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 Third High‐Level Consultation on the G‐20 Mexico Summit Perspectives from Asia‐Pacific United Nations Conference Centre, Bangkok 23 May 2012 THE MEXICO SUMMIT OF THE G20: WHAT IS AT STAKE FOR ASIA AND THE PACIFIC? May 2012 * Background paper prepared by the ESCAP Secretariat for the High‐Level Consultation on the G‐20 Mexico Summit: Perspectives from Asia‐Pacific. It has been issued without formal editing. I. Introduction
The Group of Twenty (G20) is a group of 19 countries and the European Union.1 The Group
came first into existence as the G7 finance ministers invited counterparts from a number of
systemically important countries from regions around the world, as well as representative of the
EU, IMF and World Bank to a first ministerial meeting in Berlin in December 1999 to respond to
the 1997-99 financial crisis that affected developing countries in Asia and other regions. While
initially, the G20 was a forum of its members’ finance ministers and central bank governors, the
G20 Summit in which heads of state or government meet, was created as a response to the global
financial crisis in 2008 and in recognition that key emerging countries were not adequately
included in the core of global economic discussion and governance. The first summit was held in
Washington DC on November 2008 with the aim of responding to the global financial crisis that
initiated in the United States. Since, additional Summits have been held in London (April 2009),
Pittsburgh (September 2009), Toronto (June 2010), Seoul (November 2010) and Cannes
(November 2011). The next G20 Summit is will be held in Los Cobos, Mexico, in June 2012.
At the London summit, a consensus was reached about the urgency to stop the downward spiral
that the global economy found itself trapped in. While there was no actual coordination of
policies, all members of the G20 countries implemented similar expansionary fiscal and monetary
policies to accelerate the recovery from the crisis (Ahluwalia, 2011). With the recovery underway,
concerns about fiscal sustainability became increasingly important, to the extent that at the
Toronto summit in 2010, the developed countries of the group committed to “at least halve
deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016” (G20, 2010a), a
commitment that they reaffirmed at the Seoul summit. However, at the onset of the Cannes
Summit, the macroeconomic environment had changed significantly: having been through a
turbulent period, with volatile food and commodity prices, the world economy was in fact
teetering once again on the brink of another major downturn at the end of 2011. This turnaround
in economic outlook was largely triggered by premature fiscal austerity in advanced economies
which pulled the rug from under the nascent economic recovery. Thus, the worsening sovereign
debt crisis in Europe dominated the agenda of the Cannes Summit.
In an increasingly interdependent world, the risks emanating from the global economy – be they
booms and busts of commodity prices, financial crises, or recessionary conditions in the
advanced countries – affect every single country in the world. Keeping in mind that the growth
outlook of the Asia-Pacific region is so critically affected by the global economic environment,
there is clearly a lot at stake for Asia and the Pacific in the upcoming Mexico summit. This note
overviews recent developments in the international economy and examines the various challenges
faced by the region in the current context. It places the key items of the Mexico agenda within
current context and discusses how Asia-Pacific countries could benefit from the G20 process and
what advantageous positions could be considered.
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Members of the G20 are Argentina, Australia, Brazil, Canada, China, European Union, France, Germany, India,
Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and
the United States.
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II. The G20 Mexico Summit amid a weak global economic environment
World output growth slowed considerably in 2011. Following the rebound of growth in 2010
from the depth of the global financial crisis in 2009, the downward trend is expected to persist in
2012 as weaknesses continue to particularly plague the major developed economies: high
unemployment is hampering domestic demand and is negatively affecting the demand for credit,
financial turbulence is affecting the willingness of banks to supply credit and market concerns
about the sustainability of public finances is fuelling the drive towards greater austerity,
dampening economic activity further. Accommodative monetary policy in advanced economies is
becoming ineffective to boost economic activity in developed economies, yet its contribution to
increasing global liquidity is negatively affecting developing regions by contributing to volatile
capital flows and by fuelling rises in commodity prices.
The major developed economies and key markets for the Asia-Pacific region experienced a
slowdown in growth in 2011 (see Figure 1). While the economy of Japan suffered severely and
contracted as a result of the devastating earthquake and tsunami in March 2011, which caused a
record $210 billion in total damages, and the ensuing nuclear crisis, the decline in growth in the
euro zone was caused largely by the inability to deal decisively with the sovereign debt crisis. In
the United States, the inability to tackle persistent unemployment and political gridlock over
fiscal policy damaged the confidence of consumers, businesses and financial markets, thereby
dragging down growth prospects.
Figure 1 - Real GDP growth of major developed economies, 2006-2011
6
4
2
0
-2
-4
-6
-8
Japan
US
11Q4
11Q3
11Q2
11Q1
10Q4
10Q3
10Q2
10Q1
09Q4
09Q3
09Q2
09Q1
08Q4
08Q3
08Q2
08Q1
07Q4
07Q3
07Q2
07Q1
06Q4
06Q3
06Q2
06Q1
-10
EU
Source: ESCAP, based on data from CEIC Data Company Limited
Fiscal problems in developed economies have acted both as a cause and as an effect of the rapidly
cooling global economy. The problems stalking the global economy are multiple and
interconnected, however the shift to fiscal austerity in 2010 that was triggered by concerns with
public debt and large fiscal imbalances, extinguished the nascent global recovery. At the same
time efforts to tighten fiscal deficits did not always result in reductions in public debt. To the
contrary, in most developed economies, levels of public debt, measured relative to GDP,
continued to increase. In the United States, it reached 102.9% in 2011, compared to 76.1% in
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2008; the average level of euro zone debt reached 88.1% in 2011, significantly above the 70.2%
of 2008. The concerted contraction in public demand has aggravated the economic situation in
most economies and threatens to lead to a downward spiral of growth coupled with increasing
levels of public indebtedness.
The worsening of the sovereign debt crises contributed to turbulence in financial market. In
particular, the debt crisis aggravated weaknesses in the balance sheets of banks sitting on related
assets as concerns of debt default increased. As spreads on interest rates on public borrowing
increased for several European economies, concerns about debt sustainability intensified further.
However, rather than deal conclusively with the debt crisis by taking a committed stance,
coordinating policies between countries and providing a sufficiently endowed firewall, indecisive
policy action coupled with conflicting policy statements by members of the Euro zone did little to
quell anxiety. This contributed to the downward spiral of economic sentiment.
Europe is not out of the woods yet. Although spreads on sovereign bonds have declined from
heights seen in 2011 as financial markets digested the first selective default of a euro-zone
member, Greece, 13 years after the single European currency was adopted, sovereign stress
remains high in many countries. Stringent austerity and significant rollover funding pressures in
Spain and Italy are contributing to a worsening economic outlook, such that it is increasingly
likely that Spain may have some form of a bailout despite continued pressure to slash its deficit
from 8.5% to 5.3% in 2012, in what will be one of Europe's most stringent austerity programmes.
There is thus an urgent need for greater policy coordination among developed economies so that
those with fiscal space and those with current account surpluses do more to foster domestic
demand, thereby providing positive spillovers to weaker neighboring countries.
Accommodative monetary policy in developed economies was not effective in 2011. Responding
to the weak economic environment and the withdrawal of fiscal stimulus measures, with interest
rates close to zero, ‘unconventional measures’ continued to be applied in many developed
economies. As banks remain cautious to extend credit and with anemic demand for credit in most
developed economies, these measures were not though effective in fostering domestic demand.
The United States Federal Reserve (Fed) introduced a second round of quantitative easing (QE2)
in November 2010, purchasing $600 billion of Treasury securities by the end of the second
quarter of 2011. This continued to exert downward pressure on interest rates of long-term
securities. In September 2011, the Fed further announced that by the end of June 2012 it would
swap $400 billion worth of Treasury securities maturing within 3 years or less into Treasury
securities maturing within 6 to 30 years to push long-term bond yield down further (“Operation
Twist”). Across the Atlantic, the European Central Bank surprised markets by raising interest
rates in early and mid-2011, having left its main policy rate unchanged for more than a year and a
half following the recession. This policy was though reversed in November and December of
2011 in an attempt to revive the ailing European economy and ease credit conditions for troubled
euro zone banks. Moreover, despite the temporary rate increases, unconventional policy measures
remained active throughout 2011 as the ECB supported banks and the sovereign debt of crisisaffected countries, primarily by supplying liquidity though refinancing operations at various term
lengths, by purchasing covered bonds and by providing US dollar liquidity. So far, the ECB has
however resisted pressure to make large-scale purchases of government bonds in secondary
markets, as it did in 2011, to help prevent the spread of debt contagion in the euro area. However,
it widened in December its policy toolset to include the provision of unlimited 36-month credit
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for banks in the euro zone, a reduction of the rating threshold for certain asset-backed securities
(ABS) to increase the collateral availability of ECB loans, and a decrease in the reserve
requirement for commercial banks from 2% to 1% to free up collateral and support money market
activity.
