VoxEU Column Global governance

G20: Time to institutionalise it and focus on main issues

In the long run, a number of analysts believe that the G20 should replace the G8. This column argues that the G20 summit should focus on producing tangible outcomes that will clean up the financial sector and prevent a protectionist outbreak. Despite their obvious importance, other issues, including grand reforms, can wait.

There is a flurry of international activity as we approach the G20 London Summit on 2 April. The sherpas, sous sherpas, and think tankers are all attempting to formulate an approach that could result in the summit producing a substantive communiqué addressing the crisis.

The G20 process started in 1998, as an informal gathering of finance ministers and central bank governors in the wake of the Asian crisis. The first Summit in Washington on 15 November seemingly transformed it overnight into the principal global institutional mechanism for addressing practically all that currently ails the world. The first summit also spawned four working groups, each with two co-chairs, which are expected to submit their recommendations to the London meeting. Dr Rakesh Mohan, Deputy Governor, Reserve Bank of India (RBI), co-chairs Working Group I on ‘Enhancing sound regulation and strengthening transparency’. This recognises the RBI’s success in ensuring that the Indian banking system has emerged virtually unscathed from the global financial crisis. The other three Working Groups are, ‘Reinforcing international co-operation and promoting integrity in financial markets’; ‘Reforming the IMF’; ‘The World Bank and other multilateral development banks’.

It would appear that the terms of reference of these four Working Groups have defined the agenda for the G20 deliberations. But I hope that is not the case, as it would leave out important issues like protectionism and climate change, which are both emphasised in the Declaration issued after the Washington Summit. One possible rationale is that the four issues covered by the G20 Working Groups are not being addressed in any other forum. Protectionism and climate change have their own designated processes, where negotiations are in progress. The less benign interpretation is that G20 governments do not want to circumscribe their positions in the ongoing multilateral trade and climate change negotiations by having those issues discussed in the informal setting of the G20. This is perhaps also the reason that the G20 working groups are headed by individuals rather than co-chaired by member countries.

There are two crucial questions facing the G20 at present. First, what is its legitimacy as the primary global institutional mechanism for collectively tackling global economic and financial issues? Second, should the G20 focus primarily on efforts to address the global financial crises and the subsequent economic downturn or extending its mandate to include other important global issues?

The G20 lacks legitimacy

It is clear that the G20 does not enjoy any real political mandate or institutional legitimacy. It lacks both a backing (by a treaty or UN resolution) and a declaration of vision and intent. It remains an ad hoc process, whose composition, direction, and mandate varies at different times. Even in Washington, new members like Spain and the Netherlands were added. Now for London we have the chair of the New Partnership for Africa's Development, the chair of the Association of South East Asian Nations, the president of the EU Commission, and the chairman of the African Union Commission also invited to the summit. These are in addition to the heads of the IMF, World Bank, WTO, OECD, and other multilateral development banks, who are regular attendees.

This has two implications. First, the G20’s fluid and variable geometry, while perhaps effective, may not give it the required gravitas and legitimacy to push through any proposal that it may make. Second, since it has not been institutionalised in any form, it will not be taken seriously enough by governing establishments in any major country. Its success or failure will remain a function of individual leaders and the resources and policy attention they can mobilise. A summit led by Gordon Brown may have a very different outcome than one called by a lame-duck president or an embattled head of government in an emerging economy. The G20 risks being seen by those who matter in the business and financial world as merely a “talking shop’” with no real powers. Thus, it may wither away with the passage of time.

This concern about ensuring the effectiveness of a truly global institution has generated several suggestions about reshaping the G20 process. One suggestion (by Barry Eichengreen and others) is to reduce it to a more manageable G4 that includes the US, EU, Japan and China. This could expand to a G5 to include India, so as not to exclude the world’s largest democracy and fourth largest economy. The smaller membership would better lend itself to serious consultations rather than “statement making” and impressing the galleries. But it looks unlikely that other members of the G20 or G8 would relinquish their places at the high table so easily.

The other suggestion has been for G20, in either its present or reduced form, to replace the G8. This would leave it as the only truly global formation, without any north-south or ideological divide. At the Washington Summit in November, separate meetings were organised on the sidelines of the actual summit, by various G-formations like the G8, G77, and G33. This is not healthy for the goal of collective and coordinated global action for addressing global issues. However, it will take real statesmanship on the part of G8 leaders like President Obama, Prime Minister Brown, Chancellor Merkel, and Prime Minister Aso to make this historic step.

Without this move, it seems unrealistic to expect the G20 to be able to deliver any real advance on the global agenda. Though obviously radical, it is a necessary step forward. In its absence, the present “us-versus-them” syndrome will most likely continue, directing attention to making new coalitions and protecting existing ones rather than the substantive tasks at hand. The fact that BRIC countries came up with their statement at the time of the Finance Ministers meeting in London is symptomatic of this inherent risk in the current situation.

Focus on present problems

It would be advisable to conserve the G20’s political capital and use it to first and foremost address the multiple and complex issues in the financial sector. The remaining political capital should be spent preventing the rise of protectionist sentiment in any form or design.

Addressing the financial sector issues will require restoring confidence in global financial markets – improving the regulatory systems and modalities for minimising the collateral damage that smaller emerging and developing economies are suffering despite virtually no fault of their own. G20 leaders could usefully focus on getting the global financial sector back on track, get the credit flowing again, and suggest practical measures to make the next financial sector crisis less likely. Even achieving this objective will require imagination, capacity to think boldly, acting with resolution and coordination, and sustained follow up.

Any extended period of financial sector distress and consequent economic suffering risks rising protectionism and a sharp backlash against globalisation. This is highly avoidable and threatens to take us back several decades and cause unimaginable misery worldwide. G20 leaders would do well to ensure their commitment that none of the participants will take any protectionist steps. All necessary follow up must be made to ensure that members do not renege on this commitment, lest the world spiral into a vicious cycle of competitive protectionism.

This two-fold and focused approach will ensure that the two necessary conditions for the global economy to remain open and achieve positive growth in the short term are achieved. Other objectives, however laudable, can be attempted subsequently.

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