Can Chile Recapture the Growth of Its 'Golden Decade'?

Chile’s economy appears to have held up well against significant recent headwinds, and some private-sector observers go so far as to suggest that growth rates similar to those of the "Golden Decade" may be realized again.

Despite the earthquake and subsequent tsunami in February, job losses and the closing of numerous small businesses last year because of the global financial crisis, Chile was the top destination for foreign direct investment in Latin America during the first quarter of 2010. During the recent World Conference for Trade and Development, the United Nations reported that Chile, with US$5.7 billion in foreign direct investment, had outpaced Brazil (US$5.6 billion) and Mexico (US$4.3 billion) among favorite locations for investors in the first quarter.

What’s more, the Santiago Chamber of Commerce forecasts that Chile’s foreign capital flow this year could reach US$15 billion to US$20 billion. This is reflected in the dizzying pace in the service sector, communications, mining and retail sales resulting from higher spending on public and private reconstruction initiatives, and meaningful expansion in internal demand, according to a press note from the country’s Central Bank.

Analysts widely forecast that the Chilean economy could grow at a rate of 6% in 2010, which would be in line with the goal outlined by the government of President Sebastian Piñera. Chile’s economy contracted last year by 1.5%. But market optimism has run so deep that the private sector has voiced the possibility that Chile will return to annual growth of 7%, which it achieved from 1987 to 1997, a period known as the “Golden Decade.”

Things are different now, however, says Juan Eduardo Coeymans, a professor of macroeconomics at the Catholic University of Chile. During those golden years, Coeymans notes, a combination of unique factors accelerated growth. “Chile was emerging from a military dictatorship, and the arrival of democracy was strengthening economic deregulation and free trade,” he says. Those factors increased investor confidence and facilitated the arrival of significant volumes of foreign capital. They also encouraged a political climate of reform, leading to free-trade agreements with the world’s principal economies. None of these variables could recur with as much intensity, he says.

Chile has already taken maximum advantage of global trade liberalization. It has more than 20 free-trade agreements with countries including the United States, China, Japan and Australia, as well as with the trade blocs Mercosur (Argentina, Brazil, Paraguay, Uruguay; Chile is an associate member) and the European Free Trade Association (Iceland, Lichtenstein, Norway and Switzerland).

Unresolved Issues in Education

Clearly, it is hard to replicate the economic globalization that played such an important role during the Golden Decade. Yet some argue that it is possible to re-create the climate of political consensus of those years to promote significant reform. Foremost should be reforms related to the quality of education, says Rodrigo Fuentes, professor of economic growth at the Institute of Economics at the Catholic University of Chile.

“You can’t aspire to an annual growth rate of 7% without accelerating productivity. In order to do that, you need to improve human capital, which also means incorporating initiatives for optimizing the level of education,” Fuentes says. Such reforms should involve training workers in the appropriate ways to adopt new technologies, to acquire more knowledge, and to become more professional in their respective areas, while strengthening their dependence on a base of formal education.

That is precisely the Achilles’ heel of the Chilean labor force, argues Andrea Repetto, professor of economics at the School of Government of Adolfo Ibáñez University. “The level of scholarship of our workers is low, as research projects have revealed.” According to CASEN 2006 -- the latest version of the main tool used by the government to evaluate educational policy -- almost 20% of the Chilean labor force have not completed eight years of primary education, while 40% have not finished secondary school. International achievement tests have ranked Chilean children below international standards over the last decade, Repetto notes.

This shows that Chile faces a tremendous challenge, Fuentes argues. Improving the quality of education takes time; results may be visible only over generations. Nevertheless, Fuentes says, productivity can be increased in a short period with changes in the labor market. Fuentes proposes making the workday more flexible; changing the system of unemployment insurance compensation; and devising more effective policies for adjusting minimum salaries so “any increases in salaries are reflected in an increase in real productivity.”

Repetto adds that it is important to deal with the labor market’s high turnover rate; some 35% of the country’s formal workers have work contracts that typically last only six months. Half of workers with indefinite contracts don’t last 12 months on the job, according to the Chilean government’s unemployment bureau. “As a result, it’s hard to train workers, and you spend a lot of money without changing the turnover rate,” Repetto says.

It will also be necessary, she notes, to promote telecommuting and labor incentives so companies can hire more women and young people.

