G20Mexico & the WorldFINANCIAL TIMES SPECIAL REPORT | Monday June 18 2012

Food for thoughtMexicanpresident FelipeCalderónexplains whyfood securityis at the top ofthe G20agendaPage 5

Inside this issueRegulationNew rulesare behindschedule,as nationsfocus ongrowthPage 2

Eurozone As at Cannes in2011, economic and politicalupheaval in Greece iscasting a long shadowPage 2

G20 reform The danger forworld leaders is too muchtalk and no effectivemeasures Page 2

Power structuresEmerging nations want abetter balance as the centreof economic gravity ismoves eastwards Page 4

FinancialsystemreformSweepingchangeswill arriveone day –but not in

Mexico, where the hosts aretaking a workmanlikeapproach Page 4

Food prices The focus ison security of supply ratherthan aid as a longtermsolution is sought Page 4

Mexico & trade The G20host is a stalwart defenderof open borders, unlikesome neighbours Page 5

Summit venue Los Cabosoffers many distractions – ifonly G20 leaders had timeto sample them Page 5

Security The tidemay be turning inthe battleagainstorganisedcrimePage 6

C risis is again stalkingthe Group of 20 sum-mit. As the leaders ofthe world’s most pow-erful countries fly to Los Cabosin Mexico, the dark mood thatsurrounded previous summits inWashington, London andCannes is back.

In the past week, the eurozonehas added Spain to the list ofcountries needing financialassistance. After this supple-ment went to press, Greecevoted in a second election thatis properly viewed as a referen-dum on its continued member-ship of the European single cur-rency.

The shockwaves of the devel-oped world’s financial and eco-nomic crisis are still reverberat-ing around the global economyalmost five years since it startedin August 2007.

The Los Cabos summit offersthe G20 a chance to showwhether a gathering of worldleaders can play a more con-structive role than just impor-tant and interested observers ofthe continued crisis.

Recent history suggests not.Last November at the CannesG20 summit, the agenda wascompletely overshadowed byinternal eurozone matters,occurring partly at the summitvenue, but not part of the for-mal G20 discussions.

Under huge pressure fromfinancial markets, Silvio Berlus-coni, then Italian prime minis-

ter, accepted intensive Euro-pean and International Mone-tary Fund surveillance of thecountry’s economy, but thisfailed to quell the storm and heresigned days later.

Greece’s situation was evenmore critical. George Papan-dreou, its then prime minister,suggested the country hold anin-or-out referendum on theeuro, shocking other eurozoneleaders who thought this woulddestabilise the situation further.He was summoned to Cannes,told to think again and quitwithin a week. Amid thisdrama, the G20 agreed little.

The danger for the G20 and

Mexico, the country sitting inthe chair in 2012, is a repeat ofthe Cannes experience. Held inanother tourist resort, LosCabos, on the southern tip ofMexico’s Baja California Penin-sula, the summit risks becomingan exercise in firefighting – forSpain and again Greece – ratherthan fulfilling the G20 ambitionof creating strong, stable andbalanced global economicgrowth through co-operation inthe world’s “premier economicforum”.

The global economic situationis serious. The eurozone is onthe edge of renewed recessionand avoided it only though Ger-

many’s remarkable strength.Many European countries are inrecession. US growth is againslowing, raising the prospect offurther monetary stimulus inthe months to come. And emerg-ing economies, the powerhousesof global growth since 2009, areno longer finding expansion sosimple. Growth has slowedacross all the large emergingeconomies – Brazil, Russia,India and China – and immedi-ate prospects look weak.

At the heart of the renewedloss of confidence in the globaleconomic outlook, the eurozoneis struggling to find solutions tothe crisis that are acceptable to

all amid a further intensifica-tion of the strains that havenow required Spain, Ireland,Portugal and Greece to seekloans from other European insti-tutions.

Far from giving two weeks oreven two months respite as pre-vious eurozone rescues haveusually brought, marketsreacted badly within two daysto the €100bn bailout of Spain’sbanks, underlining growingworries about the EU’s ability tocontain the contagion.

In its recent economic out-look, the Organisation for Eco-nomic Co-operation and Devel-opment, the international organ-

isation aimed at improving theperformance of advanced econo-mies, warned of a vicious circlein the eurozone “involving highand rising sovereign indebted-ness, weak banking systems,excessive fiscal consolidationand lower growth”.

In such a precarious situation,world leaders, finance ministersand heads of internationalorganisations have all offeredtheir preferred solution to thecrisis.

Fearful of the spillovers froma eurozone meltdown to the USeconomy, president Barack

Leaders aim to make a differenceCan participants at theLos Cabos summit bemore than interestedobservers of a globalcrisis? The precedentsare not encouraging,writes Chris Giles

Continued on Page 3

No smoke without fire: miners block a motorway with burning tyres near Oviedo in Asturia, Spain during protests against plans to cut coal subsidies AP

www.ft.com/g20mexico2012 | twitter.com/ftreports

2 ★ FINANCIAL TIMES MONDAY JUNE 18 2012

G20: Mexico & the World

Living up to its billing asthe world’s premier eco-nomic forum was alwaysgoing to be a challenge forthe Group of 20.

After a string of failures,the task for the Los CabosG20 summit is to stop therot and prevent the organi-sation becoming irrelevant.

It will be quite a task forMexico, the host nation.

Since the financial crisisbegan, the G20 has beenseen as the best forum fordiscussing economic devel-opments and agreeing newdirections.

The countries around thetable include all the bigeconomies and account for$17 out of every $20 earned

in the world. The organisa-tion has met at head ofstate level since 2008, ena-bling difficult decisions tobe taken. And there hasrarely been a more impor-tant time to set the globaleconomy on a more stablepath.

But there is deep dissatis-faction with the G20, bothfrom participants in theprocess and externalobservers, as it has madelittle progress since 2009.

Paul Jenkins is a fellow ofthe Canadian Centre forInternational Governanceand Innovation and aformer deputy governor ofthe Bank of Canada.

He says: “G20 leadershave not delivered on theircommitments to interna-tional policy co-opera-tion ... [resulting in] policymistakes that could havebeen avoided, had the gainsfrom collective action toaddress what are clearlyglobal issues requiring glo-bal solutions been force-fully tackled by the G20”.

Despite the hype sur-

rounding the April 2009London summit, when lead-ers promised a new globaleconomic order, the realityhas been sobering.

The G20 originated afterthe 1997-98 Asian financialcrisis, with meetings atfinance minister level, butmade little impact until late2008, when world leadersgathered in Washington todiscuss the most seriousfinancial crisis since thesecond world war.

After they agreed to refi-nance the InternationalMonetary Fund, provide afiscal stimulus and embarkon financial sector regula-tory reforms in London sixmonths later, the more diffi-cult task of implementationstarted.

At the September 2009summit in Pittsburgh, US,world leaders agreed theaim of the G20 should bestrong, stable and balancedeconomic growth.

Succeeding summits inToronto, Seoul and Cannesall sought to put flesh onthese bones with increas-

ingly meagre returns. Atfirst the explanation forlack of progress was thatagreement was harder intimes of economic growththan in times of crisis.

