Heading into the G20 summit, to be held in London on April 2, South Africa is proposing a four-track plan to deal with the current global economic crisis.

Speaking at the Institute for Global Dialogue on Thursday, National Treasury chief director of international financial relations Michael Sachs said that the financial crisis had its origins in the developed world, and that it was, therefore, up to the developed countries to take the primary action to resolve the crisis.

Sachs noted that the first tier of the plan would be the advancement of global economies to engage in serious fiscal stimulus. He noted that although the US had already invested a significant amount into fiscal stimulus, the European countries still had a long way to go.

“Secondly, advanced economies need to lance the boil of the financial sector and toxic assets in those financial sectors,” he said.

Sachs explained that having a fiscal stimulus policy was of little help if the financial sector was frozen. “The extent of your fiscal stimulus’ impact on the real economy will be limited to the extent to which the financial sector is not working in that economy.”

He added that ‘zombie banks’, banks which were not lending to anyone and which had massive debt on their corporate balance sheets, would simply channel the fiscal stimulus into a black hole.

The third track to the proposal would be the prevention of the next phase of the crisis. “Everyone knows that the next phase of the crisis is the emerging market phase. We again need decisive action from advanced economies.”

Sachs suggested that UK and US fiscal stimulus plans could be easily financed, as global capital markets were still willing to invest in these economies. However, for countries such as South Africa, the capital markets were effectively closed.

“We need a mechanism in place on a global level that will enable emerging markets in particular, to finance counter cyclical policies during this crisis.”

If stimulus funding could not be obtained, emerging markets would be forced onto procyclical positions, which would mean that deficits could not be financed. The emerging economies would then be forced to reign in expenditure, which in turn would lead to lower growth in these markets.

“We need counter-cyclical support in these countries. We also need significant funds from the International Monetary Fund (IMF) to guard against the potential of balance of payment and liquidity prices.”

The fourth and final track was the bold commitment of developed markets to reform global governance.

Sachs noted that the world that would emerge after the financial crisis was likely to differ significantly from the one before the crisis, and South Africa would need a clear commitment from those countries currently in a position of global dominance, that they would be prepared to change the situation.

“It is very easy to say that we want a new deal on global governance, but when it comes down to the doing, there are challenges. What we need on this multilateral approach is action, not words.”

British High Commission economic policy director Ade Onitolo said that the London summit hoped to find globally agreed upon responses to the crisis.

“The London summit is set against the context of a financial crisis that has spilled over into the real economy, while in the meantime, the challenges that faced the global economy before the crisis, still remain.”

Onitolo noted that the G20 summit would be focusing on four different objectives, staring with a macrofinancial response to the crisis.

“On the macrofinancial response, the London summit will be reviewing the action that has already been taken, how consistent this is with recovery and how consistent the fiscal stimulus packages are with long-term sustainability.”

The second focus area for the summit would be the global regulation of financial systems.

“What we hope to achieve is a robust risk management system that helps to bring risk management in line with developments in the financial market. The incentives in the financial markets should be consistent with stability, rather than crisis.”

Onitolo added that regulations could act as buffers during times of crisis, and should be internationally coordinated across the globe.

The third focus of this year’s summit would be the reformation of the global financial architecture. “I think almost everyone attending the summit will accept that the IMF and the World Bank, the way they operate is outdated and things need to change.”

He noted that the current resources held by individual countries to buffer them against economic hardship, was minimal compared with what the IMF could offer. He added that these resources should be made easily available to countries in need.

“More fundamentally, there is the question of the legitimacy of the financial institutions. Their governing structures need to be made more representative. There is no argument about the fact that developed and rich countries call the shots and make the policies. Developing and emerging countries need to have their voices enhanced in the government structures.”

He added that the surveillance mechanism of the IMF should also be improved to establish an early warning system when a financial crisis looms on the horizon. “At the moment, you have an IMF that makes comment on how the global economy is working, rather than acting as a strong enough voice that can pressure countries into making a change.”

Development banks within the different regions should also be used to develop the prospective regions, and to contribute to sustainable growth.

It was suggested that during the London summit, world leaders should call for an early completion to the current global trade negotiations, the Doha Round, and strengthen the commitment made in Washington, during the previous G20 summit, to refrain from measures that were protectionist, either in intention or effect, and put in place transparent mechanisms to monitor such commitments.