The High Cost of Energy

Another important issue is the country’s dependence on high-cost energy, says Guillermo Le Fort, professor of economics at the University of Chile, in a report published by the Chilean economics magazine Capital. “If we don’t manage to significantly lower the high cost of energy by using all of our potential, it will be hard to recover our productivity.”

From 1995 to 2003, Chile maintained a competitive structure of energy costs, largely through imports of Argentine natural gas at a low price. In 2004, however, Argentina restricted its shipments of hydrocarbons, forcing Chile’s electric utilities to operate with imported diesel fuel, which made their costs shoot up.

Currently, two-thirds of Chile’s electric energy is generated with its own hydropower resources. But domestic production of petroleum, natural gas and coal are low, so Chile must import petroleum and liquid natural gas at high prices. Chile is counting on results from small renewable energy projects in the north and south, based largely on wind, the sun and biomass. However, “the cost of developing attractive energy alternatives continues to be very high,” says Hugh Rudnick, professor at the Institute of Electrical Engineering at the Catholic University of Chile.

What are Chile’s best options for lowering energy costs? Taking maximum advantage of hydroelectric resources and coal, Rudnick says. But Chile will have to wait until 2012 to exploit new hydropower complexes and coal-fired plants because construction of these projects has only recently begun.

Meanwhile, Chile can make progress in other areas. One is to improve government efficiency, Coeymans says. “There seems to be an enormous waste of resources in the government, when you discover that there are 70 journalists working inside the same ministry.” A recent Ministry of Health audit revealed that 160 lawyers and 70 journalists worked in the agency, provoking a public outcry. Fuentes says the government should correct these inefficiencies, which distort resource allocation and increase production costs.

Copper and the Low Fiscal Deficit

Despite these challenges, the consensus among experts is that various favorable factors will permit Chile to achieve high growth. One is the high price of copper on world markets.

Currently, the price of copper is above US$3.30 a pound on the London Metal Exchange. That, notes Coeymans, “is providing incentives for the big mining companies that operate in Chile to invest more capital in order to increase their production levels.” According to the Santiago Chamber of Commerce, mining was the leading sector for foreign direct investment in the first quarter, with US$1.6 billion invested.

The world’s largest copper producer’s dependence on the extraction of the mineral “is a double-edged sword,” warns Javier Bronfman, professor of public policy at the School of Government at the Adolfo Ibáñez University. “It puts us in a delicate situation with regard to international fluctuations in that commodity.” When the global financial crisis broke out in September 2008, it struck a hard blow against copper prices, which dropped to US$1.14 a pound. That had a strong impact on production costs, which led to the closing of numerous small and midsize companies tied to the sector.

That is why Coeymans suggests that the government apply efficient mechanisms for covering price risks to protect not only small mining companies, but all smaller companies, “since they are responsible for generating more than 60% of jobs in Chile and contributing 30% of the GDP.”

But copper isn’t the whole story. Chile possesses strong macroeconomic accounts, which drive growth. “The best example is its extremely low fiscal deficit, which represents only 5% of its GDP, according to the latest report of the International Monetary Fund,” explains Dalibor Eterovic, professor of political economics at the School of Government of the Adolfo Ibáñez University. He is also manager of economic research and fixed income at LarrainVial, a Chilean provider of financial services.

In the context of the indebtedness affecting numerous developed countries, he says, “Chile offers the characteristics of a safe haven, which will make it easier for it to attract foreign capital.”

In any case, Chile’s future is in its own hands. Either it deals with the great unresolved issues and turns its economic advantages into high, sustained growth, or it lets these good times, which are more than satisfying to the country’s businessmen, become a lost opportunity.

09/01/2010 05:22 PM

'Peak Oil' and the German Government

Military Study Warns of a Potentially Drastic Oil Crisis

By Stefan Schultz

A study by a German military think tank has analyzed how "peak oil" might change the global economy. The internal draft document -- leaked on the Internet -- shows for the first time how carefully the German government has considered a potential energy crisis.

The term "peak oil" is used by energy experts to refer to a point in time when global oil reserves pass their zenith and production gradually begins to decline. This would result in a permanent supply crisis -- and fear of it can trigger turbulence in commodity markets and on stock exchanges.

The issue is so politically explosive that it's remarkable when an institution like the Bundeswehr, the German military, uses the term "peak oil" at all. But a military study currently circulating on the German blogosphere goes further.

