When we met here last
year, financial institutions such as Lehman Brothers
and American International Group (AIG) were falling
like tenpins. For weeks, credit froze as perceptions of
risk shot up. The global financial system went into
seizure. National Governments took emergency
measures to rescue banks and keep credit lines open.
The United States Treasury and the United States
Federal Reserve, in particular, reacted with
extraordinary boldness. For a period of time, it seemed
as if everyone was flying blind.
After a year, the situation no longer looks as
bleak today. In fact, after a sharp contraction of the
advanced economies in the first half of this year, there
are signs of a recovery. Some of the leading indicators
are flashing positive again and the next two quarters
will probably register good growth globally. Whether
this growth can be sustained is, however, a different
question.
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It would be a mistake to think that the global
economic crisis will soon be over. The crisis came
about because of excesses and imbalances which have
to be put right. Looking back, we know that the
excesses were the result of inadequate regulation of
banks and quasi-banking institutions. Over the years,
clever minds turned non-banks into de facto ones
which were not regulated as conventional banks. This
unregulated financial sector grew to dwarf the
regulated sector.
To forestall collapse when the bubble burst,
Governments and regulators stepped in taking over
financial institutions, guaranteeing liabilities,
increasing public spending and pumping liquidity into
the economy. These are emergency measures which are
needed to get the global economy through a critical
phase. They have stabilized the financial sector and
prevented the real economy from being too badly
affected.
However, as when steroids are administered to
reduce inflammation, there is a price to be paid for this
temporary relief. First, the expectation that
Governments will step in when things go badly wrong
creates a huge moral hazard. Once Governments set a
bottom limit to the consequences of risk-taking, more
risks will be taken in the future.
Secondly, the huge increase in global liquidity
has slowed down or reversed the fall in inflated asset
prices. Worldwide stock markets have benefited from
easy money. In Asia, property markets are booming
again even though the real economy is still struggling.
Withdrawing liquidity without destabilizing economies
and asset markets in the coming months and years will
be a tricky business.
And thirdly, the emergency measures which have
been taken reduce the need for painful restructuring.
Yet without major restructuring of regulatory systems
and businesses, the imbalances which created the
conditions for the crisis in the first place can only get
worse.
While excesses in the financial sector were the
trigger of the crisis, the deeper underlying cause was
the global imbalance between producers and consumers
and between saving and consumption. For too long, the
world depended on the United States consumers
keeping global demand high and on lending those
consumers the money to keep the game going. To
correct this imbalance, Asians have to consume more
and save less as a proportion of income, while
Americans have to consume less and save more.
Otherwise, a global Keynesian paradox of thrift will
cause the global economy to operate below capacity.
Rebalancing the global economy is, however, not
a simple matter at all, and is not only about economics:
it is also deeply political. The rise of Asia is altering
the global power structure. Nothing expresses this
more than the complex relationship that now ties the
United States and China together. China, with its
reserves of over $2 trillion, is heavily invested in the
United States dollar, making it a major stakeholder in
the United States economy. Without continuing market
confidence in the United States dollar, not just the
United States economy, but the entire global economy
will be put at risk.
Looking ahead, however, it is not going to be a
bipolar world but a multi-polar world. Europe and
Japan will remain heavyweights. India, Russia, Brazil
and others will become more significant players. A
multi-polar world means a messier world with a
diversity of political systems, values and worldviews.
Non-State actors like civil society organizations must
increasingly be engaged. At the same time, we are all
members of the same human family sharing the same
planet. Looking ahead, we will need more effective
global governance across a wide range of issues from
protection of human rights and international financial
regulation to efforts to combat pandemics, climate
change and terrorism.
The greatest challenge confronting us today is
that of ensuring effective global governance. We do not
want a global Government but we do need better
coordination, cooperation and enforcement in many
areas. The reform of the United Nations, including the
United Nations Security Council, is going to take time.
Incremental rather than dramatic change is a more
practical approach.
In terms of world trade, the World Trade
Organization, while far from perfect, can still function
well with effective political leadership. Once that
leadership is supplied, the Doha Round of negotiations
can be concluded within the next few years. We are
fortunate to have in Pascal Lamy a strong Director-
General at the helm. But this is a dangerous period
because domestic politics in many countries favour
greater protectionism. At all regional and international
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forums, we must take a clear collective stand against
protectionism.