Weak labour markets are damaging the prospects for recovery and may lead to increased trade
protectionism from developed economies. Persistent unemployment in developed economies is
hampering the global recovery: in the US, unemployment reached 8.2% in March 2012; in the
euro zone unemployment increased to 10.9%, its highest level in almost 15 years. Unemployment
remains high particularly among the young in many economies, exceeding 50% in Spain and
Greece. An increasing concern is the imposition of various trade restrictive measures by
developed countries to protect their economies in a climate of slow growth. It is important to
resist such protectionist tendencies and to conclude a successful Doha development round at the
World Trade Organization and thereby encourage freer flows of trade.
Challenges to the Asia-Pacific region
As highlighted by the Economic and Social Survey of Asia and the Pacific 2012 (ESCAP, 2012a),
the Asia-Pacific region continues to face the challenge of having to cope with a fragile global
environment. As the V-shaped recovery from the depths of the 2008-09 global financial crisis in
2010 proved to be short-lived and the world economy entered the second stage of crisis in 2011,
with a sharp deterioration in the global environment with the accentuation of euro zone debt crisis
and continued uncertain economic outlook of the US economy, growth of the Asia-Pacific region
declined in 2011. It is forecast to decline further in 2012 with a slackening demand for the
region’s exports in advanced economies and because of higher costs of capital. However, the
region will continue to remain the fastest growing globally and an anchor of stability in the world
economy as the region’s growth engines continue to grow at robust rates.2
The most critical risk to the region is a disorderly sovereign debt default in Europe, or the breakup of the euro common currency area. This would lead to a renewed global financial crisis and
could, in a worst case scenario, lead to a total export loss of $390 billion over 2012-13. Least
Developed Countries and Landlocked Developing Countries in the region would suffer the most
(ESCAP, 2012a). The loss of exports could lead to up to a 1.3 percentage point reduction in
growth in 2012 and would hamper poverty reduction such that by 2013 an additional 14 million
people could be trapped below the $1.25-a-day poverty line in the region.
At the same time, measures likely to be adopted by developed economies to kick-start their
growth may also be damaging to the Asia-Pacific region. For instance, the further injection of
liquidity to the financial system, as well as the interest rate differentials with the region would
result in the continuing attraction of asset markets and currencies in the region for foreign
investors. This would heighten the risk of asset market bubbles, exchange rate appreciation and
inflationary pressures. The imposition of various trade restrictive measures by developed
countries to protect their economies in a climate of slow growth would further damage the
outlook of Asia-Pacific countries.
2
More details on the most recent economic performance of the Asia-Pacific region and on the challenges that it faces
can be found in ESCAP (2012a).
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A further risk to the region would be a sharp surge in commodity prices. Many economies in the
region continue to grapple with the challenge of inflation which, while moderating somewhat in
recent months, still remains elevated in many economies. As global food prices remain close to
record levels, oil prices have been very volatile in recent months, mainly due to political tensions
in some of the major oil-producing economies. A deterioration of oil prices would put significant
upward pressure on prices in the region: for instance, an increase of $25 per barrel, due to
geopolitical tensions, for example, would add an estimated 1.3 percentage points to inflation in
developing Asia-Pacific economies. At the same time, current account balances and fiscal
balances would deteriorate, as most economies in the region are net importers of fuel, many of
which also grant extensive fuel price subsidies. For instance, ESCAP (2012a) estimates that a
25% increase in diesel and gasoline price subsidies would increase the fuel price subsidy bill in
the region up by an estimated $17 billion.
Fortunately, the Asia-Pacific region has policy space to mitigate a potential worsening of the
global economic environment. With relatively sound macroeconomic fundamentals and low
public debt to GDP ratios, Asia-Pacific developing economies could mount fiscal stimulus
programmes to cushion the blow of lower exports to developed countries. In fact, some
economies in the region already announced fiscal stimulus programmes in the second half of
2011, including Malaysia and the Philippines. The growing importance of intraregional trade
would cushion the impact further, as would resilience in some of the region’s increasingly
promising markets, including India, Indonesia and China where domestic demand remains strong.
At the same time, several countries also have the space to lower policy rates to relax monetary
policy to stimulate the economies; some economies such as India, Indonesia and Thailand have
already lowered interest rates to mitigate the impact of declining developed economies.
III. Key issues to be discussed in Los Cabos
By rallying economies to stimulate their economies through fiscal stimulus packages, the G20
proved effective when tackling urgent short-term issues at the nadir of the global financial crisis.
Since 2009, it has also developed an ambitious agenda to address important longer-term issues
affecting the global economy. However, although the G20 countries established a framework of
achieving strong, sustainable and balanced economic growth, the continued emphasis of
developed countries on the need to rebalance of global economy while ignoring robustness and
sustainability contributed to a worsening of the global environment. Nevertheless, as the G20 has
not reverted to “crisis-mode” despite the deterioration of the debt crisis in Europe and the
worsening global economic outlook, it is useful to review its longer-term agenda to understand
what is at stake for the Asia-Pacific region.
Economic stabilization and structural reforms as foundations for growth and employment
In recent years, imbalances in trade have increased dramatically. For instance, the US current
account, which has been running a deficit since 1992, reached a record $801 billion in 2006,
equivalent to 6% of its GDP, while the combined current account of Developing Asia and Japan,
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which has been in surplus since 1983, widened to a record high of $737 billion in 2008.3 While
the dramatic contraction in economic activity during the global financial crisis led to a decline in
these imbalances, they have since widened, with the deficit exceeding $470 billion in the US in
2011, and the surplus reaching $618 billion in Asia (see Figure 2). Through its current account
deficits, the US transferred $7.8 trillion to the rest of the world between 1992 and 2011. Such
liquidity, along with the low interest rates prevailing particularly during this latter part of this
period, boosted economic activity around the world. It also had major financial implications by
encouraging risk-taking and leverage in search of higher yields. This contributed to bubbles in
commodity and asset prices in many countries, notably in real estate.
Budget deficits and public debt widened significantly during the financial crisis, particularly in
developed economies. Fiscal deficits increased from 1.7% of GDP in 2008 to 9.6% in 2009 in
advanced G20 economies as expenditure accelerated, triggered for instance by higher social
expenditure such as unemployment benefits, and tax revenues declined. Deficits have since
declined to 7.2% in 2011. In emerging G20 economies the surplus of 0.3% turned to a deficit
equivalent to 4.8% of GDP in 2009, a notably weaker decline, and reached 2.2% in 2011. During
the same period, average levels of public debt increased in the advanced G20 economies from
60.6 % of GDP in 2007 to an estimated 110.3% in 2011. In emerging G20 economies, levels
increased by less than 1 percentage point to 37.0% in 2011 (IMF, 2012).
Figure 2 - Current account imbalances
800
600
400
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
0
1980
US$ billion
200
‐200
‐400
‐600
‐800
‐1000
Developing Asia and Japan Total
USA
Source: World Bank Development Indicators
Premature fiscal austerity derailed the nascent recovery. Triggered by concerns about the
sustainability of fiscal imbalances at the onset of the global recovery in 2010, developed
economies embarked upon fiscal austerity. This turned out to be premature as it derailed the
nascent recovery. It has also not alleviated the pressures on debt in advanced G20 economies.
Moreover, the inability of the European Union to deal with the debt crisis in several of its
member states, notably in Greece, worsened the sovereign debt crisis in a number of European
3
Asian countries are not the only ones that experienced large current account surpluses in the second half of the
2000s. In particular, a number of developed economies including Switzerland, Luxembourg, the Netherlands,
Sweden and Germany ran current account surpluses exceeding 5% of their GDP in the mid-2000s. In Germany the
surplus reached $248 billion in 2007, before declining somewhat to $195 billion in 2011.
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countries in the second half of 2011 by aggravating weaknesses in the balance sheets of banks
sitting on these assets, making the fiscal adjustment and efforts to repair financial sector balance
sheets even more challenging. It also exacerbated the volatility of capital flows to developing
regions, particularly the Asia-Pacific region, and contributed to further exchange rate volatility as
investors fled to safe havens.
There is agreement among the G20 countries that global imbalances, particularly in trade,
contributed to the crisis. Clearly, something should be done about them (Angeloni, 2011). At the
Pittsburgh summit, the G20 launched the ‘Framework for Strong, Sustainable and Balanced
Growth’, the backbone of which is the ‘Mutual Assessment Process’ (MAP), a process to
coordinate macroeconomic policies among the major countries and through which G20 members
aim to improve coordination critical for sustaining global growth and reassuring markets by
collectively evaluating how their policies fit together and work together to achieve their common
growth objectives over the medium run.