But, by Cannes lastNovember, that logic nolonger applied. The euro-zone had fallen back into abanking and sovereign debt

crisis and the G20 wasstanding far from theaction. The same fate risksunsettling Mexico’s party,as the summit starts theday after the second Greekelection.

Professor Eswar Prasad ofthe Brookings Institution.the Washington-based inde-pendent research and policyinstitute, says: “The Los

Cabos summit faces the realrisk of being seen as thenadir of the G20’s ability toact collectively to ensureglobal financial stability.”

This year, G20 countriescan claim to have pledgedanother $400bn refinancingof the IMF, in April, whichfinance ministers and cen-tral bank governors said ina statement “shows thecommitment of the interna-tional community to safe-guard global financial sta-bility and put the globaleconomic recovery on asounder footing”.

That financial commit-ment apart – one that wasnot backed by some leadingeconomies including the US– the co-operative landscapeof the G20 is poor.

The global economy isslowing rapidly, makingstrong, stable and balancedglobal growth a distantambition. Although sometrade imbalances, such asChina’s surplus and the USdeficit have narrowed, oth-ers such as the surplus ofoil exporters have grown.

It has the right countriesaround the table, but thesheer size of the G20 pre-vents spontaneous discus-sion, participants say. Ster-ile debates without anychance of agreement bycountries to change policiesare the order of the day.

In 2012, the problemsappear fundamental. Wherecountries disagree, the G20provides a forum for debate,but no mechanism to bangheads together in the collec-tive interest. The omens forLos Cabos are poor.

Yet, none of the depress-ing history of the G20deters countries from seek-ing to chair the group orinvite world leaders tosummits in their countries.

Officials, often Europeanswith deep experience ofinternational summits, saythis is more than just van-ity on the part of Russia,Australia and Turkey, theG20 hosts in 2013, 2014 and2015 respectively.

They say that the G20,rather like the EuropeanUnion, should be seen as a

long drawn-out process thatis better than the alterna-tive of refusing to discussdifficult economic issues.

The ambition is valid, thecountries around the tableare roughly right and incre-mental progress is made.

But, just as with the EUand the eurozone, the riskis that the discussions areso slow and progress so lim-ited that crisis will engulfthe world economy beforethe benefits of the G20 havebeen demonstrated.

Time to take action – or risk irrelevanceG20 reformThe danger forworld leaders is toomuch talk and noeffective measures,writes Chris Giles

‘Los Cabos facesthe real risk ofbeing the nadir ofthe G20’s ability toact collectively’

Entering crisis: Angela Merkel at Cannes in 2011 Getty

Last November, when the G20heads of state met amid rain inthe seaside French town ofCannes, all the best-laid plansfor a summit focused on finan-cial sector reform and economicgrowth were waylaid by a smallcountry in the south-east cornerof Europe: Greece.

Just days before leaders wereto meet, George Papandreou,then the Greek prime minister,unexpectedly announced hewould hold a referendum on anew bailout programme for hishighly indebted country, settingoff renewed panic in eurozonedebt markets and forcing EUleaders to summon Mr Papan-dreou to Cannes, where hereceived a thorough dressing-down.

Within a week, the referen-dum was off and Mr Papandreouhad resigned.

Now, eight months later, asG20 leaders meet this week inMexico, their detailed agendawill again be overwhelmed bythe political chaos in Athens.

This time, party leaders inGreece will be sorting throughSunday’s election results todetermine who will lead thecountry – and whether a newgovernment can agree with theEU on a new bailout, or will beforced out of the euro.

It was not supposed to be likethis.

In the intervening months, EUinstitutions – most importantlythe European Central Bank –moved to calm the turbulentwaters that Mr Papandreou hadreleased. In the immediate after-math, the ECB flooded the Euro-pean banking sector with €1tnin cheap loans, a move manybelieve saved the global finan-cial system from a credit crunchthat could have rivalled that fol-lowing the 2008 collapse of Leh-man Brothers.

In addition, just a few monthslater, political leaders in 25 ofthe EU’s 27 members signed anew fiscal treaty that committedthem to balanced budgets andtough debt and deficit limitsthat leaders believed would con-vince financial markets onceand for all that the eurozonewould never again get itself intosuch a highly indebted state.

But when Greek voters wentto the polls last month and over-whelmingly chose a motleygroup of political parties thatrejected the terms of their newbailout – led by the far-left radi-cals Syriza – Greece’s member-ship of the eurozone was calledinto question, leading to fears ofbank runs in Europe’s peripherythat helped force Spain intobecoming the fourth bailout vic-tim since the crisis began twoyears ago.

Moody’s Investors Service, therating agency, wrote thismonth: “Spain’s banking prob-lem is largely specific to thecountry and is not likely to be amajor source of contagion toother euro area countries,except for Italy.

“In contrast . . . Greece’s exitfrom the euro . . . could also posea threat to the euro’s continuedexistence.”

G20 leaders from outside

Europe, including BarackObama, the US president, havein recent weeks urged EU lead-ers to move more quickly, par-ticularly to shore up its teeter-ing banks – the element of thecrisis that most threatens theglobal economy because of thesevere, Lehman-like knock-oneffects a series of bank failuresin Europe could have elsewherein the world.

EU officials insist they aremoving in the right direction,pointing to the swift decision torescue Spanish banks – thequickest and most decisive ofthe four bailouts thus far – andprogressing toward a fiscalunion to accompany their mone-tary union.

The next big step will be areport due at an EU summitnext week laying out the build-ing blocks for further integra-tion, including a “bankingunion” that could include a sin-gle eurozone banking supervisorwith a common deposit guaran-tee scheme and bailout fund.

The plan will also look at thepossibilities for more fiscal inte-gration, including joint euro-zone bonds.

But the plan still faces consid-erable political hurdles, particu-larly in Germany, whichremains resistant to any poolingof sovereign debt or depositguarantees. Although AngelaMerkel, the German chancellor,has made eye-catching pro-nouncements about her desirefor more political union inEurope, senior EU officials say

her plan is clear. She will notuse German money to help backcommon eurozone bonds or abank backstop, unless the euro-zone agrees more control overnational budgetary decisions.

Brussels has already movedsignificantly down that path. Inaddition to the fiscal disciplinetreaty, the European Commis-sion now has extended powersto dictate fiscal policy to the 17eurozone countries, which theymust follow or risk paying fines.

But officials say that may notbe enough for Ms Merkel, whobelieves Brussels should haveeven more control. And suchcontrol must be backed by dem-ocratic legitimacy, Berlinbelieves, meaning more say byEuropean voters over themake-up of the EU leadership.

Such demands would explainwhy Ms Merkel has insisted thatresolving the crisis will takeyears, not months.

Such sweeping overhaulswould require big changes inEuropean treaties, a processfraught with danger, particu-larly during a time of nearlyunprecedented anti-EU senti-ment in the austerity-wearysouth and bailout-weary north.

Indeed, it raises the questionof whether there will still be aeuro once EU leaders completetheir highly-touted fiscal union.

Like the outcome of thisweek’s G20 summit, thoseanswers lie not in Los Cabos,Brussels or Berlin. They lie inAthens, where its future in theeurozone will dictate whetherthe EU and the global economycan begin emerging from a two-year crisis.

