: National Treasury
2 April 2009
