JEFFREY BROWN: And more on what came out of the summit now from Simon Johnson of the MIT Sloan School of Management and the Peterson Institute for International Economics — excuse me — and Eswar Prasad of Cornell University and the Brookings Institution.
Welcome to both of you.
ESWAR PRASAD, Cornell University: Thank you.
JEFFREY BROWN: A year ago, we all sat here. The problem was to help us get out of the crisis and prevent it in the future. What does Pittsburgh tell you, Eswar, about where we’re at now?
ESWAR PRASAD: Things have changed dramatically in the last few months. At the end of last year, it looked like the world economy was going off a cliff. All the major economies had hit a wall. And now the circumstances have changed, in part, thanks, I think, to the resilience of market economies, but also thanks to these stimulative measures which not only had a direct effect, but because the leaders stood together and said they’re going to take action together, I think that had a pretty positive effect on confidence.
So all of that seems to have gotten us away from the edge of the cliff, so we are, in fact, in a much better position right now where we can start thinking about how to entrench the recovery and whether the measures put in place to get the recovery going should be pulled back or not.
JEFFREY BROWN: All right. So, Simon, before we get to the what’s coming, what about that? And you heard Paul talk about the sense that it worked, stimulus worked.
SIMON JOHNSON: Well, the last G-20 summit, April in London, I think, was successful, exactly the reasons that Eswar said. The governments, these big, powerful governments — and this is 90 percent of the world’s economies, in terms of GDP, represented by the G-20. They decided to try and stop the crisis and act together. And I think they did well.
Unfortunately, since April, they’ve rather been resting on their laurels, to my perspective, and I’m not sure this Pittsburgh summit is really such a great moment, as Paul was saying.
JEFFREY BROWN: Well, explain. Where does it fall short?
SIMON JOHNSON: Well, on the kinds of measures that you’d think you would need to prevent this kind of crisis from happening again, for example, around the financial sector. There’s been some very good rhetoric, for example, from the White House in the past couple of weeks, but very little in terms of specifics. And I’m afraid what we got today from Pittsburgh was more empty words, which is shocking and I think a little surprising, given where we’re coming from.
Emerging markets play a bigger role
JEFFREY BROWN: Do you see some more positive reaction or actions out of Pittsburgh?
ESWAR PRASAD: I think the last three summits cumulating with this one have, in fact, accomplished a lot. They have brought the emerging market economies firmly onto the table. I think the fact that the leaders have agreed that the G-20, rather than the G-7 or the G-8, should be the primary forum for thinking about global economic policies is a big deal.
The fact that there is some agreement, although the details still need to be worked out, about giving the emerging market economies more of a say at the International Monetary Fund I think is a pretty big deal. So in terms of overall global governance, actually, I think we have accomplished quite a bit.
And, remember, this is a very diverse group of economies. And the fact that they could agree, even on some general principles, I think is quite an accomplishment. But whether we can get agreement on the specifics, of course, still remains the key issue.
JEFFREY BROWN: All right, but let's walk through a few of those things. Start with the one he just mentioned. The first one was the G-20 out of the G-8, and Paul talked about that, and he was quoting Jeffrey Sachs, as sort of an historic moment. Is that a good move forward in itself?
SIMON JOHNSON: It is a good move forward. The G-7, the industrialized countries, have become an anachronism. They used to dominate the world economy; they don't dominate it anymore. The emerging markets are about half of world GDP. They do need to be at the table, no question about it.
The problem is, when you bring them into the kitchen, that's an awful lot of cooks, and can they agree on anything more than pretty general frameworks? We certainly need a lot more than that, for example, around the regulation of banks, but you didn't see today any concrete progress in that kind of direction.
JEFFREY BROWN: But you see at least having them at the table as an important step?
ESWAR PRASAD: I think it's quite important for them to be at the table. If you think about issues like the global imbalances that we talked about, China is a very big part of it, and the other emerging market economies are a very big part of it. So unless we can involve them in a solution, we really are not going to get anywhere. So it is essential, I think, that they be part of the conversation about how to make progress.
And Simon has a point that we don't have that many specifics coming out of this, but even here I think there are some game-changers, for instance, the notion that there should be a peer review process that is going to take account of countries' microeconomic policies. There was a peer review process in place before through the IMF, but nobody cared very much about it, especially the big countries.
But what is the game-changer I think right now is that the U.S. is saying that it is going to take the IMF more seriously. And I think this will force the other countries to take it more seriously. But there still isn't an enforcement mechanism, so we still have to see how this plays out.