The G20 endorsed at the Seoul Summit an ‘enhanced MAP’ to gauge progress toward framework
goals. Following a first stage of the MAP during which the G20 shared information ahead of the
Toronto Summit on policy and macroeconomic frameworks, the G20 finance ministers and
central bank governors agreed during two meetings in 2011, upon indicative guidelines to assess
persistently large imbalances using a set of indicator, including public debt, fiscal deficits, and
the external balance composed of the trade balance and net investment income flows and
transfers. In the second stage of the MAP, the IMF presented at the Cannes Summit an in-depth
‘sustainability’ analysis of the nature of the imbalances, their root causes and impediments to
adjustment of seven systemically important G-20 countries that had ‘moderate’ or ‘large’
imbalances. These countries comprised China (for having high private savings and a large
external surplus), France (with a high external deficit and large public debt); Germany (with high
public debt and a significant external surplus); India (with high private savings and a large fiscal
deficit); Japan (with high public debt and private savings); the United States (with large fiscal
and external deficits) and the United Kingdom (with low private savings and high public debt).4
Institutional development of the MAP has been slow. Neither the “Framework for Strong,
Sustainable and Balanced Growth”, agreed to at the Pittsburgh in 2009, nor the MAP were
mentioned in the outcome document of the Cannes summit. Rather, the potential of a
deteriorating debt crisis dominated the original Summit agenda and altered leaders’ priorities.
Nevertheless, tackling trade imbalances will be on the agenda at the Mexico summit. Already, the
Mexico Presidency has announces that the G20 should reject protectionism that has arisen in
various developed and developing economies and that reducing tariff and non-tariff barriers
remains important to foster international trade and to correct commercial and financial
imbalances on the global level.
At the London summit in 2009, a consensus about the priority of stopping the downward spiral
through expansionary fiscal and monetary policies emerged. However, encouraged by the nascent
recovery, concerns about restoring fiscal sustainability moved to the forefront of the political
agenda such that, despite persistently high unemployment in many developed economies, the
developed countries of the G20 committed at the Toronto summit in 2010 to “at least halve
4
These sustainability assessments are available at http://www.imf.org/external/np/g20/map2011.htm.
8
deficits by 2013 and stabilize or reduce government debt-to-GDP ratios by 2016” (G20, 2010a).
This was reaffirmed in the Seoul Declaration. Ironically, although the G20 recognized at both
summits that a “synchronized fiscal adjustment across several major economies could adversely
impact the recovery”, it was argued that “failure to implement consolidation where necessary
would undermine confidence and hamper growth” and that a tighter fiscal stance would restore
confidence in the medium-term and encourage private demand to increase, thereby offsetting the
negative impact from shrinking public demand. Fiscal austerity, however, weakened growth in
developed economies, several of which have already entered into a double-dip recession, while
market sentiments regarding debt sustainability in several Euro zone countries continued to
deteriorate. To restore the momentum behind global growth and regain confidence in the global
economy, the Cannes summit thus produced an “Action Plan for Growth and Jobs” detailing a
strategy to address short-term vulnerabilities and strengthen medium-term foundations for
growth. This strategy included commitments to fiscal consolidation and commitments to boost
private demand in countries with current account surpluses, while strengthening the private sector
in countries with current account deficits. It also included structural reforms to raise growth and
enhance job creation across G-20 members and reforms to strengthen financial systems as well as
measures to promote trade, investment, and development (G20, 2011a).
The debt crisis will still feature on the Mexico Summit agenda as concerns about debt
sustainability in Europe persists. In December 2011, a G20 seminar discussed the current
challenges for global economic growth. When evaluating the impact of uneven growth, global
imbalances and the fiscal consolidation process on world economic prospects, participants noted
that it would be crucial for governments to work on generating the conditions that lead to a
sustainable recovery in private demand. In particular, fiscal policy should be calibrated to the
space countries have.
As highlighted by the Economic and Social Survey of Asia and the Pacific 2012 (ESCAP, 2012a),
the Asia-Pacific region has to draw the attention of the international community to the need for
undertaking reforms for reviving growth and job creation in the advanced countries. By failing to
implement the continued fiscal tightening that is taking place in many developed economies in a
coordinated manner, and by failing to address the ongoing unemployment crisis, premature fiscal
policy has derailed the global economic recovery and has not prevented sovereign debt distress
and financial sector fragility from escalating. Austerity has to some extent therefore been selfdefeating. Moreover, the institutional development of the MAP has been held up by a dichotomy
in expectations of developed and developing countries. Thus, while industrial countries view
global imbalances through the lens of trade misalignments between surplus and deficit countries,
developing countries see them through the lens of development deficits between the North and
the South. Whereas developing countries would view the MAP as a mechanism to address
development challenges, including therefore the access to funds through multilateral development
banks, developed economies view it as a mechanism to balance trade. These contrasting views
underpin the underlying growth agenda of developing countries (Kabir, 2011). For developing
countries, the growth agenda should first and foremost address their development deficit. In
particular, they need to operate trade surpluses to finance their long-term investment expenditure.
ESCAP (2012a) also emphasizes that the Asia-Pacific region should advocate the return to a
countercyclical policy stance in several countries. While the United States, Germany, Japan and
other developed economies should postpone austerity by resuming their countercyclical stance
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and by letting automatic stabilizers operate, countries with current account surpluses should do
more to strengthen domestic demand. Clearly, a number of developed countries need to address
their fiscal imbalances, particularly those emanating from structural deficits. However, several
advanced G20 countries still have fiscal space to support their economies through short-term
stabilization measures, especially those that face low financing costs. By combining such actions
with a credible medium term programme of fiscal consolidation, more robust GDP and
employment growth would eventually boost government revenues and facilitate a swifter and less
harmful budget deficit reduction in these countries. Such an approach would provide positive
spillovers to the global economy and would enable developing regions to strengthen their
development.
The Asia-Pacific region must urge G20 leaders to resist succumbing to protect their domestic
markets from problems that are essentially unrelated to trade. Since the onset of the current
global economic and financial crisis in 2008, the imposition of protective measures in developed
and developing countries has increased, with the recent increase in protectionist measures by the
G20 already having led to $13 billion in export losses for the Asia-Pacific region (ESCAP,
2012a). Such restrictions have adverse impacts on the export-led economies in the region,
especially on LDCs, LLDCs, and SIDS, which are the most vulnerable to the looming threat of
protectionism. The resolve against protectionism weakened somewhat after the Seoul G20
Summit, notwithstanding the reaffirmation of leaders at the Cannes Summit to “standstill
commitments until the end of 2013, as agreed in Toronto, […and to…] roll back any new
protectionist measure that may have risen” (G20, 2011a). The G20 needs to reaffirm their
commitment to free trade, but must also enhance market access and aid-for-trade for LDCs by
pushing more forcibly for a conclusion of the Doha Development Agenda.
Strengthening the financial system and fostering financial inclusion
Vulnerabilities in financial systems played a key role in the global financial crisis and in recent
episodes of financial volatility. To avoid a repetition of the problems that led to the crisis, an
adequate regulatory and supervisory framework of the financial system must be established. At
the same time, a gradual recovery in the availability of credit is needed to foster growth. In
developed economies, however, financial turbulence is affecting the willingness of banks to
supply credit; in many developing countries, large proportions of the population are excluded
from the financial system. Fostering financial inclusion will therefore form a critical factor in
strengthening domestic demand in developing economies to rebalance the global economy.
External financing to developing countries has been very volatile. Such financing usually consists
of FDI inflows and workers’ remittances, which accounted, on average, for around three-quarters
of the total private inflows to developing countries over the period 2000-07. Over this period,
portfolio equity inflows and short-term debt inflows also grew rapidly, from $13.5 billion and $3
billion in 2000 to $139 billion and $203 billion in 2007, respectively. As short-term debt flows
exhibit higher volatility than medium- and long-term flows, particularly during crises, these flows
are rather unstable sources of financing (ARTNet , 2010). For instance, during the global
financial crisis, short-term debt fell more sharply in developing countries than other flows. In
East Asia and the Pacific, net short-term debt inflows of $52 billion in 2007 turned to net
outflows of $11.4 billion in 2008. In 2010, short-term debt inflows reached $141.5 billion. In
South Asia the dynamics were similar, with net outflows of $7.3 billion in 2008 compared to net
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inflows of $35 billion in 2007. In 2010, net inflows reached almost $40 billion. Although the
World Bank (2012) has argued that most countries in the Asia-Pacific region do not have
significant external financing needs, due mainly to current account surpluses or relatively small
deficits, external financing needs are projected to exceed 10% of GDP in 2012 for several
countries in the region, including for instance Vanuatu, Vietnam and Kyrgyzstan. Moreover,
while the region as a whole may not be particularly vulnerable to a freezing of external finance,
this would not be the case for the lower income and island economies.
Only a small proportion of the population has access to financial services across most developing
countries of Asia and the Pacific. While many have access to microfinance, only in a handful of
countries do more than half of all households have access to formal financial services (Figure 3).
