G20 101- Part 1

The past year has seen the world wide economy plunge to the depths of the Titanic and almost everyone is in damage control mode. We are all looking for leadership and direction during these times and who better to give us that than the world leaders of the 20 most powerful countries in the world? For those who do not understand what the G20 is, here is a little guide.

The G20 is composed of the most powerful countries in the world. While power may sound a little subjective, it does encompass the different countries involved. The United States and the United Kingdom are part of it. Emerging countries and future superpowers like Brazil and China are there as well. Traditional powers like Russia and Germany are likewise included.

The history of the G20 shows that it was created in 1999 in an effort to solve the problem of the Asian Financial Crisis. Initially, there was the G33 and before that, the G22. While the frequent changing of the number may seem to show that the group is not very organized, it just goes to show the ever changing political and economic landscape. The G20 has 19 member countries plus the European Union as the 20th member. The leadership in the G20 is rotating and this year, UK Prime Minister Gordon Brown is the leader.

Why are they meeting?

Unless you are a hermit and I am assuming that you are not since you are currently on the internet, you will know that we are currently having a worldwide economic crisis. The world leaders are now gathering in London to see if they can solve the mess we are in.

What people are less aware of is that it is not merely the leaders who are gathering. The real players are other leaders who are more knowledgeable in this field. These are:

• the Finance ministers and central bank governors of the G7, 14 other key countries, and the European Union Presidency (if not a G7 member)
• the European Central Bank
• the Managing Director of the International Monetary Fund
• the Chairman of the IMFC
• the President of the World Bank
• the Chairman of the Development Committee
These people are needed if any solution will be brought about. Not only because they are knowledgeable in the field but some of them like the IMF and the World Bank, also represent lesser economies whose voice needs to be heard as well.
So is there a specific goal?

Of course there is. The meeting is going to be held with a specific goal in mind and at the same time, the members are informed of the three main aims of the summit.
If you ask British Prime Minister Gordon Brown, he would tell you that the overall goal in this London summit is the complete overhauling and restructuring of the world financial system. He, along with numerous world leaders, believe that this is the only way they would be able to solve this financial downturn. Moreover, by accomplishing such, they do not fall into a trap wherein they only present a short term solution that will eventually cause bigger problems in the future. This is what they are trying to avoid. They are looking for a long term solution to the problem as well as the placing of structure that will actually prevent future problems from happening.

The three-pronged aim is as follows:

Firstly, the group recognizes that there is a need for a concerted effort in tackling the current crisis. This is because as what we have seen, the world’s economies are so intertwined that the downfall of one can and will cause the downfall of others. On the flipside, one country’s strength will help others as well. Thus a coordinated effort is the only way to fully arrest the situation. If each country goes its own direction, then things will not be successful and the downturn will simply continue. For now, the scenarios that is being proposed that will boost the world’s economy co-ordinated action to revive the world economy, are through more interest rate cuts and more spending by governments to bring countries out of recession. This way, the world economies will get a jump start.

Secondly, it has been recognized that the crisis has been caused by a lack of regulation or outright deregulation of banks and other financial institutions. As we all know, the mortgage is the main problem here. People were allowed to get mortgages even though it was painfully obvious that the people who got them have no capability whatsoever to pay for them. While the people may be partly to blame, the real culprits here are the banks who allowed them to get the mortgage because they are the ones who are supposed to tell the people if they can or cannot afford the mortgage.

As such, the London G20 Summit will be exerting efforts to prevent a future crisis by strengthening the international regulation of banks and other financial institutions. While it does sound generic, at the very least, we can see that they know what the source of the problem is.

Thirdly, leaders are hoping to come into an agreement and come up with a well laid out plan for future reform of the world financial system. This does not only involve the individual banks in the individual countries mind you, the failure of the world economy is as much a reflection of the failure of the international financial institutions as much as the individual banks themselves.
Why? Consider this: If the individual banks are in charge of regulating what mortgages you can get, the international organizations such as the International Monetary Fund (IMF) are in charge of regulating the world economy. They need to readjust themselves because during this financial crisis, the poorer countries are also hit hard and unlike other countries, they have exhausted their resources long ago. The IMF is needed t protect them and they seem to need to remember that.
Overall, the Summit aims to protect the world from protectionism. Protectionism is when the countries shun other countries in an effort to protect only their own. While logically it may seem to be a good idea to simply think about ones own country only, this goes against the very variables of the world economy as a whole. The Summit aims to show to the world that we are all in this together and one’s country will not survive through protectionism because our economies are interwoven with each other. If one country does not cooperate, it could spell doom for the rest.

The global leaders have seen shades of this type of reaction to the global economic downturn. Some countries are shutting its doors in the hopes of preserving their own money and to stop being affected by the troubles of other nations. It is hoped that the summit will prevent this slide. They need to be able to show to the other countries that protectionism will drive us down deeper while working together is the key.

Obviously, there is a lot riding in the London Summit of the G20. Some people believe that this may be the meeting that will solve the problem we are all facing right now. While people understand that the economic problem will not be ending anytime soon, they see this as the first coordinated step towards recovery. Hopefully, a lot of things will be accomplished this week.

Part 2 Tomorrow