Exploit G-20’s medium term potential, not short-term panacea

The ongoing global economic crisis, which originated in the US and the UK, is arguably the severest in more than seven decades. There are fears that the crisis, if not tackled properly, would regress into social and political crises.

A complicating factor in the crisis is the widespread loss of trust in the competence and/ or integrity of national and international institutions, politicians, business leaders, and policymakers, which cannot be quickly restored. The crisis comes at a time when geo-economic and geo-strategic balances are in a flux, with distinct prospects of a more multi-polar world whose contours are as yet unclear.

Many developing countries are being forced to abruptly adjust to the downside of the rapid integration with the world economy. If they constitute one of the elements in elaborate international supply chains or production networks, they are likely to experience even greater volatility in economic activity. As continued access at affordable costs to international finance, trade, and investments are critical for these economies, their expectations of their governments’ global cooperation are rooted accordingly.

There are however valid concerns that the production and distribution structures, which flourished during the brief era of financial capitalism, were unsustainable in both economic and ecological spheres. Government policies aiming to restore them through currently fashionable stimulus packages are thus unlikely to address the fundamental causes of the crisis. But a fundamental re-thinking of growth strategies in an atmosphere of crisis is not easy to achieve. Even more difficult is to show concrete progress in this direction.

There are two interrelated fundamental causes of the current global crisis, both of which must be addressed simultaneously.

First, there is an inconsistency between globalisation of finance and national regulatory structures, which provides ample scope for regulatory arbitrage.

Second, large macroeconomic imbalances, particularly large US trade and fiscal deficits on the one hand, and on the other, the corresponding balance of payment surpluses of overly export-dependent economies (some call them mercantilist) such as those of China and other East-Asian countries and the commodity exporting countries. Continuing overly aggressive monetary and fiscal policies, with low or negative real interest rates in many countries, is unlikely to be conducive to correcting unsustainable production and distribution structures. There are also fears, so far muted due to the gravity of the crisis, that such policies may constrain future growth and lead to inflation.

There are high expectations that the decade-old G-20 forum, comprising more than four-fifths of the world’s economy, could provide more effective stewardship of the global economy. The G-20 Forum is more inclusive than the G-7/8 as it also includes key emerging economies and oil producing countries while representing all continents.

The G-20 ministers of finance and the central bank governors most recently met in London on March 14. The BRIC (Brazil, Russia, India and China) countries issued their first ever communiqué at the London meeting, signifying attempts to develop a common ground in their approach to the crisis and towards restructuring the international financial architecture. They, as well as the broader G-20 forum, agreed to urgently enhance resources for the IMF, with greater concreteness leading to the April summit.

The heads of state of G-20 are to meet in London on April 2 amidst high expectations for specific measures such as an agreement on stimulus packages, strengthening regulatory regimes including the “shadow banking system” and for greater representation of emerging economies in multilateral institutions and in standard-setting bodies.

While the G-20 forum has medium term potential, for several reasons, it should not be regarded as a short-term panacea for addressing fundamental causes of the crisis.

First, there are varied perceptions and priorities among the G-20 members. The G-7/8 group has been accustomed to being the primary forum for global stewardship. They continue to meet regularly. Their priority is to preserve the key position of industrialised countries in the international system, and can be expected to resist fundamental changes in the governance structures of international and standard-setting bodies. Over-representation of Europe and North America in multilateral institutions and in standard-setting bodies, for example, will not be rationalised without resistance.

The BRIC countries are striving to increase their effective representation in global stewardship. As rising economies with good long-term growth potential, they also have stake in sustaining global growth and stability. However, their priorities are to restore access to global credit and financial flows, and to prevent excessive protectionism and economic nationalism in industrial countries from curtailing trade in goods and services, and in manpower flows.
Progress in international trade negotiations, for example the Doha
Round, is a key issue for all developing nations as well.

Second, the G-20 forum lacks legal mandate as its membership has been determined on an ad-hoc basis. Even arrangements for rotating membership are currently lacking. There is no international agreement or treaty establishing the G-20 forum, and therefore it lacks the legal authority for effective global stewardship. Its size also constrains its ability to respond flexibly and quickly in sudden unanticipated need.

Third, as Barry Eichengreen has argued, unless the work programme of the G-20 forum is made consistent with that of the International Monetary and Financial Committee (IMFC) of the IMF, which has 24 members representing groups of countries known as constituencies, there will be tension and duplication of efforts between the two.

Fourth, decisive tackling of the global economic crisis requires progress in both rebalancing the economies as well reforming the international financial structure. As both are interdependent, global understanding to address them simultaneously is required. This is however precluded by the unwieldiness and lack of formal authority of the G-20 forum. Unrealistic expectations about the effectiveness of the G-20 forum may make it even more difficult to restore trust in governments and in international institutions.

India has been a constructive and active member of G-20, BRIC and IMFC. Thus, it has an interest in ensuring that the G-20 forum evolves to provide effective stewardship to the global economy; and that any inconsistency between the G-20 and the IMFC is ironed out.

Indian policymakers and businesses should, however, firmly recognise that India’s importance and influence arises from its demonstrated willingness and effectiveness in meeting the country’s developmental and governance challenges at all levels and in all spheres. Even in the midst of the global crisis, it is here that India’s energies and priorities must lie.

The writer is professor of public policy, National University of Singapore and can be reached at sppasher@nus.edu.sg. Views are personal.