Greek chaoscasts longshadow againEurozoneAs at Cannes in 2011,moves to restore trustare being undermined,writes Peter Spiegel

GeorgePapandreouwas summonedto Cannes for athoroughdressing-downfrom the G20

Since G20 leaders signedup to an ambitious regu-latory reform programmein 2009, their gatheringshave become a moment to takestock of the worldwide effort tomake banks safer and thebroader financial system moreresilient.

On the plus side, significantprogress has been made thisyear on designing new globalrules for everything from deriv-atives and credit rating agenciesto “systemically importantfinancial institutions” (Sifis)and the gathering and keepingof financial data.

But implementation has beenslow, and cross-border faultlinesare appearing, as national regu-lators meet to write tough glo-bal rules and then go home andimplement them in ways thatappear to favour their local pref-erences.

When the International Mone-tary Fund published a scorecardin April of the six main streamsof reform, only one area (forcingbanks to hold more and bettercapital) was judged to be welladvanced, and three (deriva-tives, data, and so-called“shadow banking”) were seen tobe lagging well behind schedule.

Even on capital, the Basel

Committee on Banking Supervi-sion, which writes the globalbank safety standards, said thismonth that only three of the 27Basel member countries hadissued final rules to implementthe Basel III standards that aredue to begin taking effect inJanuary. Eighteen more havedraft rules and six have not putout anything at all.

Meanwhile, events have over-taken some of the goals, withsome policy makers in Brusselsarguing that a single pan-EUbank supervisor is necessary torestore market confidence in the27-nation bloc, and Chinaannouncing it will delay bankcapital rules until next yearbecause of fears its growth isslowing.

In the run-up to the Los Cabosmeeting, global regulators meet-ing as the Financial StabilityBoard (FSB) have brought out arange of proposals, from a planto assign every wholesale mar-ket participant a unique “legalentity identifier” to proposals toidentify and regulate Sifi insur-ance companies.

But the regulatory “to do” listremains long, topped by cross-border plans for winding uptroubled global banks andefforts to channel and controlshadow banks – non-banks thatalso extend credit to the realeconomy. It is not clear whetherparticipating countries have thewill or the capacity to worktogether on longer-termreforms, analysts say.

Richard Reid, research direc-tor of the International Centrefor Financial Regulation, says:

“The agenda for a G20 summitis likely to be dominated bycurrent events rather thanthe longer-term, loftier aimsthat may have been envisagedearlier.

“If economic conditions fail toimprove, or they deteriorate,national authorities will betempted to pursue implementa-tion tailored to their own needs,perhaps at the expense of thedesired international, co-opera-tive approach,” he adds.

The Basel committee hasalready raised concerns over EUand Japanese plans to imple-ment the Basel III rules thatdiverge from the global agree-

ment in ways that loosen thedefinition of capital for theirhome institutions.

The need to focus on eco-nomic and political issues couldmake it easier for the G20 lead-ers to defer to the experts onregulatory policy, some analystssay.

Barbara Matthews, a US-basedregulatory consultant, says:“Regulatory policy issues willtake a back seat to larger geo-political and geoeconomicissues, if not full-blown crisismanagement. Viewed in themost positive light, this couldprovide regulatory policy mak-ers with breathing room to

focus on technical issues withminimal political interference.”

But she predicts that the realresult is likely to be less benign.

“It is perhaps more realistic toexpect that political and eco-nomic volatility in response tothe situation in Europe willmake it increasingly difficult forregulatory policy makers tomake bold moves that effec-tively share regulatory sover-eignty on a cross-border basis,”she says.

A slowdown in the pace ofnew regulation would be wel-comed by the banking industry,which is struggling to cope withthe Dodd-Frank financialreforms in the US, the Basel IIIcapital package and a host ofEU directives and regulations.

Laura Cox, regulatory partnerat PwC, says: “We remain opti-mistic that effective regulationbased on the key pillars of theG20 financial reforms, such asmeasures to improve capital andliquidity, bank recovery and res-olution and market infrastruc-ture, and [to make] derivativestrading more transparent – canreturn the banking industry to aplace of stability in the longerterm.

However, she warns: “Butthese changes are placing signif-icant strains on banks’resources and profitability, sothe industry’s lending capacitymay be proportionately reducedfor the foreseeable future, andperhaps permanently.”

As a result, some analystsbelieve the G20 needs to back offand give the industry time.

Gene Ludwig, founder and

chief executive of PromontoryFinancial Group, the consul-tancy, says: “Demanding moreand more regulation and doingit quickly is not helpful. Muchhas already been done. What isneeded now is growth. The regu-lators have been right to slowthings down to get thingsright.”

There are particular concernsabout the FSB’s promise topromulgate a package of globalrules for shadow banking by theend of the year.

David Strachan, anotherformer regulator who is now co-head of Deloitte’s centre for reg-ulatory strategy, says: “In con-sidering new rules for shadowbanking, the G20 and FSB needto look at the wider picture.

“Credit creation and interme-diation outside the regulatedbanking system have benefits aswell as risks.

He adds: “At this juncture,allowing credit to flow into thereal economy through as manydiverse channels as possiblelooks to have net benefits interms of reducing the overallfinancial stability threat.”

But others warn that wateringdown or delaying the globalrules could backfire over thelong term.

Tom Huertas, a former UKregulator now with Ernst &Young, says: “Weakening capi-tal standards will, in the firstinstance, weaken banks. It mayor may not revive lending, andreviving lending may or maynot revive the economy. Is thata gamble countries should betaking at this stage?”

Economic slowdown has putbrake on global reformsRegulationNew rules are behindschedule, as countriesfocus on growth,says Brooke Masters

‘Regulators havebeen right to slowthings down to getthings right’

Laying down the law: a slowdown in the pace of new regulation would be welcomed by the banking industry Dreamstime

FINANCIAL TIMES MONDAY JUNE 18 2012 ★ 3

G20: Mexico & the World

Obama called on the euro-zone this month to step upefforts to integrate and col-lectivise policies.

He said: “Leaders can layout a framework and avision for a stronger euro-zone, including deeper col-laboration on budgets andbanking policy. Gettingthere is going to take sometime, but showing the polit-ical commitment to sharethe benefits and responsibil-ities of an integratedEurope will be a strongstep.”

The call for more Euro-pean integration is airedaround the world. ChristineLagarde, head of the IMF,urged “more Europe, notless”, particularly in thebanking sector.

She said: “To break thevicious cycle of financial-sovereign risks, there sim-ply must be more risk shar-ing across borders in thebanking system,” addingthat deeper fiscal integra-tion “should go hand-in-hand with these efforts”.

The UK, whose economyis already in recession afterbeing buffeted by the euro-zone crisis, high energyprices and austerity meas-ures, is most vocal in call-ing for action, while insist-ing it will play no part inany eurozone settlement.George Osborne, the chan-cellor, accused the singlecurrency crisis of “killingoff” Britain’s recovery.

Most of these calls foraction are directed at Ger-many, which is seen as hav-ing deep enough pockets tosolve the eurozone crisis,but not the will to integratequickly. Berlin has moved aconsiderable way from thestance it adopted in Cannes.

