G20 leaders map out new economic order at Pittsburgh summit

Bankers' bonuses and excessive national deficits targeted in package of reforms

Patrick Wintour and Andrew Clark

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• The Guardian, Saturday 26 September 2009
• Article history

G20 leaders, installing themselves as permanent stewards of the world economy for the first time, agreed yesterday on a tighter regime for bankers' bonuses and mapped out an economic order in which countries would be urged to co-operate to avoid building up excessive trade deficits or surpluses.

Gordon Brown hailed the result of the summit in the former steelmaking city of Pittsburgh as a victory for British thinking and persistence, insisting the economic regime would have an impact in restoring balanced growth.

The G20 leaders agreed a system whereby they would collectively agree broad objectives every year, and then make themselves subject to a form of peer review supervised by the IMF.

The aim will be to encourage over-consuming countries, such as the US, to scale back spending and prompt those countries hoarding big surpluses, such as China and Germany, to boost consumer demand.

Barack Obama described the agreement as the opening of a "new era of engagement". "We cannot tolerate the same old boom and bust economies of the past," he said at the close of the two-day summit. "We can't grow complacent. We can't wait for a crisis, to co-operate."

The G20 also agreed to continue with the current stimulus measures, saying they had been effective in preventing the recession tipping into a great depression. The IMF is now predicting 3% growth worldwide next year, but Brown said "the recovery is still very fragile".

He claimed the stimulus measures implemented so far had saved 10 million jobs worldwide and a further 15 million could be saved in the coming year.

In a potentially momentous move, the G20 also resolved to become a permanent body responsible for economic co-operation, meeting annually at the level of leaders, rather than just finance ministers. The move is a recognition that the more limited G8 was hopelessly antiquated, as it excluded the emerging economies of China, India, South Africa, Mexico and Brazil.

Such economies were only invited to the G8 as guests, but Brown and Obama wanted to shift emphasis to the G20, following the trailblazing summit in London in April chaired by Brown.

A final communique last night said: "We designate the G20 to be the main forum for our international economic co-operation." Canada and South Korea will host summits next year, followed by France in 2011.

Among the other agreed steps were a move to give developing countries a greater share of the votes at international finance institutions such as the IMF and the World Bank.

The G20 leaders also gave the IMF responsibility for investigating the possibility of a so-called "Tobin tax" on financial speculation to contribute towards the cost of future crises. Reasserting their promise to rebalance global capital flows, G20 leaders pledged to "manage the transition towards a more balanced pattern of global growth", adding: "A return to the excessive risk-taking prevalent in some countries before the crisis is not an option."

Under the new regime, the IMF will regularly analyse whether the economic policies of G20 countries are consistent with "sustainable and balanced trajectories for the global economy".

Critics have suggested that this is toothless, pointing out that there would be no explicit penalties for countries judged to be behaving irresponsibly, partly due to reservations about such oversight from China and Germany.

Brown was adamant that the IMF led peer-review mechanism could bring real results, even though similar initiatives have foundered in the past because of the IMF's powerlessness to impose its recommendations.

He said the system was a post-war first: "The old systems of economic co-operation are over. The world is coming together to do what it should have done many years ago, and we recommended many years ago to create a system that can prevent crises as well as deal with them when they occur."

He also claimed leaders had learned from the past year's crisis that it was in their collective self-interest to co-operate more closely, including on the need to boost domestic consumer demand.

Hu Jintao, the Chinese president, accepted the broad principles of closer co-operation, but said: "We have taken active steps to adjust the overseas and domestic demand structure."

He said the real problem that needed addressing remained "the yawning development gap" between the developed and emerging economies.

He called for more concrete steps to assist developing countries.

In the year-long battle over controls on bankers' bonuses European countries, led by France and Germany, failed to get their way in imposing a cap on multi-million pound pay packages for bankers.

The US opposed any limit on principle, seeing it as excessive meddling in Wall Street, and Britain argued any such move would be impossible to enforce.

Instead, the G20 countries opted for a host of measures requiring banks to defer many bonuses for at least three years and to distribute the bulk of top executives' remuneration in shares.

The assembled leaders did agree to ban guaranteed bonuses, which are often dangled to poach staff by one bank from another.

During a brief break from negotiations, Alistair Darling, the chancellor, said a cap would not have been "practical" and that the more detailed guidelines were a "far more rigorous, better approach".

But the measures represented a climbdown for Nicolas Sarkozy, the French president, who had threatened to walk out unless a "ceiling" on bankers' pay was established.

Outside the G20 convention centre, thousands of anti-globalisation demonstrators gathered for a second day, under the gaze of a huge contingent of riot police, a Swat team and armoured vehicles.

A gathering called the "peoples' march" trickled from suburban Pittsburgh towards the city centre to protest at issues including climate change, the war in Afghanistan and inadequate action by the G20 to tackle poverty. Demonstrators held up signs with slogans such as "G20 = death to capitalism" and "we say no to corporate greed".

But the march was authorised by police and there was little sign of a repetition of Thursday's disorder, when the authorities used teargas and high-pitched sonic weapons to disperse demonstrators.

Obama dismissed the protesters, describing them as "generic" opponents of capitalism. He pointed out that demonstrations were smaller and less violent than those at London's G20 summit in April, adding: "I fundamentally disagree with them that the free market is the source of all ills.