As anyone who has lived in a foreign country and tried to learn the local language knows, there is a time when you start to think you’re really getting it, when suddenly you realize that what you’ve really just figured out is when to nod at the right times.  This same feeling of being ‘lost in translation’ also applies to everyday business people trying to navigate the increasingly complex G-world.

In a nutshell, the G-20 is made up 19[i] of the world’s largest developed and developing economies and the European Union.  Since its inception in 1999 it has evolved from a talk shop of economic and financial policy wonks to a crisis response team to shepherds of a ‘fragile and uneven’ recovery to its current state – policy chaperons aimed at preventing the next financial and economic crisis.

When central bankers, finance ministers and economists meet this year under France’s stewardship, they will be trying to agree on:  “reform of the international financial system”[ii]–a so-called new “Bretton Woods”[iii]; how to address “global imbalances”[iv]; implementation of “Basel III”[v]; and how to tackle “volatility in the commodities markets”[vi].  (See the notes below if you want a short description of each of these issues.)  Setting aside the banking and financial sectors which are directly impacted by new regulations, when you run all this through a ‘G-20 business translator’ you get two main themes which impact business:  trade and access to / cost of capital.

Trade: The crux of the trade issue is that many advanced economies are relying heavily on export-led growth to fuel their recoveries and create jobs.  To do this they need a competitive, (i.e., weak) currency.  So, when they finish their canapés in France, they discuss how to keep countries with free floating currencies from engaging in competitive devaluations (read currency war) and how to get those without flexible exchange rates (China) to loosen the reins and allow their currencies to appreciate.  The foreign exchange rate debate is central to tackling “global imbalances” and how this plays out could significantly impact a company’s ability to increase exports, pay for imports, and compete with China which many perceive as having an unfair edge with its undervalued currency.

A second piece to the trade puzzle is the possibility of increasing protectionism, especially in the high-growth emerging markets. In order to curb the vast sums of cash flowing into their markets, countries such as Brazil, China, Taiwan and South Korea have imposed various measures including restrictions on stock market investments by foreigners, tax hikes on foreign investors and other forms of capital controls on short-term investments.  Brazil’s new government, which took office on January 1, 2011, is one to watch closely.  Brazilian President Dilma Rousseff has indicated that due to the increasing strength of the real (Brazil’s currency) the country may instigate trade measures to protect domestic manufacturers from cheaper imports.  Despite the heat, other rapidly developing countries such as India and Turkey have chosen not to erect barriers.

Access to / Cost of Capital: In 2010, the G-20 agreed on new banking and financial sector regulations.  The center piece of the new regulations aims to put in place new bank capital and liquidity rules beginning in 2013.  The combined effects of requiring more capital, the increased cost of capital, and the need for banks to invest in new systems and processes to meet the increasing governance and disclosure requirements will mean higher costs to banks and financial institutions across the board.  And it’s a good bet that these added costs will be passed on to business customers.  In addition, new requirements on term funding could lead to banks and corporates both competing for a limited pool of increasingly expensive short and long-term loans.

Perhaps it goes without saying that the extent to which leaders and policy makers in G-20 governments are able to address the flaws in the global economy which led to the crisis, and do so in a balanced and coordinated way, will promote overall economic and business growth.  In the opposite extreme, if global growth rebounds on a fast track for emerging economies at the expense of developed economies, greater rifts may emerge poisoning business climates and amplifying uncertainty.  With this in mind, keeping an eye on G-world developments and periodically running their proposals through a ‘G-20 business translator’ will help you navigate the global economy and chart a course for growth.

^[i] Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, UK, USA.

[ii] Reform of the international financial system is the primary overarching policy priority for the French presidency of the G-20.  Under this banner, G-20 countries will consider methods to develop a new system which is more responsive to the globalized nature of the world economy, e.g., tackling global current account imbalances, the U.S. dollar’s pre-eminence as the global reserve currency, and methods to curb volatile capital flows.

[iii] The Bretton Woods agreement was adopted in 1944 and was the first system of rules, institutions (i.e., IMF, World Bank and IBRD), and procedures to regulate the international monetary system.  Calls for a new Bretton Woods refer to an all-encompassing reform of the international financial system.

[iv] The G-20 are trying to create a mechanism to assess and reduce persistent global economic imbalances between export-rich and debt-laden consumer countries.  On February 19, 2011, ministers agreed on a set of guidelines to identify when developments in some countries could create problems for everyone else.

[v] Due to the loss in confidence in banks’ capital standards during the crisis, the Basel Committee on Banking Supervision proposed some major revisions and additions to the existing Basel 2 capital requirements regime.  These proposals, collectively called Basel 3, are designed to improve banks’ ability to absorb shocks arising from financial stress.  They were endorsed at the G-20 leaders’ summit in November 2010.  This year they will try to agree on extra measures such as more capital and tougher supervision for big, systemically important (too big to fail) banks.

[vi] Due to rising fuel and food prices in many countries, leaders are calling for tougher regulation of derivatives and physical commodities markets to mitigate price volatility.  There is little agreement on how to proceed with Brazil and other commodity exporters opposing price controls.