Alongside austerity meas-ures, Germany is willing to

agree to France’s requestsfor greater emphasis ongrowth. It has also acceptedthat higher German domes-tic wages and prices will bepart of efforts to encourageperipheral eurozone econo-mies to regain competitive-ness and help rebalancetheir trade deficits.

This month Angela Mer-kel, the German chancellor,also made it clear that sheexpects the members of acurrency union to movecloser together, but refusedto accept the urgency of thesituation that others havestressed.

“I don’t believe that therewill be one single summitthat will decide on a bigbang,” Ms Merkel told Ger-man television this month.“But what we have beendoing for some time, and onwhich a working plan willcertainly be presented inJune, is to say we needmore Europe.”

These high-level warn-ings, encouragement and

brinkmanship are likely todominate this week’s G20summit, making lifeextremely difficult for theMexican hosts who willhave little control over theprocess.

With so many externaldistractions to dominate thesummit, Mexico has notpacked the agenda.

Professor Eswar Prasad ofthe Brookings Institutionsays: “The host countryMexico has wisely set thebar very low for expecta-tions of any deliverablesfrom the summit, especiallyin terms of long-term initia-tives such as reform ofthe international monetarysystem”.

Instead, it has urged G20countries to make incre-mental progress on eco-nomic stabilisation,strengthening financial sys-tems, improving the inter-national financial architec-ture, enhancing global foodsecurity and promoting sus-tainable development.

These are all long-termambitions on which a con-tinued dialogue at the G20level is useful and the sum-mit at head of state levelbrings its own dynamic foraction to be taken.

Mexico is also seeking toset the G20 on an incremen-tal path to improve eco-nomic co-operation ratherthan the revolutionaryambitions held by Francelast year, which were so dis-appointed in Cannes.

It will, nevertheless, be achallenge for the hosts toescape from the immediateeconomic crisis and focusminds on longer-term issueswhen the here-and-now isso urgent.

The best hope for the G20summit is that the econo-mies of the world, repre-senting more than 85 percent of global income, canreinforce the urgency of thesituation, avoid public dis-putes and lay the condi-tions for successful Euro-pean summits later in June.

Leaders aim tomake a difference

ContributorsChris GilesEconomics Editor

Javier BlasCommodities Editor

Robin HardingUS Economics Editor

Claire JonesEconomics Reporter

Brooke MastersChief RegulationCorrespondent

John Paul RathboneLatin America Editor

Peter SpiegelBrussels Bureau Chief

Adam ThomsonMexico Correspondent

Andrew BaxterCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

For advertising details,contact: Robert GrangePhone +44 020 7873 4418Fax +44 020 7873 4006Email: rbert.grange@ft.comor your usual FinancialTimes representative

All editorial content in thissupplement is producedby the FT.

‘Mexico has wiselyset the bar very lowfor expectations ofany deliverablesfrom the summit’

Crisis, what crisis? Global economic statistics provide challenging backdrop to Los Cabos meetingBudget balances of G20 countries, 2012

Forecasts

As a % of GDP (deficit indicated by a negative number)

JapanIndiaUSUKFranceSouth AfricaCanadaArgentinaAustraliaItalyMexicoBrazilTurkeyChinaIndonesiaGermany

RussiaKorea

Saudi Arabia

-10.0-8.3-8.1-8.0

-4.6-4.3-3.7-3.1-2.5-2.4-2.4-2.3-1.7-1.3-1.0-0.8

0.62.4

16.6

Photo: Bloomberg

Emerging markets versus developed countries’growth (Annual % change in GDP)

0 2 4 6 8 10

Brazil

China

India

Russia

Turkey

France

Germany

Japan

UK

US

20112012*2013*

Sources: IMF: Bloomberg FT Graphic

600

400

200

0

-200

-400

-600

LuxembourgNetherlandsGermanyBelgiumItalySpainIrelandPortugalGreece

Feb 2010 Feb 11 Feb 12

$bnCapital flight within the eurozoneSelected growth rates

Annual % change in GDP

0

2

4

6

8

10

BrazilChina

IndiaRussia

TurkeyFrance

GermanyJapan

UKUS

20112012*2013*

Receivingcountries

Sourcecountries

* Forecast

Continued from Page 1

4 ★ FINANCIAL TIMES MONDAY JUNE 18 2012

G20: Mexico & the World

Power structures Emerging nations seek better balance

The host nation, Mexico, is one of theworld’s economic success stories.

As recently as the mid1990s, itseconomy was in turmoil and required arescue package administered by theInternational Monetary Fund and the USTreasury. But since 2006, its economy hasgrown by an impressive 22 per cent,against just 9.8 per cent for the US. And itis now eurozone countries that are seekingthe succour of the IMF.

The contrast illustrates a broader shift inthe economic fortunes of emerging anddeveloped economies since the onset of thefinancial turmoil.

The collapse in global trade following thebankruptcy of Lehman Brothers in 2008dispelled any notions of a full decouplingbetween the fortunes of advancedeconomies and their emerging marketcounterparts.

But since then, emerging markets havenarrowed the gap between themselves andadvanced economies, growing at impressiverates while activity has remained weak indeveloped nations.

Recent years mark the continuation of adecadeslong trend, which has led tonothing short of a revolution in the globalbalance of economic power.

Danny Quah, a professor of economics atthe London School of Economics who hastried to pin down the centre of economicgravity based on global GDP, says it hasshifted east substantially since the mid1980s. According to Mr Quah’s research,the world’s centre of economic gravity hadmoved from the midAtlantic in 1980 to alocation east of Helsinki and Bucharest by2008. He predicts that by 2050, it will beon the border of India and China. “Withinour lifetime, the world’s economic centrewill have moved to be 10 time zones eastof Washington, DC,” Mr Quah says.

But power structures still largely reflectthe old state of the world.

Though emerging markets have more sayin the proceedings of the G20, both BrettonWoods organisations that govern globalfinance, the IMF and the World Bank, arebased in Washington.

The recent appointments of Jim YongKim and Christine Lagardecontinue a tradition which hasseen an American in thetop job at the Bank and aEuropean at the helm ofthe Fund since theinstitutions’ founding inthe mid1940s.Emerging marketofficials regard thisprocess as outdated,but could not unitebehind an alternativecandidate for either job.

“Global governance is the key challengefor the international community,” saysOusmène Mandeng of UBS. “But theregenerally seems to be little appetite forleadership among emerging markets – andindeed advanced economies – on theissue.”

Emerging markets are set to win someconcessions in the running of the IMF. TheFund’s board of governors has approved apackage of reforms to quotas, whichdetermine voting power. The reforms makeChina the third largest member country interms of quota share and will also putBrazil, India and Russia among the top 10.

But many members – including the US,the largest shareholder – are yet to passthe quota reform. With the US presidentialelections looming, a Congressional vote isunlikely until January 2013 at the earliest.

The delays over quota reform havecreated tensions between the big emergingmarkets and the advanced economies. Atthe spring meetings this year, Ms Lagarde’sattempts to secure at least $400bn inlending commitments, in part to boostconfidence that the IMF had the will andwherewithal to tackle the eurozone’sproblems, met with resistance from Brazil,which wanted greater voting rights in returnfor additional funds.

