G-20: International Cooperation Can Go Only So Far to End the Recession

Those with high hopes for this week-end's meeting of finance

ministers from the G-20 might want to rethink their enthusiasm for

such an international confab. The many words produced in the next

several days, some fine and some silly, are likely to have little

ultimate impact on the economic situation. Writing in Friday's Wall Street Journal, the G-20

meeting's host, U.K. Chancellor of the Exchequer Alistair Darling,

paints a rosy picture of international cooperation: major countries

working in partnership to restore global financial health. There is

certainly nothing wrong with international cooperation or

partnership, but each part of Darling's proposed scenario for

coordinated action raises questions and has the potential for harm

as well as good. Can the Cure Be the Same as the

Cause? Darling calls for G-20 coordinated action in three areas.

he wants countries to boost demand through monetary loosening,

fiscal stimulus, and restoration of bank lending. The idea is to

flood the market with money, have government buy for the public all

the things the public is currently unwilling to buy for itself, and

pressure banks to make loans they are otherwise unwilling to

make. If the first and third parts of that-the monetary loosening and

the pressure for more bank lending-sound similar to the policies

most responsible for creating the crisis in the first place, it is

because they are. In addition, neither requires international cooperation. In

fact, with international capital markets as well-connected as they

are, changes anywhere in the system will automatically affect

anyone in the system. Cooperating internationally at the level of

governments could result in some burden-sharing, but it is hardly

essential. The middle part of Darling's recipe for stimulating demand-the

fiscal stimulus-is a political move rather than an economic one.

The resources the government spends are not free goods; they have

to come from somewhere, either now or in the future. Fiscal

stimulus is a windfall for politicians who want to have a much

greater role in deciding who gets what in our economy. Politically

favored groups will win as a result of fiscal spending, and

politically unfavored groups will lose, but the overall effect on

the economy will be close to zero-or, more likely, negative-because

of the inherent inefficiencies of government. IMF to the Rescue? Darling's second call is for an increase in International Monetary Fund (IMF) resources to help "prevent the spread of the

crisis from corporations to countries." This is an entirely

symbolic gesture. In what is approximately a $50 trillion world economy, the IMF, in its largest spending year ever (2002) provided

less than $30 billion to member countries, or approximately 0.06

percent of the world economy. There is no conceivable increase in IMF resources that will put

the organization in a position to make a significant impact on a

world financial crisis or recession such as we are currently

experiencing. Nor should we desire such an increase, which would

divert productive capital and resources from other uses. Yes, the

IMF can help in isolated cases or in smaller economies, but its

overall impact on the crisis will be negligible. Cross-Purposes Finally, Darling calls for the reform of global financial

regulation. Here he advocates better management of risks "through

early warning capabilities and colleges of supervisors." This is

one place where agreement among the G-20 is likely and probably

harmless, though one might be skeptical as to whether joint

centralized scrutiny of risks will actually reduce risk. It might

instead increase it by focusing regulators' thinking in herd-like

manner toward only the popular problem of the day. More troubling is Darling's assertion that "all types of risk to

consumers, markets and economies need to be covered." It is, of

course, through the assumption of risk by entrepreneurs that

economies increase productivity and grow. One can always decrease

risk-indeed, that was the hallmark of the centrally planned

socialist economies of the Soviet Union and Eastern Europe-but at

the cost of growth and prosperity. We can only hope that our

central bankers will not go too far in that direction. One way Darling would reduce risk is by putting a cap on banks'

leverage ratios, requiring them to hold more reserves. But this

would reduce banks' lending-exactly the opposite of what Darling

was calling for as one of his first priorities. It may be that

banks' leverage ratios, something already regulated in all

countries, might need to be adjusted. But no one should pretend

that the ratios of reserves to lending can be increased without

reducing lending in the process. Just Get Out of the Way Darling can be excused for hyping the G-20 finance ministers

meeting and its potential impact on the world crisis. He is, after

all, the host of the event and he and his government have a

substantial political stake in a positive outcome. The rest of us,

however, should have no such illusions. Only a restoration of trust

in markets and the prices of assets will end the malaise into which

we have fallen. In that regard, an announcement by the governments

of the G-20 of what they will not do to intervene in markets

would probably go a lot further in restoring trust than any

announcement of joint action or new regulations. Ambassador Terry Miller is

Director of the Center for International Trade and Economics at The

Heritage Foundation.