Enforcing peer review
JEFFREY BROWN: OK. What do you think of this peer-review idea?
SIMON JOHNSON: Well, I think the key is the enforcement mechanism that Eswar said. Unless you have something concrete, something specific, you know, that you're going to be taken to the World Trade Organization, for example, for some sort of hearing or some sort of trade sanctions if you violate certain commitments, unless you have that, nothing is really -- is going to change.
JEFFREY BROWN: Back up though. How would it even work? I mean, help our viewers understand. What would a peer review entail? Who would do it?
SIMON JOHNSON: Well, what it means in this instance -- because the G-20 doesn't have a regular secretariat -- is that the IMF would be delegated with the task of reviewing the policies that the countries actually pursue. And every time there's a G-20 summit -- there will be two next year -- the IMF will make a report, and it'll say that these people are doing what they said they would do, and these people are not. That's the idea.
The problem is, it all gets nuanced out in these IMF reports. Big countries do not like to be criticized by the IMF at all. And unless there's a commitment to some sort of enforcement mechanism, you're not really going to make any progress.
JEFFREY BROWN: And then, of course, there's the global imbalance question that I asked Paul about and the kind of structural problem. Do you see -- are there details on moving forward on something like that?
ESWAR PRASAD: It's going to be very tricky. One part of the global imbalances was the fact that China has a somewhat export-led growth model, meaning they really need the exports in order to generate jobs and in order to keep their growth model going. That hasn't really changed.
In fact, the stimulus package they've put into place is going to make matters worse in the short term because a lot of the stimulus spending is going towards investment, so they are building up a lot more capital stock. Household income growth is not quite keeping up, so they have to ship the stuff out somewhere.
Likewise, Japan and Germany are still economies that very much rely on exports, so all of these economies are still looking to ride the U.S. coattails, so that problem remains.
But one fundamental thing has been achieved, that the emerging markets are also trying to build up foreign exchange reserves in order to protect themselves from crises. And two very big accomplishments of the G-20 are that the amount of money that the International Monetary Fund has -- and the International Monetary Fund acts as a sort of insurance mechanism for emerging markets -- that's been raised from $250 billion to nearly $1 trillion.
And secondly, emerging markets now feel they have more of a say at the IMF. So they may feel much less of a need to self-insure by building up reserves, which could be a good thing.
JEFFREY BROWN: Could that be a good thing? This is the global imbalance question. I mean, could that be a good thing, those kind of mechanisms?
SIMON JOHNSON: I think this is the triumph of hope over experience, to be honest. I mean, the emerging markets don't trust the IMF. The IMF lost a lot of legitimacy after the Asian financial crisis in the late 1990s, and it's not rebuilt it.
So countries like China, and Korea, and Indonesia don't want to ever have to borrow from IMF again. It's good the IMF has more money. That will help Eastern Europe, for example. But most of Asia and much of Latin America doesn't want to come back to the IMF.
And there's nothing I can see at this G-20 summit or in the broader G-20 process that's going to rebuild IMF legitimacy, that it's absolutely key to the points Eswar was addressing, which you need if you want to have a more stable world economy.
What's next for the G-20?
JEFFREY BROWN: You know -- we're just in the last minute -- I would probably ask you this after each of the summits, but what's next? I mean, now there have been three of these summits. Do the governments go back and continue working on their own? Or is there a chance for a kind of coordination?
SIMON JOHNSON: Well, they referred a number of key matters to the ministers of finance, who will meet in November. They need to get a move on. They have to solve the cross-border issues of what happens when big banks fail. They've not worked on that. They're saying they'll do that by the end of 2010. That's far too slow.
They're going to raise capital requirements and tell us what the numbers are at the end of 2012? That's an eternity in today's financial markets. They really need to get a move on. I think they're dragging their feet and patting themselves too much on the back at the moment.
JEFFREY BROWN: Eswar, a last word?
ESWAR PRASAD: This is a big challenge. I mean, the general principles are great, but getting down to the specifics is going to be very hard. In fact, some commitments of the G-20 leaders made too much fanfare earlier, like saying that they would not take protectionist actions against free trade.
They went back to their home countries, immediately pandered to their domestic constituencies by putting in place protectionist measures. So whether there is going to be the desire or the drive to follow through on these commitments really is an open question.
JEFFREY BROWN: All right, Eswar Prasad, Simon Johnson, thanks, as always.
SIMON JOHNSON: Thank you.
ESWAR PRASAD: My pleasure.
JIM LEHRER: The full text of the G-20 agreements is on our Web site, newshour.pbs.org.