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GLOBAL ECONOMY

G-20 leaders set economic action plan

The Pittsburgh summit ends with a plan for a coordinated effort to tighten controls on banking and to correct economic imbalances such as China's large trade surpluses and the U.S.' huge deficits.

September 26, 2009|Don Lee

PITTSBURGH — Acting in unison to prevent a repeat of the financial crisis, world leaders pledged Friday to undertake an ambitious and coordinated effort to overhaul banking practices and build a new global economic model.

The plan, unveiled at the conclusion of the Group of 20 summit here, would set constraints on executive pay at financial firms, impose tougher standards on banks and launch a process aimed at correcting economic imbalances, such as China's large trade surpluses and the United States' huge deficits.

The agreement is short on specific targets and dates, and analysts described some aspects as plainly utopian. But others said the action plan was a good starting point and, if followed through and properly enforced, could bring a significant change that would help avert the kind of deep financial crisis from which the world is now only emerging.

"We laid the groundwork today for long-term prosperity," President Obama said at a news conference at the conclusion of the summit. "Because our global economy is now fundamentally interconnected, we need to act together to make sure the recovery creates new jobs and industries while preventing the kind of imbalances and abuses that led us into this crisis."

Achieving one of his key objectives for the meeting, Obama won the support of the G-20 nations for a U.S. proposal dubbed a "Framework for Sustainable and Balanced Growth," which is intended to rectify distortions in the global economy.

Those imbalances have been caused in large part by the heavy spending by Americans that has made the U.S. the dominant market for the goods of many other countries. But after suffering the worst recession in decades, U.S. consumers have sharply increased their savings and cut back on spending, a trend that Treasury Secretary Timothy F. Geithner called a "fundamental shift."

He and other Obama administration officials said other countries must now recognize the new reality and change their policies to stimulate greater spending by their own people.

The G-20 statement Friday did not name any perpetrators, but China, which has been running a huge trade surplus with the U.S. and most of the world, is a major target. Beijing already has taken steps to boost domestic demand, but the sustainable-growth framework seeks to establish an ongoing process that would assess the effect of national policies on the global economy.

The accord calls for a kind of peer review in which G-20 member countries, with the help of the International Monetary Fund, would examine one another's economic policies. But many analysts said the plan lacked an enforcement mechanism and would have little force in correcting global imbalances.

"Any such kind of agreement will be difficult to be worth the paper it's written on," said Razeen Sally, co-director of the European Center for International Political Economy in Brussels.

In selling the framework proposal to China, the U.S. pressed the G-20 to address another imbalance -- the representation of major fast-growing countries in important global economic functions.

On Friday, Obama and other world leaders said the G-20 would supplant the Western-dominated Group of 8 as the "premier forum" for international economic cooperation.

"I think it's a big plus," said Barry Bosworth, an international economics expert at the Brookings Institution. "We cannot have a global economy controlled by a monopoly. It's a recognition of the growing importance of Asia."

The G-8 consists of Britain, Canada, France, Germany, Italy, Japan, Russia and the U.S. The G-20 adds Argentina, Australia, Brazil, China, India, Indonesia, South Korea, Mexico, Saudi Arabia, South Africa and Turkey. The European Union is represented in both.

The G-20 also adopted a U.S.-led effort to enhance the voting power of emerging economies, primarily China, at the IMF. But Bosworth called the agreement to shift at least 5% of the votes on the agency's board to developing countries a "trivial reweighting." The change comes at the expense of Europe without affecting the U.S., which maintains its veto power in the IMF.

On executive pay, the G-20 leaders endorsed standards to tie compensation to long-term performance, increase disclosure and limit bonuses by linking them to revenue. The goal is to discourage the kind of excessive risk-taking that many say was the prime culprit in the financial crisis.

Although the pay measures would be carried out by each country, the G-20 leaders called on the Financial Stability Board, a group of finance ministers and central bankers, to monitor implementation.

European leaders had pressed for pay caps, but the idea was resisted by the U.S. and was never on the negotiating table, officials said.

To strengthen the financial system, the G-20 leaders also agreed that it was necessary to raise the amount and quality of capital that banks must keep on their balance sheets to cushion against future losses.

The agreement spelled out Friday doesn't specify new capital levels. Instead, it calls for them to be developed by each country by the end of 2010, with the aim of putting them in place by the end of 2012.

European leaders had complained that increasing capital requirements would put their banks at a competitive disadvantage because they have traditionally maintained smaller reserves.

These and other principles adopted by the G-20 are all good, said Steven Schrage, an international business expert at the Center for Strategic and International Studies, a Washington think tank.

"But it's only as big a deal if governments follow through on it," he said.

"These broad statements help, but if they don't have any follow-up and teeth, they're more political statements than anything else."

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don.lee@latimes.com

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