The vast majority of the population, especially the poor, is typically excluded from core financial
services – savings, credit, insurance and remittances. Moreover, if the poor are to benefit from
financial services, they not only need access to them, but also have to use them: following an
initiative by the Reserve Bank of India to bring the underprivileged into the banking system in
2006, 28 million people had “no-frills” basic savings accounts with limited transactions facilities
that allowed them to keep zero, or very low, balances by 2008. However, less than 11% of these
accounts were active (Kochhar, 2009).
Figure 3 - Access to formal financial services (percentage of households)
Source: ESCAP (2010b) Financing an inclusive and green future
In Asia, the cost of credit is an important factor determining financial inclusion. The targeting of
credit to, for example, state-owned enterprises is limiting credit availability to the private sector,
while high interest rates are crowding out people. Other factors also drive exclusion from
financial services: some people are simply unaware of what is available, while others may find
the services on offer inappropriate. Banks may be concerned about the potential profitability of
poorer customers, the risks they are thought to present, and the costs of dealing with a larger
number of small transactions. Also, while basic consumer protection requirement is on the books
in most Asian countries, enforcement mechanisms are weaker than legislative requirements and
institutional structures are weak. For instance, less than half of the reporting financial regulators
who were responsible for some aspect of financial consumer protection had a dedicated unit to
work on these issues (Consultative Group to Assist the Poor, 2010).
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The G20 has since played an instrumental role in the development of stronger rules, more
effective supervision and more recently, resolution schemes for large, cross-border financial
institutions. Given the financial origins of the global crisis of 2008-2009, strengthening of the
financial sector has been a core objective of the G20 since its first summit, which recognized that
financial markets are global in scope and that “international cooperation among regulators and
the strengthening of international standards (…) and their consistent implementation” were
necessary (G20, 2008). Thus, the G20 endorsed the “Basel III” new bank capital and liquidity
framework in 2010 and committed to fully implement it by 2019; this framework is aimed at
reducing banks’ incentives to take excessive risks by raising the quality, quantity and
international consistency of bank capital and liquidity, constraining the build-up of leverage and
maturity mismatches, and introducing capital buffers above the minimum requirements that can
be drawn upon in bad times (G20, 2010b).
At the 2011 Cannes summit, the G20 agreed to further enhance the status of the Financial
Stability Board (FSB) as a legal entity and increase its funding. In 2009, the Financial Stability
Forum was broadened to include all the G20 countries and renamed as the FSB, with a mandate
to address vulnerabilities affecting the financial system and promote coordination among
authorities responsible for financial stability. The FSB, which is the key body responsible for the
G20’s financial sector reform agenda, released a list of global systematically important financial
institutions (G-SIFIs) whose failure would present a systemic risk to the global economy, and
proposed an additional capital requirement ranging between 1% and 2.5% for these banks on top
of the new Basel III rules. It also proposed policy measures to resolve failing SIFIs without
systemic disruption and without exposing the taxpayer to the risk of loss, which were endorsed at
the Cannes Summit; the G20 has also endorsed the FSB’s recommendation to strengthen
regulation and oversight of the “shadow banking” system, that is, bank-like activities conducted
outside of the regulated banking system. Reform of over-the-counter (OTC) derivatives markets,
which has been another priority for the G20 since the Pittsburgh summit in 2009, has also
progressed such that standardized OTC derivate contracts are to be traded on exchanges or
electronic trading platforms and centrally cleared by the end of 2012. At the Cannes summit, the
G20 further endorsed recommendations of the International Organization of Securities
Commissions (IOSCO) to address risks posed by high-frequency trading. Together with the
Global Forum on Transparency and Exchange of Information for Tax Purposes and the Financial
Action Task Force, the G20 has also supported comprehensive tax information exchange and
efforts to tackle non-cooperative jurisdictions, money laundering and terrorist financing.
No agreement was reached at the Cannes Summit on the possibility of a global financial
transactions tax. The tax has been discussed in various contexts, such as moderating short-term
capital flow volatility and raising additional revenues for development purposes. Its direct linkage
with the G20 agenda has been in the context of exploring how the financial sector could make a
fair and substantial contribution toward paying for any burden associated with government
interventions to repair the banking system. A 2010 IMF report for the G20 proposed taxes on
specific financial transactions as one of the options, but no action was taken further.
The Mexican Presidency’s priorities are to strengthen the FSB and continue to follow its
recommendations to strike a balance between financial stability and economic growth. At a
seminar organized by the Mexican authorities in late 2011, discussions centered on how to avoid
12
that financial market regulations inhibit economic growth. In particular, concerns were raised that
continued deleveraging by financial institutions could become a drag on the recovery. However,
indications are that Mexico is not looking for a new regulatory framework, but instead aiming to
strengthen the systems of monitoring and evaluation, i.e. the FSB. Indeed, the mention of real
measures of regulation, such as imposing a financial transactions tax, is notably absent on the
summit’s agenda. However, the Presidency has highlighted the need to design financial
regulation taking into account the characteristics of financial systems in emerging markets and
developing economies, to avoid regulatory measures that inhibit their development.
The G20 has recognized that financial inclusion is an important component to foster development.
At its 2009 summit, the G20 committed to improving access to financial services for the poor. It
also formed an expert group to scale up the successful models of small and medium sized
enterprise (SME) financing and identify lessons learned on innovative approaches to providing
financial services for the poor, promote successful regulatory and policy approaches, and
elaborate standards on financial access, financial literacy, and consumer protection. At the G20
Summit in Toronto, the G20 endorsed a set of Principles for Innovative Financial Inclusion
which highlight the need for governments’ commitment, the use of broad range of services and
service providers, innovation, consumer protection, financial literacy and capability to expand
financial inclusion. With the launch of the Seoul Development Consensus at the 2010 summit,
the G20 recognized financial inclusion as a main pillar of the global development agenda, and an
important component of financial sector reform. The Global Partnership for Financial Inclusion
(GPFI) was established as an inclusive platform for all G20 countries, interested non-G20
counties and relevant stakeholders for peer learning, knowledge sharing, policy advocacy and
coordination. It is focused on three areas, including the G20 financial inclusion principles and
Standard Setting Bodies (SSB), SME finance and financial inclusion data and target setting. The
G20 is encouraging SSBs such as the Basel Committee to pay more attention to financial
inclusion opportunities and integrate them in their overall works. It is also engaging experts to
leverage the “core set” of indicators on financial inclusion and develop additional financial
inclusion dimensions not yet covered on a consistent, harmonized basis.
Financial inclusion will feature prominently on the agenda of the Mexico summit as its links with
the ongoing financial sector reform agenda are made clear. In September 2011, Mexico launched
its National Council on Financial Inclusion, to put in place a national strategy for financial
inclusion and establish mechanisms to ensure that the strategy is implemented broadly. Mexico is
encouraging other G20/GPFI members and other countries to create similar national coordination
councils.
The Asia-Pacific region must emphasize that tighter financial sector regulation has implications
for financial flows to developing countries and is likely to limit access to financing. Therefore, an
impact assessment must be conducted on how these reforms, including Basel III, will affect poor
developing countries that are highly dependent on external financing and whose domestic
financial markets are at an early stage of development. In particular, the “one-size-fits-all”
approach of Basel III fails to recognize consequences that could disadvantage banks in the
developing world, where low institutional capacities often makes implementation of modern
financial regulatory and supervisory functions difficult.
13
Since the financial crises in the late 1990s, several emerging countries have increased their
capital ratios and implemented macro-prudential measures. Nevertheless, challenges remain in
stabilizing nascent financial systems in the face of shocks, such as volatile flows created by
international shadow banks which escape regulation. The Basel III regulatory stance could be a
problem for emerging markets, especially as their financial systems, which are bank dominated
and already have strong regulation and taxes, are yet to reach scale (Goyal, 2012). Emerging
markets are at the point of creating sound banking systems, widening inclusion in the formal
financial system, and creating and managing a broader set of financial markets such as corporate
bond markets and basic currency derivatives. Thus development of the domestic financial market
and various instruments are the more relevant issues for most countries in the region.
The G20 committed to ensuring the availability of at least $250 billion to support trade finance at
the London summit in 2009. Although trade finance should not be affected by crises in financial
hubs, global trade finance in the fourth quarter of 2008 was down 39% compared to a year earlier,
with countries including China, India and Thailand experiencing a double-digit decline in
availability of trade finance during the same period (ARTNet, 2009). In response, a number of
initiatives emerged from the Asia-Pacific region, including the ADB’s Trade Finance Programme,
which provides financing and guarantees through over 200 banks for up to three years and
supported 783 trade transactions worth $2.76 billion in 2010. With European banks, which
traditionally finance approximately one-third of world trade, building up their capital bases to
meet Basel III requirements, less credit will be available in Asia, making regional facilities even
more important in the near future.