The study is a product of the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military. The team of authors, led by Lieutenant Colonel Thomas Will, uses sometimes-dramatic language to depict the consequences of an irreversible depletion of raw materials. It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the "total collapse of the markets" and of serious political and economic crises.

The study, whose authenticity was confirmed to SPIEGEL ONLINE by sources in government circles, was not meant for publication. The document is said to be in draft stage and to consist solely of scientific opinion, which has not yet been edited by the Defense Ministry and other government bodies.

The lead author, Will, has declined to comment on the study. It remains doubtful that either the Bundeswehr or the German government would have consented to publish the document in its current form. But the study does show how intensively the German government has engaged with the question of peak oil.

Parallels to activities in the UK

The leak has parallels with recent reports from the UK. Only last week the Guardian newspaper reported that the British Department of Energy and Climate Change (DECC) is keeping documents secret which show the UK government is far more concerned about a supply crisis than it cares to admit.

According to the Guardian, the DECC, the Bank of England and the British Ministry of Defence are working alongside industry representatives to develop a crisis plan to deal with possible shortfalls in energy supply. Inquiries made by Britain's so-called peak oil workshops to energy experts have been seen by SPIEGEL ONLINE. A DECC spokeswoman sought to play down the process, telling the Guardian the enquiries were "routine" and had no political implications.

The Bundeswehr study may not have immediate political consequences, either, but it shows that the German government fears shortages could quickly arise.

A Litany of Market Failures

According to the German report, there was "some probability that peak oil will occur around the year 2010 and that the impact on security is expected to be felt 15 to 30 years later." The Bundeswehr prediction is consistent with those of well-known scientists who assume global oil production has either already passed its peak or will do so this year.

Market Failures and International Chain Reactions

The political and economic impacts of peak oil on Germany have now been studied for the first time in depth. The crude oil expert Steffen Bukold has evaluated and summarized the findings of the Bundeswehr study. Here is an overview of the central points:

• Oil will determine power: The Bundeswehr Transformation Center writes that oil will become one decisive factor in determining the new landscape of international relations: "The relative importance of the oil producing nations in the international system is growing. These nations are using the advantages resulting from this to expand the scope of their domestic and foreign policies and establish themselves as a new or resurgent regional, or in some cases even global leading power."

• Increasing importance of oil exporters: For importers of oil more competition for resources will mean an increase in the number of nations competing for favour with oil producing nations. For the latter this opens up a window of opportunity which can be used to implement political, economic or ideological aims. As this window of time will only be open for a limited period, "this could result in a more aggressive assertion of national interests on the part of the oil producing nations."

• Politics in place of the market: The Bundeswehr Transformation Center expects that a supply crisis would roll back the liberalization of the energy market. "The proportion of oil traded on the global, freely accessible oil market will diminish as more oil is traded through bi-national contracts," the study states. In the long run, the study goes on, the global oil market, will only be able to follow the laws of the free market in a restricted way. "Bilateral, conditioned supply agreements and privileged partnerships, such as those seen prior to the oil crises of the seventies, will once again come to the fore."

• Market failures: The authors paint a bleak picture of the consequences resulting from a shortage of petroleum. As the transportation of goods depends on crude oil, international trade could be subject to colossal tax hikes. "Shortages in the supply of vital goods could arise" as a result, for example in food supplies. Oil is used directly or indirectly in the production of 95% of all industrial goods. Price shocks could therefore be seen in almost any industry and throughout all stages of the industrial supply chain. "In the medium term the global economic system and every market-oriented national economy would collapse."

• Relapse into planned economy: Since virtually all economic sectors rely heavily on oil, peak oil could lead to a "partial or complete failure of markets," says the study. "A conceivable alternative would be government rationing and the allocation of important goods or the setting of production schedules and other short-term coercive measures to replace market-based mechanisms in times of crisis."

• Global chain reaction: "A restructuring of oil supplies will not be equally possible in all regions before the onset of peak oil," says the study. "It is likely that a large number of states will not be in a position to make the necessary investments in time," or with "sufficient magnitude." If there were economic crashes in some regions of the world, Germany could be affected. Germany would not escape the crises of other countries, because it's so tightly integrated into the global economy.

• Crisis of political legitimacy: The Bundeswehr study also raises fears for the survival of democracy itself. Parts of the population could comprehend the upheaval trigged by peak oil "as a general systemic crisis." This would create "room for ideological and extremist alternatives to existing forms of government." Fragmentation of the affected population is likely and could "in extreme cases lead to open conflict."

