103 years ago in 1906 Vilfredo Pareto made a remarkable observation that 80 per cent of land in Italy was owned by 20 per cent of the population. Little did he realise then that he had unwittingly hit upon the ratio which will be found in so many different walks of life.
The Pareto principle of the vital few causing maximum consequences is a frequently mentioned rule of thumb in economics and management classes. For example, 20 per cent of customers contributing 80 per cent of profits, 20 per cent of employees contributing to 80 per cent of profits (and losses if they happen to be in banks one may say these days!). Try thinking about your life, does 80% of your happiness depend on 20% activities you do? Just count those vital few things you do or vital few people in your life who make your life feel good. Does 80% of your income get spent on 20% of habits? Does 20% of your knowledge contribute to 80% of your productivity?
Where the Pareto principle may not apply perhaps is the number of financial institutions that caused the financial crises. Perhaps it was less than 20 per cent of banks that created more 80 per cent of bad assets that subsequently caused havoc in financial world. Anyway, let’s see if 80-20 principle can be applied to G20 summit outcomes.
A group of leaders from 20 countries and regions representing 80 per cent of global trade came together in London to fix global economic recession. The deliberations over two days and many preceding weeks resulted in a statement by G20 leaders published on Thursday. The statement runs into nine pages, 29 numbered paragraphs and contains 3,077 words. I am going to look for those vital few 20 per cent of the statements made and try to make 80 per cent of sense! Applying the principle strictly I am going to search for maximum six paragraphs that seem vital to me.
The first vital paragraph is number five which says that the global lender of last resort for countries, the International Monetary Fund, will be provided additional resources of about $1.1 trillion; reasoning being that this will provide money to various countries’ governments to spend on public projects, green technologies and so on to boost demand and create jobs in hope of reviving the economy. The Keynesian economic principles applied on a global scale! Vital issue: The evidence of public management of infrastructure in most cases is far from satisfactory.
Second vital paragraph is number 13 which identifies the failures by financial sector players, watchdogs and regulators as the primary causes of crises. Fair enough. Response is in vital paragraphs 14 and 15 which call for setting up of tougher regulatory regimes nationally and internationally. These super regulators will regulate financial sector players, watchdogs and will coordinate with other national regulators to reduce unnecessary risk taking, improve global financial system and accountability. Vital issue: Regulatory capabilities and effectiveness would need to leap frog to higher level. Regulating smart bankers will require smart regulators who are as good as bankers. But if they are as good as bankers why would they work as regulators?
Fifth vital paragraph is number 22. It declares the intention of G20 countries to protect the world from economic protectionism. No issues with this so long as the most European countries and the USA follow this.
Sixth and final vital paragraph for me is number 25 which refers back to the problem that disturbed Pareto 100 years ago. The G20 statement promises help for the poorest countries. It is recognised that problems caused by vital few have serious immediate consequences for many. Steps announced to this end are most welcome.
Finally, there are vital signs in the communiqué that address many issues addressed by the protestors on London’s streets over the two days. Pushing for greener developmental options, promoting the interests of the poorest, controlling exorbitant compensations in financial industry and improving the transparency in tax systems are all ambitious statements. Has the G20 summit promised far too much? On the face of it this appears to be the case. Let’s wait and watch till the next summit which is likely to be in 2009 itself.
The Pareto principle of the vital few causing maximum consequences is a frequently mentioned rule of thumb in economics and management classes. For example, 20 per cent of customers contributing 80 per cent of profits, 20 per cent of employees contributing to 80 per cent of profits (and losses if they happen to be in banks one may say these days!). Try thinking about your life, does 80% of your happiness depend on 20% activities you do? Just count those vital few things you do or vital few people in your life who make your life feel good. Does 80% of your income get spent on 20% of habits? Does 20% of your knowledge contribute to 80% of your productivity?
Where the Pareto principle may not apply perhaps is the number of financial institutions that caused the financial crises. Perhaps it was less than 20 per cent of banks that created more 80 per cent of bad assets that subsequently caused havoc in financial world. Anyway, let’s see if 80-20 principle can be applied to G20 summit outcomes.
A group of leaders from 20 countries and regions representing 80 per cent of global trade came together in London to fix global economic recession. The deliberations over two days and many preceding weeks resulted in a statement by G20 leaders published on Thursday. The statement runs into nine pages, 29 numbered paragraphs and contains 3,077 words. I am going to look for those vital few 20 per cent of the statements made and try to make 80 per cent of sense! Applying the principle strictly I am going to search for maximum six paragraphs that seem vital to me.
The first vital paragraph is number five which says that the global lender of last resort for countries, the International Monetary Fund, will be provided additional resources of about $1.1 trillion; reasoning being that this will provide money to various countries’ governments to spend on public projects, green technologies and so on to boost demand and create jobs in hope of reviving the economy. The Keynesian economic principles applied on a global scale! Vital issue: The evidence of public management of infrastructure in most cases is far from satisfactory.
Second vital paragraph is number 13 which identifies the failures by financial sector players, watchdogs and regulators as the primary causes of crises. Fair enough. Response is in vital paragraphs 14 and 15 which call for setting up of tougher regulatory regimes nationally and internationally. These super regulators will regulate financial sector players, watchdogs and will coordinate with other national regulators to reduce unnecessary risk taking, improve global financial system and accountability. Vital issue: Regulatory capabilities and effectiveness would need to leap frog to higher level. Regulating smart bankers will require smart regulators who are as good as bankers. But if they are as good as bankers why would they work as regulators?
Fifth vital paragraph is number 22. It declares the intention of G20 countries to protect the world from economic protectionism. No issues with this so long as the most European countries and the USA follow this.
Sixth and final vital paragraph for me is number 25 which refers back to the problem that disturbed Pareto 100 years ago. The G20 statement promises help for the poorest countries. It is recognised that problems caused by vital few have serious immediate consequences for many. Steps announced to this end are most welcome.
Finally, there are vital signs in the communiqué that address many issues addressed by the protestors on London’s streets over the two days. Pushing for greener developmental options, promoting the interests of the poorest, controlling exorbitant compensations in financial industry and improving the transparency in tax systems are all ambitious statements. Has the G20 summit promised far too much? On the face of it this appears to be the case. Let’s wait and watch till the next summit which is likely to be in 2009 itself.
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