Can G20 create a new financial order?
By Shahid Javed Burki
Monday, 07 March, 2011
THE Group of Twenty, or G20, is made up of seven industrial, a dozen emerging economies and the European Union. It was assembled in 1999 as a response to the Asian financial crisis that took a heavy toll on the economies of that region.
Until then much of the direction to the major organisations that have the responsibility for providing relief to the economies in distress was given by G7, the group of industrial economies.
The crisis in Asia made it clear that some of the major emerging economies have to be involved as well to shape a new global economic order. This led to the creation of G20. Since most of the issues addressed by the new group concerned finance, the IMF became its de facto secretariat.
Questions remain as to how representative is the G20 of the global economy. Of the 12 countries from the emerging world the largest number is from Asia. The continent is represented by Australia, China India, Indonesia, and the Republic of Korea. Latin America has three members: Argentina, Brazil and Mexico. Saudi Arabia and Turkey are from the Middle East. The African continent and East Europe each has only one member – South Africa, and Russia respectively. There are some glaring omissions in the composition of the group. Pakistan and Egypt, for instance, have large enough economies to have been included but were kept out mostly for political reasons.
The G20 has handled a range of issues since its creation in 1999. These include growth policies, the international financial system, dealing with financial crises and combating terrorist financing. The group has attempted to foster the adoption of internationally recognised standard through the example set by its members in areas such as the transparency of fiscal policy, combating money laundering, and financing of terrorism.
In 2004, the group committed itself and by implication the entire world to new higher standards of transparency and exchange of information on tax matters. It is this decision that led to the exposure of thousands of Americans who were maintaining large amounts in accounts in foreign banks to avoid being taxed. It is the work done by the G20 ministers concerning transparency that will help locate and possibly repatriate the large sums of money that were siphoned off by the autocrats of the Middle East some of whom have fallen and some other will undoubtedly be removed in the coming weeks and months. It is in the area of the management of the global economic and financial systems that G20 has attempted to play an important role. However, its efforts have only been half successful. In November 2008, as the world was rapidly plunging into what has come to be called the Great Recession of 200809, the administration of then President George W. Bush took the decision to turn to G20 to devise public policies needed to cushion the impact of the downturn. However, those were the waning days of the Bush administration.
Barack Obama had already been elected as the new American president and his predecessor was not in any position to commit his country to any particular approach. That changed in April 2009 when the heads of state met in London for their second summit – the first being the one held in Washington – and took two decisions that were to significantly affect the course of events in the global economy. The first was to commit the countries to launch programmes for stimulating their economies through fiscal expansion. The largest of the many programmes that were launched as a consequence of this decision were in China and the United States.
Each country spent close to a trillion dollars in stimulating their respective economies. The second decision was to provide large amounts of new resources to the International Monetary Fund, the World Bank, and three regional development banks to inject capital into the countries in distress. It was because of this additional funding made available to the IMF that Pakistan was able to sign a large Stand-by Arrangement with the IMF.
While the G20 was apt at dealing with economic and financial crises, it has made little progress in getting its members to agree on solutions to the structural problems that currently plague the global economy. These are collectively referred to as “global imbalances”.
These include the large trade and current account surpluses in countries such as China, South Korea and Japan. These surpluses are balanced by equally large deficits by the rich countries in particular the United States. In explaining why there are such imbalances China and the United States have focused on different causes and hence have pushed different approaches to deal with them. China believes that the cause is the large fiscal deficit being run by Washington which increases domestic demand in that country and forces it to import more than it can really afford. This is the second global imbalance.The United States’ view, on the other hand, is that the Chinese have created a large demand for their manufactures by keeping low the value of their currency.
If the Chinese allowed the yuan to appreciate, the demand for their exports would decline and it would not run such large surpluses in the trade account. Misalignment of international currencies, therefore, is an important issue for Washington. There is also a belief in the United States that if the Chinese were to properly price their currency, it would slow down the process of de industrialisation that is affecting the structure of the American economy and is causing severe job losses in that country.
Some progress was expected in resolving – or at least making some advance – with respect to this dispute at the recently concluded meeting in Paris of the G20 finance ministers and central bank governors. That did not happen.
The communiqué issued after the conclusion of the meetings made some general statements. “We reaffirm our commitment to coordinated policy action by all G20 members to achieve strong, sustainable and balanced growth”, wrote the ministers and central bankers.
Our main priority actions include implementing medium term fiscal consolidation plans differentiated according to national circumstances in line with our Toronto commitment, pursuing appropriate monetary policy, enhancing exchange rate flexibility and to better reflect underlying economic fundamentals and structural reforms, to sustain global demand, increase potential growth, foster job creation and contribute to global rebalancing”.These were essentially a list of the objectives to be achieved not how they would be realised.
From Pakistan’s perspective it is important that the group “discussed concerns about consequences of excessive commodity price volatility and asked our deputies to work with international organisations and to report back to us on the underlying challenges posed by these trends for both consumers and producers and consider possible action. Keeping in mind the impact of this volatility on food security, we reiterate the need for longterm investment in the agricultural sector in developing countries”.
What this quick overview of the progress made by G20 over the last dozen years, especially since the heads of state and government got involved in its deliberations is that a forum is in the making that will provide direction to the global economy.
However, Pakistan is absent from the forum and has only a weak voice in the IMF and the World Bank where it can – and should – pursue its national interest. One of the priorities of Islamabad’s diplomacy should be to gain access to G20 even if it means increasing the size to G25.