The scenarios outlined by the Bundeswehr Transformation Center are drastic. Even more explosive, politically, are recommendations to the government that the energy experts have put forward based on these scenarios. They argue that "states dependent on oil imports" will be forced to "show more pragmatism toward oil-producing states in their foreign policy." Political priorities will have to be somewhat subordinated, they claim, to the overriding concern of securing energy supplies.

For example: Germany would have to be more flexible in relation toward Russia's foreign policy objectives. It would also have to show more restraint in its foreign policy toward Israel, to avoid alienating Arab oil-producing nations. Unconditional support for Israel and its right to exist is currently a cornerstone of German foreign policy.

The relationship with Russia, in particular, is of fundamental importance for German access to oil and gas, the study says. "For Germany, this involves a balancing act between stable and privileged relations with Russia and the sensitivities of (Germany's) eastern neighbors." In other words, Germany, if it wants to guarantee its own energy security, should be accommodating in relation to Moscow's foreign policy objectives, even if it means risking damage to its relations with Poland and other Eastern European states.

Peak oil would also have profound consequences for Berlin's posture toward the Middle East, according to the study. "A readjustment of Germany's Middle East policy … in favor of more intensive relations with producer countries such as Iran and Saudi Arabia, which have the largest conventional oil reserves in the region, might put a strain on German-Israeli relations, depending on the intensity of the policy change," the authors write.

When contacted by SPIEGEL ONLINE, the Defense Ministry declined to comment on the study.

Gold Rallying to $1,500 as Soros's Bubble Inflates

By Nicholas Larkin

Aug 31, 2010

Investors are accumulating enough bullion to fill Switzerland’s vaults twice over as gold’s most- accurate forecasters say the longest rally in at least nine decades has further to go no matter what the economy holds.

Analysts raised their 2011 forecasts more than for any other precious metal the past two months, predicting a 10th annual advance, data compiled by Bloomberg show. The most widely held option on gold futures traded in New York is for $1,500 an ounce by December, or 18 percent more than the record $1,266.50 reached June 21. Holdings through bullion-backed exchange-traded products are already at more than 2,075 metric tons, within 0.1 percent of the all-time high.

“Either a swift economic recovery or further dismal economic performance should bring new buyers into the market,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt who was the most accurate forecaster in the first quarter and expects the metal to rise as high as $1,400 next year. “A stronger economy would create more jewelry demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven.”

Investors added to their gold holdings through ETPs for three consecutive weeks, reflecting demand for assets typically favored in times of financial stress. Two-year Treasury yields fell to a record low of 0.4542 percent on Aug. 24 and the yen reached a 15-year high against the dollar the same day. Pacific Investment Management Co., Deutsche Bank AG and Citigroup Inc. have announced or are offering funds or traded instruments designed to guard against sudden market declines.

Swiss Reserves

Buyers accumulated almost 278 tons of gold in 2010 across 10 ETPs tracked by Bloomberg, worth $10.4 billion at this year’s average price. Total holdings are almost twice Switzerland’s official reserves of 1,040 tons, data compiled by the World Gold Council show. ETP holdings reached a record 2,078 tons July 19, data compiled by Bloomberg show.

One of the biggest buyers has been Soros Fund Management LLC, which oversees about $25 billion. George Soros, who made $1 billion breaking the Bank of England’s defense of the pound in 1992, described gold as “the ultimate asset bubble” at the World Economic Forum’s January meeting in Davos, Switzerland. Buying at the start of a bubble is “rational,” he said.

Soros Fund Management sold 341,250 shares of the SPDR Gold Trust, the largest ETP backed by bullion, in the second quarter, according to an Aug. 16 Securities and Exchange Commission filing. That still left a holding of 5.24 million shares, equal to almost 16 tons. Soros declined to comment on the change, through a spokesman.

Accurate Forecasters

Gold may rise as high as $1,500 next year, 21 percent more than the $1,240 traded at 1:45 p.m. in London, according to the median in a Bloomberg survey of 29 analysts, traders and investors. Dan Brebner, an analyst at Deutsche Bank in London who is the most accurate forecaster so far this year, says the metal may reach $1,550.

Bullion gained 13 percent since January, beating an 8.4 percent return on Treasuries, an 8 percent decline in the MSCI World Index of shares and the 10 percent slump in the S&P GSCI Total Return Index of 24 raw materials.

