Besides a resolution to clamp down on bankers’ bonuses, the G20 summit in Pittsburgh produced two major results:
- A pledge to expand emerging markets’ say and sway in the IMF by increasing their quota by five percentage points to 43% of the total. The US-sponsored idea will go some ways to addressing the grudge held by China and India vis-à-vis the IMF’s founding and dominant members, Europe and the US.
- The “framework for strong, sustainable and balanced growth” – code for macroeconomic policy coordination among the main economies, presumably overseen by the IMF.
While the latter is purportedly for the longer haul, the initiative at this point is in good part aimed at propelling domestic demand in China, Germany, and Japan in lieu of their dependence on US-bound exports – a pattern that the Obama administration has deemed unsustainable in the face of the debilitating US fiscal deficit and dampened US consumer demand.
In addition, the leaders reiterated their commitment to conclude the Doha trade round, now setting the end of 2010 as the target.
The challenge ahead
This is good progress, particularly considering the unruly medley of nations acting as summiteers only for the third time. But three immediate challenges lie ahead.
- First is the very same issue that has faced the G system throughout its incarnations from a G4 to G5, G7, G8 and, now, G20 – implementing the internationally agreed macroeconomic policy changes even when they may clash with domestic political imperatives.
Today’s ideas for rebalancing global growth are strikingly similar to those pursued in the mid-1980s, with the only real difference being that China’s role was then. The renowned 1985 Plaza Agreement succeeded in committing the US to tightening its fiscal policy, Japan to boosting private demand through tax reform, and Germany to stimulating its economy by cutting taxes. But except for Plaza, the subsequent Louvre agreement, and a few occasions in the late 1970s, for most of its lifespan the G system has self-censored strong commitments for policy changes and instead focused on information-sharing and debate on global policy issues.
The job for the G20 is to defeat this daunting past and see the pact to recalibrate the world economy through – including major cuts in the self-defeating US deficit and real commitment by Europeans to get demand going. To be sure, two of the same opportunities that engendered meaningful policy commitments in the past are now in place: a global crisis and American dire straits.
Much like during the Plaza years, today’s spectre of meaningful reforms to spur growth from within the export-led economies would surely have not materialised without the seriousness of the US economic bind and relative inability and apparent unwillingness of America to propel global economic demand on its own. The Obama administration has been rather convincing at exhorting this notion to China, Germany, and others ever since the London G20 summit in April. Beijing is taking the claim seriously, and at Pittsburgh it signalled its commitment to further stimulate its economy.
- The second challenge for the G20 is to live up to its pledge to conclude the Doha trade round – a measure, even if resulting in a “Doha lite”, that would inject much-needed momentum to the nascent revival of world trade and help counter the crisis-sparked bouts of protectionist practices.
The more optimistic observers think the round could indeed be brought to a conclusion sometime in the spring of 2010, a window of opportunity before the autumn US mid-term elections, while the bulk of trade watchers argue for 2011. In the US, trade will likely continue to be a secondary consideration as long as the major domestic reforms – on financial regulations, health care, and the like – remain pending. The Doha ministerial in November 2009 offers an opportunity to validate the die-hard Doha optimists.
- The third challenge ahead is dealing with the outcome of the spree of financial regulatory reforms now in motion around the world, particularly in the US and Europe.
A less-discussed issue at Pittsburgh, reformism has yielded rather remarkably similar proposals. There is general agreement on macro-prudential regulations and the need for system-wide, overarching monitors to connect the dots and identify systemic risks like the build-up of asset bubbles. Basic agreement also exists on regulation on all systemically important institutions, markets, and instruments.
But questions remain. The main economies are still struggling with the ideal and politically feasible domestic (and, in Europe, regional) regulatory frameworks, contesting terms such as “too big to fail.” And there are some vexing issues related to global financial flows. For one, the existing tools for cross-border crisis management are blunt at best. The lack of common rules on ways to deal with bank failures can entice countries to seal themselves off from cross-border finance, lest their taxpayers face the dramatic implications of a foreign bank gone bust on their own soil.
Another tough issue facing global movement of money is that the regulatory frenzy may result in differences between countries – especially Europe and the US – in the stringency of rules, such as on banks’ capital requirements. Valves screwed tighter in one jurisdiction than in another will leave banks room for arbitrage, a situation that in many ways may not be salutary for transatlantic relations. The best outcome would be to pre-empt a row with some form of compromise.
G20’s long-run role
A more general issue is the very usefulness of today’s G-system of the nearly fully overlapping G2 (between Washington and Beijing), the resilient G8 (among industrial nations plus Russia), and the G20 supernova. Yes, as flexible coordination tools without heavy obligations, each G is well suited for the fast-changing world of global finance. Each also allows the members to customise policies and drive at deeper commitments than would be possible in a G20 alone, let alone in some bigger forum. Pittsburgh helpfully clarified the division of labour between the G8 and the G20, making the former the rich countries’ arm for foreign policy coordination and the latter the global economic field marshal.
Nevertheless, the overlap does entail some coordination challenges across the forums, besides risking the wrath of the outsiders. Further, the strengths of the G system – agility, responsiveness, and customisation – are also its weakness: no real-time whistle-blower mechanism and no overarching system of truly sturdy surveillance, let alone enforcement. The IMF is now expected to serve as the referee of the G20 pledges, a good idea in light of the Fund’s readily available barracks of capable PhDs. But whether the Fund has the political heft to effectively shame shirking players remains to be seen.
The real test comes in good times
The main litmus test of the G20 will come as global trade and growth rebound. Promises can be harder to keep when the political pressures produced by the crisis fade. Yet, living up to pledges is all the more important to further and hone globalisation, the very force that made the new G members prosper and enter the global club – and which would not have blossomed without strong commitments to open markets and global economic stability made by the core G nations since the 1940s.
Editor’s Note: This column first appeared on the German Marshall Fund site.