The Asia-Pacific region must draw attention to the inadequate representation of a larger number
of developing countries in the FSB. There is a discussion on forming FSB regional consultative
groups to involve non-members, but concrete plans are yet to follow. Thus, currently low-income
countries have no structured means of following the debates of its committees and working
groups and therefore lack influence over issues of key interest to them. The Asia-Pacific region
should therefore urge the FSB secretariat to appoint in the meantime a senior member to conduct
a full-time liaison with low-income countries and to ensure that their issues remain on the FSB
agenda (Bhinda and Martin, 2011).
Building upon a wide range of country experiences, the Asia-Pacific region could provide
valuable contributions to G20 initiatives on financial inclusion. Clearly, there is an urgent need to
provide the opportunities and security of a well functioning financial system to the millions of
‘unbanked’. Tackling barriers to access requires innovation in bringing financial services to the
poor, investment in human resources and technology within the banking system. Different types
of financial institutions e.g. commercial banks, microfinance institutions, development financial
institutions, post offices and other public networks have a role to play to serve the poor, building
upon positive and negative country experiences from the region. Public policies and regulations
also have a critical role to play in creating an inclusive financial system which is efficient, fair
and secure, particularly as experiences suggest that left to itself, the financial system is unlikely
to champion financial inclusion. In this view, the region could draw upon its experience of
commercial banks entering microfinance (such as in India), using post offices (such as in China
and several Central Asian countries) and using mobile phones (such as in Philippines and
Cambodia) for banking services. Important lessons can also be learnt in creating national credit
14
bureaus that centralize credit-related information to enable low-income people with good credit
history to obtain loans, as has been done in Thailand, among others.
International financial architecture
The current crisis has challenged the conventional wisdom that advanced countries’ financial
systems are stable, that their markets are liquid and deep and that their policymakers are able to
address crises in a timely and decisive way. Indeed, the global financial crisis has made clear the
need to reform the obvious deficiencies in the international monetary system (IMS), which
comprises the set or rules, conventions and institutions that govern the conduct of monetary
policies, their coordination, exchange rates and the provision of international liquidity. The crisis
has highlighted the need to revise multilateral surveillance to give greater consideration to
international spillovers of national economic policies. It has also poignantly illustrated the
necessity to strengthen vigilance over risks emanating from the major developed countries,
particularly the reserve currency-issuing ones.
A core function of the IMS lies in the provision of international liquidity. However, the concept
of this, as well as its relationship with the key problems of the international economy, is poorly
understood (Palais Royale Initiative, 2011). In part, this is due to the absence of commonly
agreed definitions and measures of global liquidity, and the fact that its provision is influenced by
the monetary policy stances in the countries whose currency is used as international reserve
currencies and is amplified by the global financial system.
Current international institutions are unable to regulate and stabilize the volume of international
liquidity. Such liquidity is transmitted to other economies through capital flows, exchange rate
pressures, and impacts on international commodity markets, as this ultimately depends on
domestic considerations in a handful of countries. Moreover, such liquidity can change quickly in
response to shifting perceptions about global economic prospects, as witnessed by FDI flows to
the region (see Figure 4), particularly from the developed countries, which have been the
traditional FDI sources to the region.
Figure 4 - Percentage change of FDI inflows in selected Asian economies, 2009/2008, 2010/2009 and 2011/2010
India
Russian Federation
Indonesia
Kazakhstan
2008-2009
China
2009-2010
Republic of Korea
2010-2011
Malaysia
Thailand
Viet Nam
Pakistan
-75%
-50%
-25%
0%
25%
50%
75%
100%
Source: ESCAP calculations based on data from CEIC Data Company Limited (2012).
15
The IMS has created several mechanisms to deal with the volatility of capital flows. In 2009, for
instance, the IMF created the Flexible Credit Line (FCL), “to meet the increased demand for
crisis-prevention and crisis-mitigation lending from countries with robust policy frameworks and
very strong track records in economic performance” (IMF, 2011a). The IMF created the
Precautionary Credit Line (PCL) “to meet the needs of countries that, despite having sound
policies and fundamentals, have some remaining vulnerabilities that preclude them from using
the Flexible Credit Line (FCL)” (IMF, 2011b). This was replaced in 2011 by the Precautionary
and Liquidity Line (PLL), “to allow…the Fund to deal with rapidly evolving crises, and…to
enhance the effectiveness of the toolkit by allowing qualifying members to get financing in a
wider range of situations, enabling them to benefit from the positive signalling effect linked with
PLL qualification” (IMF, 2011d). The Rapid Financing Instrument (RFI) was also established in
late 2011 to replace existing emergency assistance instruments. Utilization of these facilities has,
however, been limited: neither the RFI nor the PLL have been accessed to date; only Columbia,
Mexico and Poland accessed the FCL and only the Former Yugoslav Republic of Macedonia
accessed the PCL. For one, the relatively strict conditionality of the facilities limited their
attractiveness. Moreover, “the low subscription to these instruments [the FCL and PCL] reflects a
preference for self-insurance, remaining perceived stigma linked to the use of Fund instruments,
and residual concerns over the perceived lack of instrument flexibility” (IMF, 2011c).
Economies in the region prefer to use foreign exchange reserves to protect against sudden capital
outflows and the impact upon exchange rates. In 2011, official international reserves of the AsiaPacific region exceeded $ 6 trillion. However, as the Economic and Social Survey of Asia and the
Pacific 2012 (ESCAP, 2012a) points out, in a number of cases, reserves are not necessarily
adequate to protect exchange rates, and thus macroeconomic stability, in the case of substantial
capital outflows. Moreover, other than the efficacy of using reserves, an ever-present and
increasingly important issue is the cost of holding reserves, given the declining value of the dollar
and the euro as well as the interest rate differential between holding European or United States
bonds compared to the comparatively high domestic interest rates which have to be paid to mop
up through sterilization operations the resulting local currency injection. Recognizing this,
several countries in the region have diversified some of their reserves into higher yielding but
potentially higher-risk investment classes. Ultimately, however, the pooling of regional funds to
provide liquidity, boost trade financing and increase the amount of funds available for
infrastructure development would be more beneficial for the whole region as it would reduce the
amount total amount that would be held.
The problem of large capital inflows, has not received much consideration on the G20 agenda.
While the above-mentioned facilities of the IMS deal with a sudden tightening of capital flows by
providing emergency international liquidity, the issue of large inflow is particularly important as
these can cause currency appreciation, rises in commodity prices and can foster speculative
bubbles. Addressing these problems without tackling its main cause – volatile capital inflows –
will not provide a long-term solution. Given the disadvantages of using reserves accumulation as
the main instrument to deal with capital inflows, a number of countries have implemented at the
national level the management of capital flows through various forms of capital controls, in line
with the recommendations of ESCAP over a number of years (ESCAP, 2010a, 2011b). Indeed,
the IMF announced in 2011 the development of a framework to help countries manage large
capital inflows (IMF, 2011e). This marked a significant shift from its previous stance which
16
insisted on maintaining unrestricted flows of money across borders as it led bailouts during crises
in Latin America and Asia in the 1990s. Yet, this framework aroused opposition from some
developing nations, fearing that it would restrict the range of policy responses available to them.
Thus, several developing countries “strongly oppose any [such] guidelines or ‘codes of conduct’
that establish, standardize, prioritize or restrict the range of policy responses of the member
countries that are facing large surges in volatile capital inflows” (Bloomberg, 2011).
At the London, Toronto, Seoul and Cannes summits, the leaders of the G20 declared to their goal
of promoting a “more stable and resilient international monetary system”. At the Toronto
summit, they emphasized the “need for national, regional and international efforts to deal with
capital flow volatility, financial fragility, and prevent crisis contagion”. In addition, they tasked
their finance ministers and central bank governors “to prepare policy options, based on sound
incentives, to strengthen global financial safety nets for (…) consideration at the Seoul summit”,
and called on the IMF “to make rapid progress in reviewing its lending instruments, with a view
to further reforming them as appropriate” and to enhance its IMF surveillance “to focus on
systemic risks and vulnerabilities wherever they may lie” (G20, 2010a). At the Seoul summit, the
G20 leaders “agreed to explore ways to further improve the international monetary system to
ensure systemic stability in the global economy and asked the IMF to deepen its work on all
aspects of the international monetary system, including capital flow volatility” (G20, 2010b). At
the Cannes Summit, the G20 leaders committed to “an appropriate transition towards an IMS
which better reflects the increased weight of emerging market economies”. They declared that
additional resources would be made available to the IMF and that efforts to further strengthen
global financial safety nets would be strengthened. They also asked their finance ministers at the
Cannes Summit “to work on deploying a range of various options including bilateral
contributions to the IMF, SDRs, and voluntary contributions to an IMF special structure such as
an administered account” for the next summit (G20, 2011b).