Climate change is a long-term challenge for
humanity which needs to be addressed with some
urgency. While we cannot be sure how much increased
carbon dioxide emissions will affect the global climate
in the coming decades and centuries, it would be
irresponsible for us in this generation not to start acting
now. The increased weather volatility we have been
experiencing in recent years could be a warning of
longer-term trends already under way. An international
agreement on climate change which aligns our interests
and efforts is absolutely necessary to preserve this
planet for future generations.
For that reason, we must redouble efforts to
conclude negotiations for an international agreement at
the Copenhagen Climate Change Conference at the end
of this year. It is good that caring for the environment
is increasingly becoming a moral norm in the world,
especially among the young. We must not fail them.
The strong political commitment expressed by many
leaders at the Summit on Climate Change, chaired by
the Secretary-General himself here last week, gives us
reason for hope.
The present economic crisis is a major challenge
to global governance. In November last year, then
United States President George W. Bush convened the
first summit of the Group of 20 (G-20). The second
meeting of leaders was held in London in April and the
third has just concluded in Pittsburgh under President
Barack Obama’s chairmanship. The G-20 has now been
designated the premier forum for international
economic cooperation, replacing the Group of Eight
(G-8).
This G-20 process and the swift, decisive actions
that it brought about have helped avert an economic
depression in the last year. The emergency measures
taken by various Governments in response to the
financial tsunami have bought us precious time to
restructure and rebalance the global economy. In
Pittsburgh, the G-20 leaders acknowledged that a sense
of normalcy should not lead to complacency. We
welcome their pledge to adopt policies needed for
strong, sustained and balanced growth. If the biggest
economies do not persist in that effort — and persisting
means pain for domestic constituencies in many
countries — the respite we are now enjoying will lead
to an even bigger crisis, this time possibly involving
foreign exchange markets as well.
In the coming months and years, it is important
for the G-20 process to develop greater legitimacy,
especially as it begins to deal with a broader set of
issues. That the establishment of the G-20 leaders
meeting was not blessed by the United Nations or other
existing international organizations should not hold us
back from giving it full support. Although the G-20
process is not ideal, it is the most important driver of
change that we have right now.
The United Nations itself is too intricate and not
structured to deal with issues such as a major financial
crisis. The old G-8 lacked representation, and the G-8
Plus was not acceptable because it put the additional
participants at a disadvantage. As for the International
Monetary Fund, it was never designed to tackle a crisis
of such scale. In any case, the Bretton Woods
institutions themselves need reform, which indeed is a
major subject on the G-20 agenda.
For the G-20 process to be effective and
legitimate, however, it is not enough for leaders to
confer and make general exhortations. Ministers and
experts must also meet and go into details. They should
not be confined to the same G-20 countries every time.
We need variable geometry in membership. For
different subjects, there could be different groups of
participants, including both G-20 and non-G-20
countries. The views of small States, which comprise
the majority of Members of the United Nations, must
not be ignored. The meetings should be transparent.
There must be wide consultations so that those not
included in specific meetings can still table their views.
Depending on the subject, those consultations can take
place at the United Nations or at one of the other
international organizations.
Mindful of the need to widen participation,
British Prime Minister Gordon Brown invited regional
representatives, such as the Chair of the Association of
Southeast Asian Nations (ASEAN), the Chair of the
New Partnership for Africa’s Development and the
Chairperson of the African Union Commission, to the
G-20 leaders meeting in London in April 2009.
President Obama followed this precedent in Pittsburgh.
We in ASEAN certainly hope that the inclusion of the
ASEAN Chair will become the norm at future G-20
leaders meetings. It is right that the United Nations
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Secretary-General was included from the very
beginning.
A balance has to be struck between effectiveness
and inclusiveness. If a meeting is too big, it becomes
unwieldy and unworkable. If too small, it lacks
representation and legitimacy. As most Members of the
United Nations are not in the G-20, it is important for
us to have a say on the role the G-20 should play as an
agent of change in global governance. While we should
support the G-20 process, we should do so in a way
that ensures that our own interests as smaller States are
taken into account.
A great power shift is taking place in the world.
The formal establishment of the G-20 as a new
international institution last week marks a momentous
new beginning. History shows that power shifts never
occur smoothly. Without a good system of global
governance, we can be sure that the power shift in this
century will also be a troubled one. Putting that system
in place requires the collective effort of all of us. We
should not be lulled by the temporary easing of the
global economic crisis into thinking that the worst is
behind us and that we can return to our old ways.