The advanced economies’ intellectualdominance through the socalledWashington Consensus, a grouping ofpolicies advanced by the Bretton Woodsinstitutions, has also attracted criticism.

Guido Mantega, Brazil’s finance minister,has been among the most vocal critics,saying last year in response to the Fund’sattempts to soften its rules on capitalcontrols: “Ironically, some of the countriesthat are responsible for the deepest crisissince the Great Depression, and have yet tosolve their own problems, are eager toprescribe codes of conduct to the rest ofthe world.”

Ensuring that Mr Mantega, and hisemerging market counterparts, feel theircontribution to the world economy isreflected in global power structures isregarded as vital if the Bretton Woods

institutions are to remain relevant.James Ashley, senior European

economist at RBC CapitalMarkets, says: “We cannot

freeze time – frameworkswhich made sense in theimmediate aftermath of thesecond world war are not thesame arrangements which in

any way best reflect theeconomics realities of today.

“The rise of China, and otheremerging markets, will surelyneed to be reflected materiallyin the way in which theinstitutions function.”

Claire JonesIMF director ChristineLagarde AFP

Until 2007, the cost of maizehad barely featured on theradar of the world’s mostprominent leaders, who areusually more interested inglobal geopolitics.

But this lack of interestin food commoditieschanged abruptly – and ithappened in Mexico, whichis hosting the G20 summitin Los Cabos this week.

The rise in maize pricestriggered a steep increase inthe price of the tortilla, alocal staple. The tortillariots that followed were thebeginning of what becomethe 2007-08 food crisis.

Since then, Mexico andother G20 countries havebeen concerned that risingand volatile agriculturalcommodities prices are agrowing problem for theglobal economy.

Food security, long only aconcern for aid advocatesand farming ministers, isnow hotly debated amongG20 leaders.

“The sharp increase infood prices has put agricul-ture back on the politicalagenda,” says Frank Rijs-berman, head of the Consor-tium of International Agri-cultural Research Centers,a network backed by donorcountries such as the US,the UK and Germany.

The G20 will receive astark assessment of the sit-uation. A group of UN insti-tutions, including theWorld Bank and the Foodand Agriculture Organiza-tion (FAO), have written areport for the group’s lead-ers warning that “globalagriculture will face multi-ple challenges over thecoming decades”.

The report says the farm-ing industry must, amongother things, produce morefood, contribute to overalldevelopment and povertyalleviation, confront in-creased competition foralternative uses of finiteland and water resources,and adapt to climatechange.

Food prices have recentlystabilised, but theyremain much higher thanin the past. The FAO foodindex was most recently at204 points, compared withits level of 127 in 2006. Theindex has been close to 200points for the past twoyears.

Five years after the initialrise in food prices, the pol-icy response to the chal-lenge is evolving. The ini-tial reaction of the G20 –and its predecessor, the G8– was to fight the emer-gency created by rising foodcosts.

The supply uncertaintiesand price spike of 2007-08 –the first food crisis in 30years – pushed millions ofpeople in sub-SaharanAfrica and Asia into pov-erty and triggered riots thatled to the collapse of thegovernments in countriesfrom Haiti to Madagascar.The spike in wheat and bar-ley prices after the crop fail-

ure in the former SovietUnion countries of Russia,Ukraine and Kazakhstan inmid-2010 further aggravatedthe emergency.

The number of peoplechronically hungry roseafter the 2007-08 food crisisto roughly 1bn, according tothe FAO, dealing a mortalblow to the target of halv-ing the number of theworld’s hungry by 2015.

This increase has forcedglobal leaders to wake up tothe reality that food aid will

cost much more than in thepast. The World Food Pro-gramme, for example, spent$3.6bn last year helpinghungry people, up 44 percent from a pre-food crisislevel of $2.5bn. Spendingpeaked in 2008 at $5bn.

But as the era of highfood prices appears to behere to stay, the focus ofthe G20 is slowly shiftingfrom fighting the emer-gency to addressing thelong-term problem.

The shift started in 2009,when the G8 and several

other countries launchedthe so-called “L’AquilaFood Security Initiative” –named after the Italiantown where the summitwas held – which focusedon long-term investments infarming in the developingworld.

The G8 initiative under-scored Washington’s newapproach to fighting globalhunger under PresidentBarack Obama, reversing atwo-decades-old policyfocused almost exclusivelyon food aid.

Hillary Clinton, US secre-tary of state, said at thetime: “For too long, ourprimary response [to fighthunger] has been to sendemergency [food] aid whenthe crisis is at its worst,”adding: “This saves lives,but it doesn’t address hun-ger’s root causes. It is, atbest, a short-term fix.”

The G20 is now deepeningthe shift towards invest-ment in long-term agricul-ture, particularly in Africa.

The economic crisis,which is forcing G20 mem-bers to tighten their belts inevery spending area, is aserious obstacle. The WhiteHouse is pushing for moreinvolvement by the privatesector.

The idea will be debatedat Los Cabos, according toG20 officials.

The report by the UNinstitutions warns: “Invest-ments by the private sectorin the developing worldremain small, and agricul-tural research continues tobe mostly funded by gov-ernments.”

But the shift from publicsupport to greater involve-ment by the private sectorhas its critics. Campaignersare worried that the poorestareas in Africa will be for-gotten. The reality is that,without private investment,public money may notreach those same countrieseither, because of budgetaryconstraints.

Leaders seek a long-termsolution to hunger painsFood pricesThe focus is onsecurity of supplyrather than aid,writes Javier Blas

Agriculture isback on thepoliticalagenda,says FrankRijsberman

A moment of sweep-ing reform for thei n t e r n a t i o n a lfinancial systemwill arrive one day. But itwill not arrive at the G20 inMexico.

Last year, NicolasSarkozy aspired to root-and-branch change when hechaired the G20 as presi-dent of France, calling for a“new Bretton Woods” andrailing against “monetarydumping” on the one handand the dollar’s role as glo-bal reserve currency on theother.

But financial stressreturned and those ambi-tions came to grief.

Mexico, by contrast, istaking a more workmanlikeapproach – and even thatmay end up overshadowedby another round of euro-zone woe.

Felipe Calderón, the Mexi-can president, has said:“We’ll be looking for thismeeting, under the leader-ship of Mexico, tostrengthen and establishconcrete commitments tostrengthen internationalinstitutions, particularlythe International MonetaryFund, so that it is a strongand flexible tool forconfronting the economic

crisis.” Some of the long-term tensions in the inter-national financial systemhave relaxed, at least fornow.

For example, the crisisreduced global imbalances.China’s economic stimulusin 2008 helped to push itscurrent account surplusdown from 10.1 per cent ofGDP in 2007 to only 2.3 percent this year; the US wentthe other way, from a 6 percent of GDP deficit in 2006,to 3.3 per cent this year.

Nothing fundamental hasbeen resolved – there is stillnothing to stop a countrythat chooses to run a mer-cantilist policy of currencyundervaluation from doingso – but circumstances havechanged enough to dull thepressure for reform.