Reform of the IMS will not be a priority for the Mexico Summit. Nevertheless, the list of
potential issues to address remains long. The issue of providing further resources to the IMF, for
instance, has proven to be a divisive issue, particularly given the contentious focus on the
European crisis. While the EU executive has expressed the desire that the 'strong members' of the
IMF boost its funds, arguing that “no region remains unaffected by possible developments" in the
euro crisis (Agence France-Press, 2012), no decision was reached at the February 2012 meeting
of finance ministers and central bank governors in Mexico to boost the IMF by some $600 billion
in new resources. Rather, most finance chiefs of the G20 expressed the necessity for the euro
zone to first boost its own bailout funds.
ESCAP (2012a) argues that the Asia-Pacific region will need to exert its influence in the G20 for
building a more development friendly international financial architecture. This will include
highlighting that the international financial architecture needs to address the fact that certain
countries, notably the US, are able to finance persistent trade deficits by issuing their currency
which acts as a reserve currency. At the same time, it needs to address that countries with
persistent trade surpluses have little incentive to reduce them - to the contrary, the ability to
accumulate, and hoard, foreign exchange reserves has, at least since the Asian crisis of 19971998, seemed an attractive mechanism of self-insurance against external shocks.
17
The Asia-Pacific region should continue to advocate the establishment of global reserve currency.
A critical component in the reform of the existing IMS towards is establishing a special drawing
rights based global reserve currency with a stable value, rule-based issuance and manageable
supply that could be issued counter-cyclically to achieve the objective of safeguarding global
economic and financial stability. The proposal of the Stiglitz Report to create a new global
monetary framework with a global issuer could serve as a basis for discussions on the global
financial architecture.5 Until the new framework is implemented, the Asia-Pacific region would
be able to foster a major program of investing in itself, particularly considering the combined $6
trillion of foreign exchange reserves that the region holds. At the same time, the region needs to
consider its stance on accumulating reserves. The recent diversification of foreign currency
reserves that has been observed in some countries is a positive development.
ESCAP (2012a) also suggests that the Asia-Pacific members of the G20 should continue to exert
pressure to introduce a global financial transaction tax. This would moderate short-term capital
flows and could raise resources for financing development and to accelerate progress towards
international development goals, such as the Millennium Development Goals, alleviating further
the need for reserves. According to a recent report, “even a small tax of 10 basis points on
equities and two basis points on bonds would yield about $48 billion on a G20-wide basis, or $9
billion if it were confined to larger European economies … Other FTT proposals offer
substantially larger estimates, in the $100 billion to $250 billion range, especially if derivatives
are included” (Gates, 2011).
The Asia-Pacific region should advocate an increase in the flexibility of IFI lending facilities.
The region should call for an expansion of the coverage of these facilities to developing countries
that may not meet all the conditionality requirements. In the meantime, the region should
continue developing the regional crisis prevention and response facility by increasing the scope
and coverage of the Chiang Mai Initiative Multilateralization (CMIM), as discussed in ESCAP
(2011a). This is especially important as the European experience and the difficulty at containing
the fallout of the Greek debt crisis have highlighted the need to strengthen large firewalls at the
regional and international level. Indeed, 13 East Asian countries (Japan, China, South Korea and
the 10 ASEAN members) have agreed in March 2012 to double the size of the CMIM to $240
billion to cope with a potential financial crisis that could affect the region. However, to make the
CMIM more effective, coverage should be extended to include other systemically important
countries in the region, including Australia, India and the Russian Federation.
Enhancing food security and addressing commodity price volatility
Commodity markets have endured a rollercoaster ride in the past 5 years. In a special chapter
devoted to high and volatile commodity prices, the Economic and Social Survey of Asia and the
Pacific 2012 (ESCAP, 2012a) shows how after having reached record highs in 2007, food prices
declined in 2008 in the midst of the global financial crisis, only to accelerate once again to a new
high in early 2011 (see Figure 5). ESCAP argues that it would be a mistake, however, to consider
the new high plateau reached recently as a sign of quieter times ahead. Rather, there is
5
Report of the Experts of the President of the United Nations General Assembly on Reform of the International
Monetary and Financial System, September 21, 2009, United Nations, New York.
18
considerable risk that prices will continue to increase once the Euro zone debt crisis is solved and
when the recovery of the global economy gains traction.
High inflation and food prices remain a major challenge across much of the Asia-Pacific region.
These are threatening to slowdown economic growth, poverty reduction, achievement of MDGs
and inclusive sustainable development. The latest spike in food prices in the second half of 2010
kept additional 19.4 million people in poverty in Asia–Pacific (ESCAP, 2011a). Food price rises
hurt particularly the poor who are net buyers of food and leave them less income to spend on
other priorities including health and education. In face of such damaging effects, curbing
commodity price volatility has been at the top of the political agenda.
An unprecedented boom has taken place in commodity prices. While the ups and downs of
commodity prices in the past five years have drawn general attention to the volatility of
commodity markets, the overall boom in commodity prices, which has broken the historical
downward trend in prices since 2000, has been somewhat unnoticed. In contrast to short-term
price rises, which can have many causes, the longer-term increasing trend has fewer, and more
basic, explanations. One factor is economic growth, which increases the demand for a broad
range of primary products for production, trade and transport. The commodity boom over the past
decade coincided with a period of very fast growth. Globally, between 2000 and 2010, per capita
GDP increased by an annual average of 2.3%, one percentage point faster than in the previous
decade. This growth has been driven mainly by manufacturing in Asia which has boosted global
demand for primary products and fuelled economic growth of a number of low-income countries
that depend heavily on commodity exports.
Figure 5 - Prices of selected food commodities, 1997-2011
400
Monthly indices based on current US dollars,
(2000=100)
350
300
250
200
150
100
50
1997M01
1999M01
Fats & Oils
2001M01
2003M01
2005M01
Grains
2007M01
2009M01
2011M01
Other Food
Source: ESCAP based on data from World Bank Development Indicators (accessed 27 September 2011).
The boom in commodities has ended a secular decline in commodity terms of trade. Net
exporters of commodity are enjoying improvements in their terms of trade while many lowincome resource-scarce countries are diminishing terms of trade as the price of their imports
increases and the international price of their manufacturing exports decreases (ESCAP, 2012a).
The countries that experienced the highest increase in their terms of trade over the past decade
were all major exporters of energy resources or minerals. On the other hand, countries whose
19
main exports are manufactures have seen their terms of trade deteriorate. This boom in
commodity is not unprecedented: the rise of Western Europe and its offshoots in the midst of the
first period of globalization in the 18th Century also created the conditions to a commodity price
boom. Thus, the industrial revolution increased the growth rates in the rich core countries which
specialized in manufactures much faster than it did in the poor periphery countries which
specialized in primary products. Both groups of countries gained from the trade boom but the
periphery missed the big push given by industrialization and fell behind, giving rise to the great
income divergence between the rich countries and the poor periphery much of which persists to
this day.
The same factors that contributed to the increasing divergence during the 19th century are at play
today. The Economic and Social Survey of Asia and the Pacific 2012 (ESCAP, 2012a) argues
however, that this time the dynamics are more complex as the impact of the commodity boom on
the growth trajectory of these countries depends upon the extent that price shifts for both
manufactures and commodities will alter incentives within each economy either towards or away
from increasing diversification and modernization. The declining terms of trade of manufactures
creates incentives for countries that are catching-up and aspiring to boost production and trade.
Catching-up countries can also expand even faster towards those new products and services that
are subject to less competition and can demand higher returns. Commodity-boom countries, on
the other hand, have the incentive to further specialize in primary products. In addition to these
structural factors, low income countries face the risk that high food prices will hit hardest at their
most vulnerable people and increase hunger and poverty, with social and economic impacts that
are severe and long-lasting.
Food security and commodity price volatility have been at the top of G20 agenda. In 2011, the
goal of reducing commodity price volatility was included among the priorities of the French
Presidency of the G20. However, as the Cannes Summit focused upon the Euro debt crisis, scant
attention was paid to the issue of volatile commodity prices. Prior to the Cannes Summit, in June
2011, the agriculture ministers of the G20 had committed to five main objectives of an action
plan on food price volatility and agriculture: “(i) improve agricultural production and
productivity both in the short and long term in order to respond to a growing demand for
agricultural commodities; (ii) increase market information and transparency in order to better
anchor expectations from governments and economic operators; (iii) strengthen international
policy coordination in order to enhance confidence in international markets and to prevent and
respond to food market crises more efficiently; (iv) improve and develop risk management tools
for governments, firms and farmers in order to build capacity to manage and mitigate the risks
associated with food price volatility, in particular in the poorest countries; (v) improve the
functioning of agricultural commodities’ derivatives markets” (G20, 2011d). A key element of
the action plan was the establishment of a new Agricultural Market Information System (AMIS)
to try to increase the efficiency of world wheat, maize, rice and soybean markets and reduce price
volatility.