Investors are concerned the recovery is weakening. Sales of new U.S. homes fell to an all-time low in July, the Commerce Department said Aug. 25. The U.S. economy grew at a 1.6 percent annual rate in the second quarter, less than previously calculated, the department said Aug. 27. U.S. growth will slow to 2.8 percent next year, compared with 3 percent in 2010, according to the median of as many as 69 economists’ forecasts compiled by Bloomberg.

‘Fear Another Crisis’

People “fear another crisis and so they will diversify into gold,” said Thorsten Proettel, an analyst at Landesbank Baden-Wurttemberg in Stuttgart, Germany, who was also the most- accurate forecaster in the first quarter. He expects gold to trade as high as $1,350 next year. Anne-Laure Tremblay, an analyst at BNP Paribas SA in London whose forecast was also the best in the period, is estimating a 2011 high of $1,370.

Bullion’s four-fold rally since the end of 2000 has attracted fund managers Eric Mindich and John Paulson. Mindich’s $13 billion Eton Park Capital Management LP bought almost 6.58 million shares of the SPDR Gold Trust in the second quarter, according to an Aug. 16 SEC filing. That’s equal to about 20 tons of gold. Paulson & Co., managing $31 billion, held 31.5 million shares in the SPDR Gold Trust, making it the largest investor, an Aug. 16 SEC filing shows.

Astor Sells

Astor Asset Management LLC, with about $570 million of assets, once had as much as 10 percent of its holdings in the SPDR Gold Trust, according to Bryan Novak, managing director of the Chicago-based company. The firm sold the stake at the end of last year for a profit and now owns silver, copper and a multicommodity ETP.

“We don’t believe we’re heading into a double-dip recession,” Novak said. “Gold carries some risk because a lot of people are piling into the trade.”

A plunge in equities may spur investors to sell their gold holdings to raise cash, he said. The Standard & Poor’s 500 Index dropped 14 percent since this year’s peak on April 26.

Investment demand of 1,901 tons last year exceeded jewelry consumption of 1,759 tons for the first time in three decades, according to London-based researcher GFMS Ltd. That trend continued into the second quarter, with total demand advancing 36 percent to 1,050.3 tons, the WGC in London said Aug. 25.

Newmont Mining

Earnings at Newmont Mining Corp., the largest U.S. gold producer, may increase 47 percent to $1.93 billion in 2010, according to the mean estimate of seven analysts’ forecasts compiled by Bloomberg. The 16-member Philadelphia Stock Exchange Gold and Silver Index advanced 8.7 percent since January.

Bets on gold may pay off even if economic recoveries strengthen. World growth will be 4.6 percent this year, the most since 2007, the International Monetary Fund said July 7. China, the second-biggest bullion buyer after India, will expand 10 percent in 2010, compared with 9.1 percent last year, according to the median of 24 economists’ forecasts compiled by Bloomberg.

Gold imports by India this year may total 600 tons to 625 tons, compared with an estimated 480 tons to 485 tons last year, according to Anjani Sinha, chief executive officer of National Spot Exchange Ltd., the country’s biggest bourse for trading physical gold.

While growth may curb investors’ appetite for gold to protect their wealth, it may also bolster purchases of jewelry, reviving demand that fell to a 21-year low in 2009, according to Jochen Hitzfeld, an analyst at UniCredit SpA in Munich and the best forecaster in the last three quarters. He’s predicting a 2011 high of $1,350.

More Bullish

Analysts are getting more bullish. Their median estimate for next year’s average gold price climbed 6.2 percent since June 16 to $1,247.50, according to 17 forecasts compiled by Bloomberg. That compares with a 2.6 percent gain in silver forecasts, 0.6 percent advance in platinum predictions and a 0.5 percent jump in their palladium outlook.

Gold averaged $1,166.43 since January, heading for a ninth consecutive year of higher average prices. That’s the longest streak since at least 1920.

Options traders are also betting on prices rallying. The biggest position is in call options expiring in November 2010, giving traders the right to buy the metal at $1,500 by then. The next biggest position is the call option for $2,000 expiring in November 2011, data from the Comex exchange in New York show.
“Investors’ interest is still growing and still hasn’t reached a reasonable part of their portfolio,” UniCredit’s Hitzfeld said. “Gold is still an under-owned asset, that’s perfectly clear.”

To contact the reporters on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net.