Ideas for diversifying thesystem away from the dol-lar, perhaps with a greaterrole for a currency basketsuch as Special DrawingRights at the IMF, are alsoin abeyance.

The travails of the eurodo not make it look a tempt-ing alternative to the green-back, while China’s interna-tionalisation of the ren-minbi still has years to run.

But a third tension – thedominance of institutionssuch as the Fund by richcountries, despite the grow-ing economic weight of thedeveloping world, will be anissue at Los Cabos.

That is, not least, becauseof unfinished business fromthe IMF’s spring meetings.

The G20 finance ministersagreed then on a boost toIMF firepower, but some ofthe largest developing coun-tries pledged only a mini-mum collective number.

The amounts and theterms, which are crucial,must be firmed up in Mex-ico.

Those extra resources willarrive in the form of bilat-eral loans to the Fund, butone reason developing

countries are leery of com-mitment is that they wantto be sure that, when theIMF’s permanent resourcesare increased, they willsecure a boost to their vot-ing power.

The next review of theIMF’s infamous quota for-mula – the brevity of whichis in inverse proportion tothe rows it can cause – is on

the horizon even thoughthe last round of quotachanges is still not com-plete. Quota determinesrequired contributions,access to resources, andvoting power at the IMF.

By January 2013, theFund’s executive boardmust complete a compre-hensive review of the quotaformula, in preparation fora revision by January 2014.

Both the formula itself,and the battle to influenceit, are measures of anation’s power and weightin the global economy.

Today’s formula weightsgross domestic productmost heavily, followed bytrade openness, the varia-bility of capital flows in andout of a country and finallyits official foreign exchangereserves.

Most of these variableshave been present eversince Bretton Woods. Theresult is then “compressed”,so that small economies geta bit more quota and bigeconomies a bit less.

Changes in GDP will, inthemselves, lead to a shiftin quota towards China andother developing countriesover the four years sincethe last reform.

The question is, how andwhether to change the for-mula itself?

An initial IMF staff paperon the topic considers theeffects of dropping some ofthe subsidiary variablesand putting greater weighton GDP – but its simula-tions show why reaching an

agreement to do so will behard work for the G20 overthe next 18 months.

Large developing coun-tries would like to weightGDP more heavily in theformula and play downsome of the other measures.

The variability indicator –which is meant to showcountries that are morelikely to be recipients thanproviders of the Fund’sresources – seems mostlikely to go.

But it is the measure of“openness” that provokesthe most argument.

It favours Europe becauseof trade flows betweenEuropean nations – eventhough many of those flowsare within the eurozone –but removing variabilityand openness from the for-mula could cut the Euro-pean Union’s quota from 30to 25 per cent of the total.

No decisions will bereached in Los Cabos, butwith Europe in need ofshort-term favours, the slowtrickle of power towardsdeveloping countries in theinternational financial sys-tem is set to continue.

Change forthe betterwill come –but not yetFinancial systemTrickle of powerto developingcountries is set tocontinue, writesRobin Harding

FAO Food Price Index

2002-2004=100

Monthly change in international prices of a basket of food commodities

2005 06 07 08 09 10 11 12100

120

140

160

180

200

220

Source: UN

Different world: The IMF was conceived in 1944 at the Bretton Woods Conference EPA

The dominance ofinstitutions suchas the IMF byrich countries,will be an issue

FINANCIAL TIMES MONDAY JUNE 18 2012 ★ 5

Rubén Reachi, the state’stourism minister, callssport fishing “the first pil-lar of tourism in theregion”. That is apt, giventhat the Sea of Cortés’teeming ocean life was themost important catalyst forthe region’s initial develop-

ment as a tourist destina-tion in the 1950s and 1960s.

Known as “the marlincapital of the world”, LosCabos first attractedwealthy yacht owners fromCalifornia. Back then, there

town of Santiago was origi-nally established in theearly 18th century as a Jes-uit mission – though thenative Pericú Indians ran-sacked it 10 years after itsfoundation, killing the resi-dent priest.

Today, the small agricul-tural town built around adesert oasis is the gatewayto Baja’s Sierra de laLaguna Biosphere Reserve,an 11,300-hectare nationalpark that was created in1994.

At elevations that exceed2,000m, the reserve is one ofthose rare places wherenature itself seems to getconfused. Here, subtropical,alpine and desert land-scapes sit side by side.

However, most tourists toBaja – mainly US residentsand Canadians – go for twothings: fishing and golf.

G20: Mexico & the World

When the thousands ofinternational delegates,government ministers andheads of state land in theMexican resort of Los Cabosthis week for the G20 sum-mit, they will first see thecraggy, sun-baked moun-tains that form the spine ofthe Baja California penin-sula.

Then, they will catch aglimpse of the alluring darkblue sea beyond, before dis-appearing for the rest oftheir stay into windowlessmeeting rooms in hotelsand in the region’s new con-ference centre (see accompa-nying article online).

This is not how mostinternational visitors spendtheir time in Los Cabos –and with good reason.

What until 50 years agowas a sparsely populatedand isolated tip of rockydesert separating thePacific Ocean from the Seaof Cortés has grown into

the country’s smartest tour-ist destination.

Anchored by the twoneighbouring towns of SanJosé and Cabo San Lucas, itis home to Mexico’s bestgolf courses, prestigiousfishing tournaments, andthree of its best hotels,including one in the world’stop 50 according toTravel+Leisure.

Los Cabos is a class apartfrom Puerto Vallarta,Acapulco and the touristyCancún. Take the One &Only Palmilla, a hotelwhere even the moststressed executive cannothelp forgetting the pres-sures of life back home.

In the mornings, takebreakfast by one of thepools and look out for oneof a dozen types of whales.After that, lounge by thepool where staff clean thelenses of your sunglassesevery couple of hours andhand out iPads with pre-installed audio books.

Given all the attention, itis hard to leave. But ifyou do, and you headnorth across the Tropic ofCancer, you will get a tasteof how this 1,200-km-longarid peninsula was colo-nised.

Along with most of theother urban settlements onthe Baja peninsula, the

Venue makes alluring backdrop for talksLos CabosThere are plenty ofdistractions fordelegates – if theyget the time, writesAdam Thomson

International trade is underattack. Recession hastested many countries’commitment to keep theirborders open, as politicians,beholden to domestic audiences,have succumbed to the tempta-tion of throwing up trade barri-ers for short-term economicgain.

That is a fair enough sum-mary of the current state of glo-bal trade. But not in Mexico,one of the most stalwart defend-ers of free trade in Latin Amer-ica – or indeed the world.

“We have to be very clear thatthe way forward is not protec-

tionism, but openness,” FelipeCalderón, Mexico’s outgoingpresident, told a gathering ofchief executives during April’sSummit of the Americas. “Theway forward remains commerce,as it has been for millennia.”

It was a passionate and rarepublic statement by a leadinginternational politician infavour of free trade. In today’seconomic climate, it is hard tothink of any other G20 leaderwho would stick out his or herneck so far on the issue.

It was also a thinly veiled crit-icism of some of Mexico’s part-ners. These include the US,where there are protectionistmeasures in Congress and, espe-cially, two Latin Americancountries that have large Atlan-tic coastlines and where nerv-ousness about deindustrialisa-tion has recently triggered mer-cantilist instincts.