The Mexican Presidency will focus on food security as one of the three priorities for the
Development Working Group (DWG) agenda.6 The DWG meeting held in Seoul in March 2012
reviewed progress made on the expected deliverables during the Mexican Presidency of the G20,
6
The other two priorities are infrastructure and inclusive green growth.
20
in particular on the three core development pillars. The DWG agreed on the implementation and
follow-up of the commitments set out in the Cannes Declaration, the Action Plan on Food Price
Volatility and Agriculture and the Multi-Year Action Plan on Food Security. On food security,
important progress was made in the preparation of the Agricultural Productivity Report that the
international organizations are jointly drafting (agencies involved: Bioversity, CGIAR, FAO,
IFAD, IFPRI, ICA, OECD, UNCTAD, WFP, World Bank, WTO). The Report will be a key
input for the discussions in the Agriculture Vice-Ministers Meetings in Mexico City in April and
May, as well as for the third DWG meeting in Los Cabos. Progress was also made in the
implementation of previous commitments established in the DWG, mainly the Tropical
Agriculture Platform, the Agriculture Pull Mechanisms, the Scaling Up Nutrition Movement, and
efforts to establish pilot projects for emergency humanitarian food reserves.
The G20 is concerned about the effects of commodity price volatility on growth. In February
2012, the Finance Ministers and Central Bank Governors agreed to build on previous work by the
G20 and to draw inputs from the international organizations to produce a report on the effects of
commodity price volatility on economic growth. This report should assess policy options that
would reduce excessive commodity price volatility or otherwise mitigate the effects on growth
and on the wellbeing of vulnerable sections of the population, or seize opportunities for economic
growth that commodity markets present. The meeting reaffirmed its commitments to improve the
Joint Organisations Data Initiative (JODI) Oil database and to work on applying the same
principles to JODI-Gas. It also reaffirmed to facilitate energy market producer and consumer
dialogue, which was also one of the policy recommendations proposed by ESCAP in 2011; to
improve transparency on gas and coal markets, and oversight of oil price reporting agencies, and
to rationalize and phase out over the medium term inefficient fossil fuel subsidies, while
providing targeted support for the poorest and report on progress made. Moreover, the G20 Study
Group on Commodities recently pointed to three policy areas that warrant particular attention
going forward. These include strengthening the functioning of commodity markets to support
efficient allocation of scarce resources, and especially investment in commodity production to
strengthen long-term supply capacity; making sure that markets themselves are robust enough to
earn the full benefits of wider participation of financial investors in commodity markets; and
taking into account the international dimension of domestic policies related to commodity
markets (G20, 2011c).
A priority for the Asia-Pacific region should be to reverse the neglect of agriculture in public
policy. To protect the region from future episodes of commodity price volatility and promote its
food and energy security, support for agricultural research and development must be enhanced.
This will include providing easier access to credit and other inputs. The goal should be to foster a
new, knowledge-intensive “green revolution”, which would make agriculture more
environmentally resilient while enhancing its productivity. As highlighted previously be ESCAP
(2011c), South-South and triangular cooperation on knowledge and technology transfer could
play important roles.
ESCAP (2012a) urges that the Asia-Pacific region advocate more global economic cooperation to
moderate the volatility of oil and food prices. Volatile prices are highly disruptive of the process
of development and should be addressed in a concerted manner. For instance, price volatility in
grains markets could be addressed through the countercyclical use of buffer stocks, including
regional ones such as the Rice Reserve Initiative of ASEAN+3 and the SAARC Food Bank. At
21
the global level international cooperation should be stepped up to curb financial speculation in
international commodity prices and to discipline the conversion of cereals into biofuels. The G20
countries should swiftly take and implement appropriate decisions for a better regulation and
supervision of agricultural financial markets. In particular, unregulated derivatives trades should
be carried out in public exchanges and speculative position limits must be established and applied
equally to all investors. The implementation of the L’Aquila Initiative, which included a
commitment of US$ 20 billion of financing to developing countries for food security, should be
expedited. In the area of oil price volatility, the G20, as a grouping bringing together major oil
consumers, could engage in negotiations with OPEC, the primary cartel of oil producers, to
determine a mutually agreed ‘fair’ price of oil and agree to restrict the day to day fluctuations
within a band around this price. Creation of a global strategic oil reserve and its counter-cyclical
use would also be effective for moderating price volatility of oil, particularly as experience has
shown that oil prices go down in past instances of the major developed economies drawing upon
their strategic reserves
G20 countries should supporting non-G20 countries in improving their agricultural production
and productivity. To respond to the growing demand for agricultural commodities by, G20
countries could provide the necessary policy space, trade opportunities and international support
to non-G20 countries that are in the early stages of their structural transformation to diversify
their economies and to increase the productivity of their agricultural sector by expanding
productive employment out-of-agriculture to tap the labor surplus in the agricultural sector and
increase the domestic market for agricultural products. The G20 countries should also support
non-G20 emerging economies in reversing the neglect of agriculture by facilitating the transfer of
agricultural knowledge and technology (ESCAP, 2011a).
ESCAP (2011a) calls for a strengthening of regulations to prevent speculation on commodity
derivative markets. In particular, unregulated derivatives trades must be carried out in public
exchanges and speculative position limits must be established and applied equally to all investors
(ESCAP, 2011a). The G20 should therefore take and implement appropriate decisions for better
regulation and supervision of agricultural financial markets.
Promoting sustainable development, green growth and the fight against climate change
Greater resource use has contributed to climate change through the production of greenhouse
gases (GHGs). The rise in the global population, urbanization and the industrial revolution have
contributed to a rapid expansion in consumption of the earth’s natural resources. These pressures
have been intensified by higher levels of growth in developing countries, particularly by the
strong growth of the Asia-Pacific region over the last two decades, which has lifted more than
half a billion of its people out of poverty. Since 1990, global GHG emissions have grown from
32.3 billion tonnes to 40.2 billion tonnes in 2005. However, large differences in emissions exist
between regions and countries. For example, 80% of the global CO2 emissions, which are the
most important GHGs, are generated by only 19 countries – mainly those with high levels of
economic development and/or large populations. As elsewhere, rapid development has led to a
significant increase in CO2 emissions from the Asia-Pacific region, with total CO2 emissions
from the region increasing by two-thirds between 1992 and 2008. However, although GHG
emissions from the region are currently higher compared to those of developed regions, the latter
are responsible for the bulk of pollution in the atmosphere as historically their CO2 emissions
22
have been much higher. Moreover, average per capita CO2 emissions of the developing AsiaPacific region are below the world average of 4.4 metric tons per capita and far below the 8.1
metric tons per capita of the EU, and the 18.7 metric tons per capita in North America.
Notwithstanding that the high carbon intensity of the regional economy could pose significant
challenges associated with maintaining growth while reducing greenhouse gas emissions in
future, developed and developing regions bear common, but differentiated responsibilities in
tackling emissions.
Resource depletion and pollution resulting from environmentally unsustainable energy use and
land-use change have become global issues. Amid these concerns, the concept of sustainable
development has emerged, envisaging a low-carbon development trajectory in which decisionmaking processes reflect the social and economic benefits and costs associated with the use of
ecosystem services and biodiversity, and in which growth is ‘green’: green growth involves
achieving economic growth and well-being while using fewer resources and generating fewer
emissions in meeting the demands for food production, transport, construction and housing, and
energy (ESCAP, ADB and UNEP, 2010). Thus, investments in sustainable transport and urban
planning, for example, can reduce GHG emissions, while improving urban mobility, access to
markets and public health. Moreover, green growth policies are tools that can help develop
synergies between economic growth and environmental sustainability, such that by pursuing
green growth policies, developing countries will be in a better position to face an uncertain and
resource-constrained future (ESCAP 2012b).
Concerns about resource scarcity have already triggered important policy and strategic
developments to support more resource-efficient economic growth in countries of the region.
However, sustaining growth of production in a resource constrained world will remain
challenging for many Asian and Pacific countries, especially for economies that use large
amounts of natural resources per unit of economic activity and that depend on imports of
resources and materials. Also, many countries in the region, particularly Small Island developing
states in the Pacific, are extremely vulnerable to the impacts of climate change.
