Inside his notebook - keywords for Seoul Summit

Korean President Lee Myung-bak looks at his notebook just before the G20 Toronto Summit starts on June 27. Under the title “Issues on international financial organizations reform,” the page reads: 1. Shorten reform timeline; 2. Increase quota; 3. Elect managing director based on capability; 4. Strengthen IMF role; 5. Improve IMF loan system.
/ Korea Times photo by Wang Tae-seok

l Summit will focus on fixing financial system

By Cho Jin-seo
Staff reporter

No time for empty talk on world peace. No time for monologues with political ambitions. “Let’s put it simple, straight, and do what we have to do,” Korean president Lee Myung-bak, may remind other participants when he hosts the roundtable meeting.

The Seoul Summit of G20 will be, and should be focused on one issue: the economy. With only a day to spend together, they cannot afford distractions to politics or diplomacy.

In theory, the presidents, prime ministers and a king only need to confirm the draft of the “communique,” as the G20 official announcement is often called, which will be pre-arranged by their finance ministers and central bankers. But in practice, this process has not always been so smooth. We may expect some last-minute scuffle in Seoul.

As the G20 does not have a permanent administrative body, it is the host country’s job to set the agenda and mediate between countries of differing interest. Seoul’s G20 Preparation Committee has been doing the job since last year. Sakong Il, the chairman of the Seoul preparation committee, has set a rough guideline by declaring that the official slogan would be “shared growth beyond crisis.”

The International Monetary Fund (IMF), the Financial Stability Board (FSB), and the World Bank are also giving guidelines on financial reform plans to the G20, because it is their specialty. But it must be noticed that those two organizations themselves are to be the subject of financial reform.

Reform agenda

The only thing the G20 members have agreed on so far unanimously is the strengthening of the international banking regulatory system. The core idea is to tighten the global standards of bank capital and liquidity limit. In other words, it will prohibit banks from making too much loans without considering how much money they keep in the safe.

The FSB has been in charge of making a draft for this topic. “The quality and amount of capital in the banking system must be significantly higher to improve loss absorbency and resiliency,” said Mario Draghi, the FSB chairman, in his letter to the G20.

Transparency of the financial system is another issue the FSB is interested in. The problem with modern financial products, such as investment funds and credit swaps, is that they are too complex to understand even for the people who design and sell them. So the asset bubble was created when people invested too much without thinking about the risk. In the process, rating agencies failed to give warnings to investors.

To improve transparency, G20 nations are likely to come up with plans to improve the over-the-counter derivatives markets, enhance incentive structures of financial firms, and improve the way rating agencies work.

Nations will agree that the role of the FSB and the IMF must be enlarged in monitoring of the global financial system, so that they can act before a crisis brakes out.

On bank tax, nations do not have a shared objective. The idea was that governments should charge a special tax on banks, so they can raise the money to bail themselves out during a crisis. If the tax is levied on the non-core assets of banks, it will also effectively reduce the chance of banks being reckless in investing.

The international talks on bank tax, however, fell flat at the Toronto summit in June since many nations, led by Canada, thought it would hurt their banking industry’s ability to create profit.

However, the discussion is not completely dead, said Shin Hyun-song, senior advisor to President Lee. “Even though the adoption of a global bank levy was rejected by the opposition from Canada, there is no reason for Korea to not have it,” he told The Korea Times. “In America as well, the original idea of bank levy is still alive and its government is going to set up a separate bill on it.”

As most nations have recovered from the financial crisis, the G20 is likely to be more fiercely engaged in the austerity debate in Seoul. It is currently the hottest issue for economists that whether nations should keep their expansionary monetary and fiscal policies in order to further boost their economies, or should they begin to tighten belts to fight inflationary pressure and mounting government debts. As each nation has its own circumstances and interests, a single solution on this issue is unlikely to be made, and neither it should be.

Reform of the IMF and World Bank is one issue that the G20 is poised to complete in Seoul. The two organizations acknowledge that developing nations, such as China, should be better represented so the voting share can reflect the gradual power shift of the world economy.

Korea is also pushing the IMF to ease the process of its rescue program. Asian countries suffered a reputation problem when they received funds from the IMF during the Asian crisis in late 1990s. In order to quell this “stigma effect,” the IMF is likely to make its funds more available for countries, and without being attached with stringent conditions.

Some countries, notably the United States and the European Union members, also like to see a revaluation of China’s currency. Their argument is that China has been benefit from its undervalued currency in international trade, because the cheap yuan makes their goods cheaper than those from other nations.

Western media, such as the Financial Times, insist that the G20 has “pointed pleas for greater currency flexibility” in China, and the “world is looking on with mounting impatience.” But this is far from true. Other than a few Western nations, most of the G20 nations have little interest in the Chinese exchange regime and nor do they believe the country must adopt flexible rate system.

Even some executives inside the IMF believe China’s currency is not significantly undervalued. With inflation being a major domestic concern, China, naturally, won’t budge a bit, and the G20 communique won’t explicitly name the country.

Korea is also trying to draw attention on the global economic development issue. The country thinks its own history of rapid economic and social development can teach a lesson to chronically underdeveloped nations in Africa and in Southeast Asia. Sakong, the preparation committee chief, has declared that it would be the “Korea Initiative” at the Seoul Summit. Whether other nations will gladly accept this as a core mission of the G20 is another issue.

While most of the agenda are economic, climate change has a fat chance of becoming a sudden G20 topic. This summer is likely to be one of the hottest one in recent history, and one catastrophic natural disaster in any developed nation will be enough to raise the alarm on the climate change issue.

After all, sparing a bit of time for green talks will help improve the public image of the G20 meeting as well as that of each politician at the talks. The climate change issue perfectly fits the bill.