Focus on the meat and two veg of reform

By Howard Davies

Published: August 31 2010 22:04

The French take over the leadership of the Group of 20 this autumn, a prospect that must be exciting Downing Street and the White House already. Last week Nicolas Sarkozy, France’s president, set out his priorities, initially to a complaisant audience of French ambassadors in the safe environs of the Quai d’Orsay.

He proposes to be an activist chairman. Who could have imagined otherwise? France’s leadership will be energetic and effective. In particular, it will promote fundamental reform of the international monetary system, a theme Mr Sarkozy broached in his address to the World Economic Forum in Davos in January. Instability in financial markets, he argued, “is a threat to world growth”, adding: “We need new instruments to prevent excessive currency volatility.” What the full range of those instruments might be was not set out, but he did call for a new reserve currency “not issued by one country alone”.

There are the germs, here, of yet another narrative explaining the financial crisis and its aftermath. Mr Sarkozy has already been fertile in his explanations. Initially, we may recall, the French focused on hedge funds and on offshore centres, known more colourfully in French as “fiscal paradises”. In the run-up to the London G20 last year, indeed, Mr Sarkozy insisted on measures to clamp down on them – threatening not to show up at all if Gordon Brown, Britain’s then prime minister, did not concede the point. We hear little of those concerns now: the caravan has moved on.

Indeed, it is striking how, fully three years after the crisis began, we are still no nearer to a consensus about the underlying causes and the most effective remedies. Normally, when a disaster strikes, whether man-made or natural, we begin with a range of theories, some less plausible than others. Then, as more is learnt, we tend to converge on one, or perhaps a small number of competing explanations. This time, the old saw that success has a hundred fathers but failure is an orphan has been turned on its head.

Far from opinion converging on one theory, views have tended to diverge, with a range of competing narratives articulated, from the grand macro explanations focusing on global imbalances, loose monetary policy and the savings glut, through regulatory failings – too little capital, feckless supervisors, gaps in oversight in the US – to a whole series centred on the outrageous behaviour of banks themselves, fuelled by greed and dangerous incentives. I have catalogued 38 distinct theories in a new book, The Financial Crisis: Who is to Blame?

Politicians have become more attracted by the wicked bankers line as time has passed and elections have had to be surmounted. But now it is the dollar, the International Monetary Fund and the currency markets that are coming under the spotlight, as underlying factors which contributed to the crisis. The American (and British) belief in pure currency floats, broadly supported by the IMF, is seen as creating the conditions for “excess” volatility. These are, of course, long-held concerns in Paris, where the role of the dollar in international markets is widely resented and part of the attraction of the euro was its potential role as a “competing” reserve currency, so perhaps we may count this new narrative as one that slots under “never waste a good crisis”.

Does this lack of consensus matter? Maybe we should welcome a comprehensive overhaul of the financial and monetary system, even of those parts that can hardly be blamed for the meltdown. Perhaps, but the risk is that the G20 gets bogged down in a morass of initiatives. Already the initial sharp focus on remedial measures evident at the London summit last year has dissipated, and different countries have focused on domestic reform programmes that have little to do with each other and which will not make international co-ordination easier in future. The Dodd-Frank debates over US financial reform proceeded with almost no discussion of the global dimension of securities markets. The recently announced UK plan to carve the Financial Services Authority into four pieces, whatever its internal merits, will make it harder for British regulators to play their part in international forums, as their structure will not match those of other countries. European parliament proposals on pay sit uneasily with reforms already agreed under the auspices of the Financial Stability Board.

A better approach for the G20 over the next year would be to give the Federation of Small Businesses the job of producing its own summary of the principal malfunctions in financial markets in 2007-09, together with an assessment of how far the reforms we have seen already offer the prospect of correcting those malfunctions. I suspect that exercise would produce a different agenda from the one sketched out by Mr Sarkozy last week. There is still much work to do on the capital framework for banks and brokers, there is an unfinished agenda in the derivatives markets, and the thorny issues surrounding cross-border insolvencies need resolution.

Grappling with these tough technical questions, which do need political focus to overcome national resistance, is not such a glamorous menu for world leaders. The meat and two veg of bankruptcy arrangements is less appealing than the foie gras and soufflés of international monetary reform, but more nourishing in the longer term.

The writer is director of the London School of Economics and a former chairman of the FSA. His latest book is The Financial Crisis: Who is to Blame?

Copyright The Financial Times Limited 2010.