G-20 nears agreement on 'peer review' of economies

The apparent aim of such critiques is to try to prevent the economies of individual countries from becoming unstable pillars.

Charles Dharapak/AP
President Barack Obama looks on as Brazil's President Luiz Inacio Lula da Silva, left, shakes hands with China's President Hu Jintao Friday at the G-20 summit in Pittsburgh.

The Group of 20 nations appear close to agreeing Friday to some form of “peer review” of one another's economies. The apparent aim of such critiques is to try to prevent the economies of individual countries from becoming unstable pillars – for example, think of the huge appetite the US has for goods made in China.

But what leverage the peer reviews would have is not clear. Many economists expect they won't be much more than discussion, certainly not binding.

“To have a forum, an exchange where some countries present and others comment in a open discussion, that is fine,” says Barry Bosworth, a senior fellow at the Brookings Institution in Washington. “The idea that countries would tolerate others reviewing their policies, I don’t think that will go through.”

Still, the idea of discussing world economic imbalances has an appeal, says David Wyss, chief economist at Standard & Poor’s in New York.

“Finally, there is a consensus the world economy is out of whack and the imbalances are uncontrollable,” he says. “For example, the Chinese recognize they cannot continue to run an export-driven economy. They have to get their surpluses down, the same as the US can’t continue to buy everything.”

If the G-20 process brings changes in economic practices down the road, Mr. Wyss says it would remind him of the Plaza Accord in 1985. That accord, named for the hotel in New York where finance ministers met, contained an agreement to depreciate the US dollar compared with the Japanese yen and the Deutsche mark. The dollar fell by 51 percent in two years.

In a peer review today, one implication might be a lower-valued US dollar, Wyss says. That would be one way to get Americans to buy fewer imports. A lower dollar would also give US companies an advantage in exporting.

But on Thursday, US Treasury Secretary Timothy Geithner, an author of the “peer review” concept, said US policy was for a strong dollar.

“A strong dollar is very important in the United States,” said Mr. Geithner at a press briefing. “We have a special responsibility here in the United States to make sure we are doing the things in this country to preserve confidence in the US financial system – confidence that's very important to sustain the dollar's role as the principal reserve currency in the international financial system.”

It will be healthy, Geithner says, for the US to save more and for other nations to spend more. "It's going to allow us to have a more healthy pattern of growth in the future, allow us to finance the investments we need to support future innovation,” he said.

Mr. Bosworth, among others, has reservations about a peer review. Specifically, he doubts that Congress would accept the premise of other countries making suggestions about how the US should run its economy. “In prior years, we’ve rejected [International Monetary Fund] reviews of the financial system,” he says.

Although the dialogue might be useful, Mark Zandi of Moody’s does not expect it to have any immediate impact.

“It could be helpful, but it won’t benefit this current problem – the imbalances that were the root causes of the financial crisis,” he says. “But it could be good for problems down the road.”

Some economists want to see more details. “It could be a first step in the reorganization of the world economy,” says Stuart Hoffman, chief economist at PNC Financial in Pittsburgh. “But the devil is in the details.”

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