There have been many different opinions about the just concluded G20 summit in Washington. Some say it has failed to result in concrete steps - neither something of a Bretton Woods II nor big checks from the emerging market economies for IMF's further bailout spending.
Others tend to view from a seemingly larger perspective - alleging that time has changed and now that 80 percent of the world's GDP is represented in G20, the old G7 or G8 institution will become history.
These comments are more easily made, and even emptier, than the ideas arising from the officials' meeting. You have no risk by alleging any point in a longer process as having few concrete results, or having some vaguely-defined larger significance.
For me, the G20 communique does contain some important stuff. It sheds light on two things that matter to the well-being of all nations, especially when the whole world faces the global financial crisis.
First, none of the nations that represent 80 percent of the world's GDP had anticipated a crisis of this magnitude. It is an admitted fact. No matter how the government is structured, what economic philosophy is in domination, what intellectual caliber the advisers have, none of the nations had prepared for the challenge that we are facing now.
Second, despite the promise of collaborative efforts whenever necessary, and the proposal for pooling international expertise and sending early warnings, we still do not have a working model for the future. Be it G20 or a reformed IMF/World Bank system, people still have no idea as to how economies are to work together on a day-to-day basis, not on once-every-five-months basis (for the next G20 is scheduled for April 30).
The above-mentioned two things point to two areas of the unknown, or areas which people have no ready knowledge about.
In the first area, tremendous resources, as seen in the surge of American mortgage and related financial derivatives, were tied to what were called financial innovations in the boom time and which later turned into destructive forces. Not just the financial companies (the world's largest ones included), but also the world's most powerful national governments and their central banks had little knowledge about the complexity of those innovations, even less the ability to manage their consequences.
Although there seems little question that those financial innovations will be placed under some regulation, we still do not know if there will be a firewall to keep them from draining too much resources from the rest of the economy. We also do not know how information about similar financial instruments can be released and exchanged between central bankers whenever and wherever they occur.
On a more technical level, can different financial innovations be categorized? Can their risk levels be appropriately rated? Can there be an alarm line of some sort to indicate a player's total exposure to potential risks? Also, since we are to retain the market economy after all, can there be competition among different financial markets, or markets in different countries, for providing the related services?
Without figuring out these questions, a monitoring system of the global financial market would be hard to function, and a related advisory service - to sovereign entities and to large financial institutions - would have little to base on.
Once these problems are solved, we inevitably face the challenge in the second area, namely the general pattern in which national governments (and their central banks) and international financial services should work together. There have been very few successful precedents. But if the world's future system can function like the meteorologists', or in a broader sense, the world weather reporting system - which covers the reporting of day-to-day changes and from time to time the long-term climate trends, economies in the world may be in a much better position to decide what they should do to stay away from trouble.
Unfortunately, from now to really having a financial early warning system similar to the weather report we have every morning - and every hour on the television, we seem to still have a long march to take.
E-mail: younuo@chinadaily.com.cn
(China Daily 11/17/2008 page4)