In February, for example,Brazil moved to shield its carindustry from Mexican competi-tion; the country’s vintners alsowant protection from Chilean

imports. Argentina, a prodigiousinventor of eccentric policies,has meanwhile required import-ing businesses to sell something– anything – to foreigners worthas much as what they buy fromthem.

The contrast between theseapproaches and the attitude ofbig Latin American economieswith a Pacific coastline – Mex-ico, Colombia, Peru and Chile –is stark. All have strong free-trade instincts, perhaps becausethey have a sharper sense thatthe world’s economic centre ofgravity is shifting towards Asiaand the Pacific.

Mexico, for example, is one ofthe most open of the world’sleading economies. In 2010,trade accounted for almost 60per cent of its gross domesticproduct, compared with Chinaat 48 per cent, the US with 22per cent and Brazil at 19.

Look to the future, and thecontrast is even starker. HSBCreckons Mexican trade, whichtotalled $700bn last year, willrise to almost 70 per cent of

GDP this year and 85 per centby 2017.

In some ways, this makesMexico a regional standardbearer for open trade – althoughone could argue it has littlechoice. The country sits next tothe world’s largest market, towhich it can supply goodswithin 48 hours. It is also less

rich in commodities than, say,Brazil. Both factors point toMexico’s strategic need tobecome adept at manufacturingand facilitating trade.

Thus, its exporting vocationhas been further boosted by aplethora of trade agreements,and by fostering supplies ofskilled and semi-skilled labour.Some 110,000 engineers gradu-

ated in engineering and technol-ogy in 2010, more than doublethe number in 1999, according toInegi, the national statisticsagency.

As a result, the country hassteadily diversified its tradepartners and moved up thevalue chain, as Mexico-basedmanufacturers have becomeever more efficient and skills-rich. The country now evenexports cars to China.

Analysts agree it is unlikelythis attitude will change afterMexico’s July 1 presidentialelection.

Politically, Enrique PenaNieto of the opposition Institu-tional Revolutionary Party(PRI), who leads in the polls, ispushing a reformist agenda thatseeks to break down barriers togrowth rather than erect newones. Indeed, top of his list aredomestic reforms to encouragemore competition in Mexico’sinternal economy.

The country is also benefiting,as the relative competitiveadvantage of Chinese manufac-

turers is eroded by rising wageand labour costs there. The con-tinued shortening of NorthAmerican supply chains will seeMexican industry ever moretightly integrated into theregion.

Nor is it the only country inthe region with free tradinginstincts. Alongside Canada,Mexico is angling to join thetrans-Pacific Partnership (TPP)which is being pushed by Wash-ington to form a grand Asia-Pacific trade area. At the sametime, Chile, Colombia and Peruwant to form with Mexico an“Alliance of the Pacific”.

Whether these Latin ambi-tions will come to anything isanother matter. But at least theapproach is businesslike. Thisyear, for example, the presi-dents of Mexico, Colombia, Peruand Chile discussed their pro-posed trade alliance via a “vir-tual summit”.

That might be a fancy phrasefor a “videoconference”. But itmarked a welcome change in acontinent that has often seemed

overly fond of grandstandingpresidential summits that arefilled with patriotic fervour butrarely produce much of sub-stance.

The Mercosur trade bloc, forexample, which groups Brazil,Argentina, Uruguay and Para-guay, was once held up as anemblem of regional trade inte-gration.

Yet today it has becomebogged down in disputes –including, in May, a “chip war”after truckloads of frozen fries,produced in Argentina and nor-mally destined for Brazilian-based hamburger chains,clogged the two countries’ bor-ders.

Indeed, if you put aside thesmiles and diplomatic niceties,since 1995 trade within the blochas grown less than amongcountries outside it, or evenbetween individual Mercosurmembers and other Latin Amer-ican countries.

Meanwhile, Mexico, underNafta, has become an exportingpowerhouse.

Way ahead ‘is openness, not protectionism’Free tradeJohn Paul Rathbonesays the country is astalwart defender ofopen borders, incontrast to someof its neighbours

Enrique PenaNieto of theopposition PRIhas an agendaincluding morecompetition inthe economy

The ‘marlin capitalof the world’attracts sportfishing enthusiastsall year round

Cooling-off period: a bartender pours drinks at the PuebloBonito Rose resort hotel in Los Cabos AFP/Getty

was hardly any infrastruc-ture and sailing was themain way of getting there.Today, by contrast, itattracts sport-fishing enthu-siasts from all over theworld and year round.

The calendar is packedwith competitions, but theannual highlight is the Bis-bee’s Black and Blue Tour-nament, named after thegiant black and blue marlinthat inhabit the waters sur-rounding the peninsula.

More than 200 teams typi-cally take part each year tocompete for $4m in prizemoney.

Golf is a much newerarrival to the region, butalready there are severalworld-class coursesdesigned by famous names.

Since it opened in 1994,Cabo del Sol has gained areputation as one of the

most scenic courses in thewestern hemisphere, andJack Nicklaus, its designer,called the 16th, 17th and18th holes “the best threefinishing holes in all ofgolf”.

The Cabos’ DiamanteDunes golf course is argua-bly even better. Rankedat 58 in the world last yearby Golf magazine, andhailed by Golf Digest asMexico’s best course, theDunes is an intoxicatingcombination of ocean anddesert dunes.

Of course, many residentsof California and the USsouthern states havealready discovered thebeauty of Los Cabos.

But with plenty of public-ity from its role as host tothe G20 summit, Baja’sappeal could soon becomemuch more international.

The Arab Spring is referred to asthe first “internet revolution”,as Facebook and Twitter helpedfoment insurrections that endedseveral autocratic regimes. But abigger factor in the overthrows mayhave been rising food prices thatmade people even more desperatethan usual.

In fact, all around the world,people are having more troubleputting food on their tables.

Increasing demand in emergingmarkets, droughts and floods becauseof climate change and unregulatedspeculative pressures in commoditymarkets have provoked a wave ofprice volatility that has put many ofthe poorest on the brink ofstarvation.

Indeed, concerns about the currentshape of the global economy arepressing and demand immediateaction. But for Mexico, as presidentof the G20, this should not make usneglect the long-term issues affectingthe lives of billions around theplanet. We will have failed if wemanage to get the richest nationsback on track while the poorest stillexperience famine.

That is why my country insistedon placing food security at the topof the G20 agenda, alongside therestoration of economic growth andglobal financial reform.

Mexico, as host of the G20 summitat Los Cabos this week, will pushhard for effective and immediateactions to tackle this issue.

