financial crisis

Consider a very different “group-of-8” countries: Botswana, Chile, Mauritius, Uruguay, New Zealand, Norway, Singapore and Switzerland.  Do they have any relevance for the G-20?  Hardly, at first.  None of them are invited to the London G-20 Summit next week.  They are not G-20 members, since neither their economic size nor their population are large enough, and they lack the global “systemic significance” of most G-20 members.  None of them belongs to the EU.  This particular "group-of-8" in fact does not really exist as a formal body.

But there is a neglected rationale for the leaders of the G-20 to pay attention to this particular set of uninvited countries.  Like the G-20, they comprise a rather diverse group of developing and developed countries from different regions of the world.  But, unlike most of the G-20, this group of eight countries have exhibited high quality of national governance.

No country is perfect, obviously.  Each one in this group of 8 industrialized and emerging economies has its own challenges. But overall their quality of governance (and recent trends) exceed those of the Group-of-20, and to an extent even those of the powerful, formal, and elite Group-of-8.

This does matter.  Not just because failures of governance (among key nations in  the G-20) played a major role in today's financial crisis.  It also matters because lessons can be drawn for short and longer term initiatives from the good governance experiences from this group of 8 small countries (in short 'ggg-8' ifor this 'good governance group'-- and not in caps, since they are small, and not a formal group...).

Another Ponzi scheme has allegedly been uncovered now, led by the Texas Financier R. A. Stanford, who may have swindled about 50,000 investors out of US $8 billion, or so.  The Feds have raided his house of cards but were having a hard time finding him. 

At US $50 billion, Madoff may have stood out because of the sheer magnitude of his scam.  But obviously he is not alone in large Ponzi schemes, not even within the US.  As global financial conditions have continued to deteriorate, the nakedness of those emperors without clothes is starkly exposed. 

But like the case of Madoff, this case also raises questions about whether ‘the SEC was asleep at the switch’ in this case as well.  Evidently allegations of fraud (and possible drug money laundering) have been made against Stanford over the past decade.  Yet the SEC took belated action very recently only after two former employees filed a lawsuit in civil court.

With a new administration in the White House, different approaches to address the persistent financial crisis are on the table, once more.  Over the last week there's been some talking about the creation of an "aggregator bank" -also called 'bad' bank- that will buy troubled assets with part of the remaining bailout funds (TARP), aiming to take toxicity off financial institutions' balance sheets. 

An aggregator bank that eats all of the junk in the financial sector is expected to finally unfroze credit markets, and gives new life to the idea of a bailout a la Swedish.  However, the Nordic country's experience draws some specific governance lessons that go beyond separating good and bad assets, and that are applicable regardless of the technicalities, features and context that make both cases different.

The first G-20 summit, focused on the financial crisis, just took place this past weekend.  When measured against expectations of such gatherings, there were some accomplishments.  Such as in trade:  the collective pledge to avoid raising any trade and investment barriers, or the promise to ‘strive’ for a deal on the stalled Doha round.  And the  summit's ‘action plan’ holds promise. 

The declaration includes a generic list of a plethora of financial sector  ‘principles’ and many areas of work.  But at least it is comprehensive in scope, touching on most of the right ‘buttons’.  It provides space to work concretely on real issues.