Sustainable development and the green economy have been important items on the agenda of the
G20. At the Washington Summit in 2008, the G20 recognized the importance of sustainable
growth and development, including assisting developing countries with infrastructure investment
(G20, 2008). At the Pittsburgh Summit in 2009, the G20 tried to strengthen contributions to
financing the transition to a green economy through investment in sustainable clean energy
generation and use, energy efficiency and climate resilience, recognizing that access to diverse,
reliable, affordable and clean energy was critical for sustainable growth. While the G20
recognized that inefficient markets and excessive volatility could negatively affect both producers
and consumers, there was a consensus by the G20 leaders to “move towards greener, more
sustainable growth” (G20, 2009). At the Toronto summit in 2010, the G20 committed to a green
recovery and to sustainable global growth and emphasized that it was committed to engage in
negotiations under the UNFCCC on the basis of its objective provisions and principles including
common but differentiated responsibilities and respective capabilities. The G20 was determined
to ensure a successful outcome through an inclusive process (G20, 2010a). The following summit
in Seoul also placed high importance on combating the challenges of global climate change,
taking note of the report of the High-Level Advisory Group on Climate Change Financing
submitted to the UN Secretary-General (G20, 2010b).
23
The Cannes summit placed sustainable development, green growth and climate change on the
G20 agenda. It agreed on a set of principles, described in the Cannes final declaration. To foster
clean energy, green growth and sustainable development, several key issues were noted,
including the need to promote low-carbon development strategies; to spur innovation and
deployment of clean and efficient energy technologies; to support the development and
deployment of clean energy and energy efficiency technologies; and to mobilize the political to
reinsert sustainable development at the heart of the international agenda for "Rio + 20" (G20,
2011b). To combat climate change, the Cannes Declaration identified areas such as the need to
operationalize the Green Climate Fund; to assist developing countries to mitigate and adapt to the
impact of climate change; and to recognize the role of public finance and public policy in
supporting climate-related investments in developing countries (G20, 2011b).7
A renewed political commitment at the Mexico summit could lead to discussion and policy
convergence in issues related to sustainable development, green growth and climate change. How
to promote these issues has primarily been discussed by the Energy and Growth Subgroup of the
Energy and Commodities Working Group within the Finance Track, and in the Sherpas' Track by
the Development Working Group. At a meeting in Mexico City in March 2012, the Sherpas
highlighted the importance of identifying and sharing best practices. They also emphasized
synergies between economic growth and environmental protection as tools of sustainable
development.8 ESCAP has also been addressing issues related to sustainable development, green
growth and climate change in multiple fora. Indeed, a recent report shows that those countries
that are exploring policy innovations and becoming clean technology leaders are finding
significant economic opportunities in making efficiency gains (ESCAP, 2012b). Tapping the
growing market for green goods and services, in particular emerging low-carbon and alternative
energy technologies can be a source of sustained economic growth, while also creating green
jobs. Countries of the region are accounting for a growing share of this global market.
The Mexico summit is an important opportunity to raise valuable resources, especially in the
context of green growth technology and climate change. ESCAP analysis underscores the need to
recalibrate economies to better align economic growth patterns with the pursuit of inclusive and
sustainable development objectives. Policies are required to narrow the gap between market
prices and the economic value of ecosystem goods and services. This transition will also be
important for specific and complementary financing mechanisms to help close the “time gap” –
the delay between investing in green growth and realizing tangible economic benefits (ESCAP,
2012b). However, to sustain momentum, the region requires an adequate financing mechanism to
fund investment in green and sustainable development.
Regardless of the regional context and differences in economic growth conditions, the post crisiseconomic policy responses should target job creation and the protection of the environment in a
manner that promotes sustainable development. While national policies can reduce carbon
7
The Cancun agreements, reached on December 11 in Cancun, Mexico, at the 2010 United Nations Climate Change
Conference recognized key steps forward in capturing plans to reduce greenhouse gas emissions and to help
developing nations protect themselves from negative climate impacts and build their own sustainable futures given
their national realities.
8
See Ministry of Foreign Affairs, Mexico: http://saladeprensa.sre.gob.mx/index.php/es/comunicados/1312-092,
accessed on 10 April, 2012.
24
dependency and ecosystem degradation, emerging growth polices in the region could prioritize
investment and capacity development in renewable energy resources, green manufacturing
sectors, urbanization, food security and biodiversity. However, policymakers must be aware that
there will be short-term costs in a green transition as patterns of employment will change. The
capacity of developing countries to take advantage of new green jobs and develop the skills
required to succeed in a ”green” market place must be built. As ESCAP (2012a) points out, social
protection programmes will be needed to mitigate risks associated with unemployment,
especially for the youth in the region.
The potential of South-South cooperation in sharing technology for green growth needs to be
fully exploited. A regional investment fund in the region would assist in mediating between the
region’s excess savings and the vast unmet investment needs for green growth related financing.
The G20 leaders in Mexico should give a clear and strong endorsement of sustainable
development and green growth related policies and should commit to adequate financing
mechanism strategies to fight climate change and foster inclusive growth.
Given the diversity of the region, no common blueprint can be applied to all countries equally.
Rather, green growth strategies must be carefully adapted to national situations and investments
must be prioritized depending on specific environmental, social and economic contexts, while
addressing climate change must be based upon the principle of common but differentiated
responsibilities. In such, as highlighted by the Asian and Pacific Regional Preparatory Meeting
for the United Nations Conference on Sustainable Development (Rio +20), a Green Economy
approach should i) facilitate trade opportunities to all countries, in particular, developing
countries; ii) address the three pillars of sustainable development in a comprehensive,
coordinated, synergetic and balanced manner, iii) allow sufficient policy space and flexibility for
governments to pursue sustainable development strategies based on national circumstances and
respective stages of development, iv) promote the inclusion of vulnerable sections of the society,
women and youth, v) facilitate technological innovation and transfer and promote access to green
technologies at affordable costs, and vi) address the challenges of delivering a green economy in
small islands developing states in particular, along with high mountain and land-lock states.9
Moreover, region-wide policies are needed to improve access to basic services for the rural and
urban poor. The urgent need for large new infrastructure investments in the region – including
housing, transportation networks , energy and water supplies – offers planners and policy makers
a unique opportunity to design these investments guided by the principles of sustainability,
accessibility, eco-efficiency and social inclusiveness.
IV. Summary
Although global economic prospects have improved slightly since the G20 Cannes, the risk of
slipping back into a prolonged period of stagnation and turbulence at the onset of the Mexico
Summit remains high. As the growth outlook of the Asia-Pacific region is critically affected by
the global economic environment, the region has a high stake in avoiding such a scenario, which
would particularly affect the least developed countries and the poorer segments of the population
9
Seoul Outcome of the Asia and the Pacific Regional Preparatory Meeting for UNCSD (Rio+20).
http://www.unESCAP.org/esd/environment/Rio20/pages/RPM.html
25
in the region. ESCAP urges that the 8 Asia-Pacific that are represented at the G20 highlight to the
international community the urgency of undertaking reforms to revive growth and job creation in
the advanced countries. In doing so, they should advocate the return to counter-cyclical policy
stances and should urge G20 leaders to resist succumbing to protect their domestic markets from
problems that are essentially unrelated to trade.
Given the ongoing fiscal consolidation and de-leveraging that is taking place in developed G20
countries, the Asia-Pacific region could emphasize that tighter financial sector regulation has
implications for financial flows to developing countries, and that it is likely to limit their access
to financing. Attention could be drawn to the inadequate representation of a larger number of
developing countries in the FSB and other standard setting bodies. At the same time, reform of
the global financial system and its governance should be accompanied by greater efforts to
enhance financial inclusion. A wide range of country experiences that have been made in the
Asia-Pacific region in this area could provide valuable contributions to G20 initiatives.
In recent years, episodes of volatile capital flows and swinging exchange rates have negatively
affected Asia and the Pacific. The region should therefore urge the G20 to step up actions to
reform the international financial architecture and to strengthen global financial safety nets.
Doing so will require increasing the flexibility of IFI lending facilities. It should also encompass
the establishment of a special drawing rights based global reserve currency that could be issued
counter-cyclically to strengthen global economic stability. In this regard, governance reforms of
IFIs continue to be an urgent matter. To ensure that the international financial architecture is
made more development friendly, the Asia-Pacific region could exert influence in the G20 to
advocate for a global financial transaction tax.
Owing to higher food prices, an estimated 20 million additional people were kept in poverty in
the region in 2010. As the Asia-Pacific region seeks to enhance food security by reversing the
neglect of agriculture in public policy, it could call upon the G20 to support non-G20 countries in
improving their agricultural production and productivity, including through technical
cooperation. To address commodity price volatility, the region should advocate increased global
cooperation, particularly in enhancing regulations to prevent speculation in commodity markets.
Sustainable development is a priority for the region, especially as many developing countries are
highly vulnerable to the impacts of climate change. The Mexico summit is an important
opportunity to raise valuable resources, especially in the context of green growth technology and
climate change. The G20 could exploit the potential of South-South cooperation in areas such as
knowledge sharing. However, as highlighted in the regional preparatory meeting for Rio+20,
governments must have sufficient policy space and flexibility to pursue sustainable development
strategies based upon national circumstances and respective stages of development.
26
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