Historic G20 summit shifts economic balance of power

The Group of 20 meeting in Washington was historic not only because of what was agreed to but also because of who participated. Global economic meetings used to be a gathering of rich nations plus Russia (first the G7 and then the G8). Now a number of emerging economies such as China, India, Argentina, Turkey, Brazil and Saudi Arabia joined countries from the developed world to put together a co-ordinated response to the world's economic crisis.

The countries at the Washington meeting represented 85 per cent of the world's population and the fact that the G20 agreed to a number of reform proposals and to meet again at a summit in April is recognition of the shift in the international economic balance of power. It will be the G20, therefore, and not the G8, which is to play the leading role in dealing with this crisis. Brazilian President Luiz Inacio Lula da Silva remarked: "We are talking about the G20, because the G8 doesn't have any more reason to exist." World leaders also agreed that their finance ministers will work on the details of the reforms before next year's meeting.

Among the key issues agreed on at the summit were a reform of the World Bank and the International Monetary Fund, a commitment to conclude a world free trade deal by the end of next month, better financial market transparency, making sure companies provide complete and accurate information of their financial situation, ensuring that financial institutions' incentives prevent excessive risk taking, the strengthening of financial regulatory regimes and the identification of financial institutions whose collapse would threaten the world's economic system.

Of course, this summit did not change the world, nor did it question the basic principles of the free market or capitalism. In fact, the joint communiqué in Washington said the reforms would only be successful if they were "grounded in a commitment to free market principles". However, the summit was a good start towards getting to grips with the world's worst financial crisis since the Great Depression and to further regulate the capitalist system, something which is long overdue.

What is important is that the G20 summit acknowledged this crisis can only be overcome if countries work together in an open market to get the global economy moving again. Leaders promised to avoid protectionism, to push for economic growth and to move quickly on regulatory reform. The objectives, which should be in place by March 31, 2009, are certainly ambitious but definitely worth pursuing. True, these goals alone will not solve everything and each individual country has to come up with an economic stimulus package to get the national economy moving again, but international economic co-operation is absolutely imperative in such a volatile situation. Robert Zoellick, president of the World Bank, said: "The G20 recognised it faced a global crisis that is going to need a global response."

The US obviously has a major role to play in turning the global economic situation around and a lot will depend on what Barack Obama does when he takes office in January. Obama did not attend the Washington summit and this is understandable, as George Bush is still President. However, the Bush administration said it held extensive consultations with the Obama transition team prior to the summit.

Whether Obama will make major decisions on regulatory reform in the early days of his administration - to meet the March 31 deadline for changes to be in place - or concentrate more on an economic stimulus plan is still to be seen. Ideally he will do both.

These are certainly difficult times and last week's economic and financial news was all bad. Germany, Italy, and the rest of the eurozone, and Japan all officially slipped into recession. The US Federal Reserve said the country's GDP could be flat this year, and might shrink in 2009. European and Asian markets fell sharply soon after the Dow Jones share index in New York fell to its lowest level in five years.

Furthermore, car chief executives from Ford, GM and Chrysler in the US asked for a $25 billion bail-out package to help them survive, pointing out that the money is needed not just to save the car industry but to save the US economy from "a catastrophic collapse".

A strong co-ordinated international response as well as further action by individual countries to boost their national economies is certainly what the world needs right now. Last week's economic figures highlight the seriousness of the situation.