I am certain theG20 can reachagreements thatallow us topromote a newgreenrevolution, onethat focuses

on unleashing the potential of smallproducers instead of the great globalconglomerates that have led previousincreases in output. Some steps canbe taken immediately to this end:● First, we must developmechanisms to encourage moreprivate investment in agriculture andfisheries, but this must be done inways that take into account theneeds and development objectives ofrural communities. Publicinvestment must be targeted at thecreation of public goods, such asinfrastructure, that will support andencourage private investment.● Second, mechanisms must bestrengthened for risk management inagriculture to enable small farmersto withstand droughts and pricevolatility. Small farmers do not havethe same capacity to absorb losses oruse futures contracts as larger ones,so we must develop country andregional programmes to protect them.The G20 can be a forum to shareinternational experiences and buildcapacity in lower income countries.● Third, we must promote capacitybuilding through training producersand organising communities. Wemust also boost research intotechnologies to increase the earth’sproductivity and develop crops moreresistant to diseases, drought andherbicides. Then, the G20 shouldcreate knowledge transfermechanisms and knowledge banksthat could push advances intooperation quickly on a massive scale.● Fourth, the operations ofagricultural markets should beimproved by increasing transparencyand the quality of information fortraders to reduce price swings anduncertainty. The volatility of globalcommodity markets has made itharder for small farmers to predictprices, and sometimes evencontributes to a reduction inproduction. Small farmers may optto leave fields fallow if they thinkthey are going to lose money onthe crop.

Luckily, wehave made a

start. The G20 developed importantinitiatives under the Frenchpresidency in 2011, and countriesagreed to work together in the areasof research and development;promoting investment; improvingmarket transparency and the qualityof information; strengtheninginternational policy co-ordination;developing risk management tools;and improving the operation ofagricultural commodities markets.

In addition to ensuring the properimplementation of previouscommitments, we are working on thedevelopment of specificrecommendations to increaseagricultural productivity worldwide.

To implement changes and havereal impact, we are focusing onsolutions that can be implementedquickly in poor and remote ruralareas of the planet. We need to begina new era that gives priority to thedemocratisation of knowledge thatcan take the world to a new level ofdevelopment – one that is equitableand sustainable.

To accomplish this, governmentsmust accept they cannot go it alone.That is why we are working with thebusiness community, through theB20 process, in which entrepreneursfrom all over the world aresubmitting recommendations on howto improve food security bystrengthening public-privatepartnerships.

We must also listen to the voicesof civil society, and that is why thework with renowned internationalfoundations that are deeply involvedin the issue of food security is ofspecial importance during Mexico’spresidency of the G20.

The G20 must build permanentbridges with countries that face thegreatest challenges in food security,and demonstrate that co-operationbetween the world’s largesteconomies brings benefits to theentire international community.

That almost 1bn people in theworld remain undernourished isunacceptable.

The time has come for foodsecurity to be considered one of themost important tasks humanity mustaddress in the 21st century, and thisyear’s G20 meeting will be a strongstep in that direction.

Felipe Calderón is president of Mexico

Why food security comes firstViewpointFELIPE CALDERÓN

Mexico’sFelipeCalderón:G20 mustbuild bridges

6 ★ FINANCIAL TIMES MONDAY JUNE 18 2012

G20: Mexico & the World

Baja California Sur, theMexican state that istemporary home tothousands of peoplearriving in Los Cabos for thisweek’s G20 summit, is normallya quiet and peaceful place, farremoved from the country’sbloody conflict with drug car-tels.

But today, the tip of one of theworld’s longest peninsulas isbuzzing with police, army andnavy, who have set up check-points – complete with gamma-ray machines for inspectingvehicles – on all the region’shighways. Look out to sea andyou can even see the marines’gunboats surveying the coast-line.

Marcos Covarrubias Vil-laseñor, the state’s governor,says: “We’re providing state,federal and municipal forces, sothat people arriving in theadvance parties from the partici-pating countries feel safe assoon as they arrive.”

It may feel very militaristic,but it is also indicative of thewider build-up of security forcesthroughout Mexico since centre-right President Felipe Calderónmade fighting organised crime,in particular the country’s drugcartels, a priority.

And, for the first time sinceMr Calderón came to office, thatbeefed-up security may be hav-ing its desired effect.

According to police statistics,the number of murders duringthe first three months of thisyear fell more than 6 per centcompared with the same periodof 2011 – the first quarterly fallin homicides since 2007.

Moreover, each of the pastthree quarters has recordedfewer murders than the previ-ous one – for the first time sinceMr Calderón took office.

That, in turn, has driven themurder rate so far this year to

about 17 per cent below its peakduring the second half of lastyear.

The reduction has the govern-ment cautiously optimistic thatthe steep upward trend of vio-lence over the past few yearsmay finally have flattened outand may even be graduallyheading in the right direction.

On a recent trip to the north-ern industrial city of Monterreylast month, Alejandro Poiré, the

interior minister, said that per-haps “we are not at the begin-ning of the end, but we may beat the end of the beginning”.

Mr Poiré was talking specifi-cally about the northern state ofNuevo León of which Monterreyis the capital. But many observ-ers believed that he might wellhave been thinking about thecountry as a whole.

Alejandro Hope, a securityexpert with Mexico City’s Mexi-

can Institute for Competitive-ness and a former official atCisen, Mexico’s intelligenceservice, says several factorscould be behind the apparentchange in trend.

One of them, he says, is thesheer number of security forcescompared with at the beginningof Mr Calderón’s six-year term.Mexico now spends about 1.2per cent of its gross domesticproduct on security – a figure

that includes the armed-forcesbudget. By the end of this year,that will be about double whatthe previous administrationspent.

Just as important, says MrHope, there are some clues thatthe government’s intelligence isstarting to work better.

Evidence includes the factthat several relatively high-level arrests made in previousmonths were carried out

without firing a single shot.“The state has a much greater

capacity now [to deal withorganised crime] than it didwhen all of this started,” hesays.

Indeed, the rise in violenceover the past five years tookalmost everyone by surprise.Government statistics show themost recent overall murder ratewas about 22 per 100,000 inhabit-ants on a rolling 12-month basis.

That may be lower than Bra-zil, with about 25, or Colombiawith more than 30, but it isabout three times higher thanthe rate when Mr Calderón tookoffice.

That increase, which has dom-inated international press cover-age of Mexico and terrorised res-idents, in particular in the northwhere cartels fight it out forcontrol of the main drug-smug-gling routes into the US, impliesthat it could be many years – MrHope estimates almost 10 –before Mexico returns to thesame levels as 2007.

That, he admits, is a long timeto wait. But already, there aresome examples of how the vio-lence is dropping rapidly.

Just a couple of years ago,Ciudad Júarez, the dusty andsprawling industrial city thatborders El Paso, Texas, was onits knees. A bitter fight betweenat least two rival gangs pro-duced an average of 263 murdersa month in 2010, according topolice figures.

Today it is at about 100 –hardly acceptable, but at leastmuch lower than at the city’sworst point.

Experts say that none of thisis likely to make much of adifference on the popularity ofthe present government, as itprepares to leave office onDecember 1 this year. Presiden-tial elections are scheduled forJuly 1.

According to the Mitofskypolling company, Mr Calderóncurrently has an approvalrating among the population of52.4 per cent – considerably lessthan his predecessors duringthe same period of their termsin office.

But if the trend continues, itwould at the very least be awelcome present for the nextadministration.

First signs that drug crime is on the wane

Pooling their resources: Mexican federal police in riot gear during a crowd control drill at Los Cabos AFP/Getty

SecurityAdam Thomson findsa police and militarybuild-up and betterintelligence mayfinally be working

Each of the past threequarters has recordedfewer murders thanthe previous one

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