Taking Care of Business
25 June 2010
By John W.H. Denton
Chairman, BCA Global Engagement Task Force
This weekend the leaders of the Group of 20 nations will be meeting in Canada. They are meeting at a critical time. Over recent months sovereign debt problems in Greece and other European nations have threatened to derail the recovery from the global financial crisis.
Decisive actions are required to underpin confidence, investment and growth in the global economy. Importantly, if we are to realise sustained investment and growth, then these need to be driven by business. We have seen in Europe how structural government deficits have become unsustainable.
South Korean President Lee Myung-bak put it well in a speech earlier this year when he said that governments must focus on the private sector taking the baton so that a global recovery can take hold and continue over the medium to long term. And if there is to be a sustained, business-led recovery, then G20 leaders must this weekend focus on three key priorities.
First, government leaders should give a strong and unambiguous direction to trade ministers in relation to the Doha Round of trade negotiations. Before the end of the year, there must be a conclusion to the Doha Round that will open up meaningful new opportunities for business in all industries.
Reducing trade barriers and opening up markets to overseas competition brings benefits for everyone, business and consumers alike.
The respected Peterson Institute for International Economics in the United States has estimated that a conclusion to the Doha Round that opens up global markets in a significant way would boost global trade by more than $900 billion a year, and add $320 billion a year to global gross domestic product. This will support growth in jobs and higher living standards.
There is also an added benefit from a new global trade agreement. It is the most effective way to counter protectionist moves across the world that would cause economic damage. This is especially important when sluggish growth and high levels of unemployment are generating pressure for governments to introduce protectionist measures.
Second, governments must critically examine proposals that are in the process of being developed to change financial regulation. These proposals include the introduction of new capital and liquidity requirements for financial institutions. New arrangements for the supervision of institutions are also under development. New levies or taxes have also been proposed to have a source of funds to pay for any future interventions that might be required when financial institutions run into difficulty.
US and European governments are behind the push to change financial regulation. The proposals that have been developed are a response to what governments in America and Europe regard as the causes of the financial crisis.
But there is a potential downside to the introduction of major changes to financial sector regulation, especially when an economic recovery is not assured. The proposals are likely to reduce the availability and to increase the cost of capital for investors. This could compromise our future growth and prosperity because businesses depend on capital for investing in existing and new operations. In turn, the wider economy depends on capital for growth.
As far as Australia is concerned, our financial institutions withstood the effects of the global financial crisis. This reflected the fact that our banks and other businesses in the financial services sector were well managed, and that the regulatory framework we have in place is highly effective and robust. The arrangements were supported by the decisive action taken by the federal government to provide guarantees to banks operating in Australia.
About 10 years ago, Australia went through a detailed process to develop and implement financial sector reform. We are well placed to contribute in this area, and to finding the right balance between beneficial and effective reforms versus the potential that such reforms might have to reduce growth into the future.
A third priority must be to enable business to contribute to the work of the G20. Last year, on behalf of the Business Council of Australia, I proposed that a business reference group be included as part of the G20. The Canadian government has accepted this recommendation.
This coming weekend in Toronto, alongside the discussions of the G20 leaders, there will be a meeting of this new business reference group, which will be known as the B20.
I will be taking part in that meeting. It will be important that this become an ongoing part of the G20. This will be assisted by the fact that the South Korean government will also be holding a business meeting alongside the G20 leaders’ summit later this year. These steps are important.
Bringing business into the policymaking process allows ideas to be tested, and advice to be provided on the potential impact of any new proposals. This will be especially valuable when it comes to the proposals for financial sector regulation. The business community is also a valuable source of information about new and emerging issues within the global economy.
Given the uncertain economic outlook, it is more important than ever that governments and business work together to set priorities and to look at change in a considered and informed way. Over the past two years the G20 has been proven to be a key institution for co-ordinating an effective response to the global crisis. But the true test will be how it performs in laying the foundation for future growth by the private sector that in turn generates tangible benefits not only for the members of the G20, but for all the nations of the world.