The G-20 Summit at Five

Time for Strategic Leadership

Kemal Dervis, Peter Drysdale, Kemal Dervis, Peter Drysdale

• Publisher: Brookings Institution Press
• Year: 2014
• Print ISBN: 9780815725916
• eBook ISBN: 9780815725923
• Edition: 1
• Topic: Economics
• Subtopic: International Economics
• Index: Economics

Can the G-20 become a steering committee for the world's economy? Launched at a moment of panic triggered by the financial crisis in late 2008, the leaders' level G-20 is trying to evolve from crisis committee for the world economy to a real steering group facilitating international economic cooperation.
What can and should such a ""steering committee"" focus on? How important could the concrete gains from cooperation be? How much faster could world growth be? Is there sufficient legitimacy in the G-20 process? How does the G-20 relate to the IMF and the World Bank? How can Australia in 2015, and then Turkey in 2016, chair the process so as to encourage strategic leadership?
The East Asian Bureau of Economic Research in the Crawford School of Public Policy at the Australian National University and the Global Economy and Development program at the Brookings Institution joined forces in putting together this volume and asked opinion leaders and policymakers from G-20 countries to provide their independent perspectives.
Contributors include Colin Bradford (Brookings), Peter Drysdale (Australian National University), Kemal Dervis (Brookings), Andrew Elek (Australian National University), Ross Garnaut (University of Melbourne), Huang Yiping (China Center for Economic Research), Bruce Jones (Brookings), Muneesh Kapur (IMF), Homi Kharas (Brookings), Wonhyuk Lim (Korea Development Institute), Rakesh Mohan (IMF), David Nellor (consultant, Indonesia), Yoshio Okubo (Japan Securities Dealers Association), Mari Pangestu (Republic of Indonesia), Changyong Rhee (former Asian Development Bank), Alok Sheel (Government of India), Mahendra Siregar (Republic of Indonesia), Paola Subacchi (Chatham House, London), Carlos Vegh (Brookings), Guillermo Vuletin (Brookings), and Maria Monica Wihardja (World Bank).

PART I

Principles of Global Governance

	KEMAL DERVIŞ AND PETER DRYSDALE
1	G-20 Summit at Five: Time for Strategic Leadership

The leaders’ level G-20 was born at a time of crisis and panic.¹ In early October 2008, when the United States issued the invitation to the G-20 heads of state or government to assemble in Washington, D.C., on November 15, the world was facing the danger of a total collapse of the financial sector in the United States. With global trade and financial links having grown over the decades, particularly after the fall of the Berlin Wall in 1989, a financial collapse in the largest economy—and the financial center—of the world would have brought down the entire world economy.

The United States had to—and did—act to arrest the collapse, through unprecedented intervention in its own banking and insurance sectors. This was quickly followed by equally unprecedented fiscal and monetary expansion and even intervention in the industrial sector, with the government rescuing General Motors at the end of March 2009. These actions contained the crisis but did not prevent a drift toward worldwide recession. It was clear that the financial-sector virus was spreading and that expectations were shattered worldwide. The world was in danger of a steep decline in investment and consumer demand, mass unemployment, and beggar-thy-neighbor protectionist trade policies, triggering a deflationary vicious cycle that the world had not gone through since the Great Depression of the 1930s. A floor had to be put under expectations, a sense of resolve had to be projected, fiscal expansion had to be encouraged wherever feasible, and protectionist reflexes had to be countered.

This is how the leaders’ level G-20 was born. Previous resistance to including the large emerging countries at the head table, formerly monopolized by the G-7, evaporated. China, India, Brazil, and others were needed for a global psychological and substantive response. The fact that a finance ministers’ G-20 already existed allowed the United States to circumvent debate on inclusion. It was easier to simply invite the government leaders of the existing group of twenty than to try to agree on who should be included in or excluded from the November meeting. There was no time for such a debate.

It is not possible to measure exactly the impact of the first (Washington) and second (London) G-20 meetings. We cannot be sure of what would have happened without these meetings. Most observers agree, however, that the combination of decisive action by the U.S. Federal Reserve and U.S. Department of the Treasury, the G-20 commitment at the Washington meeting not to raise trade barriers, and then the signal at the April 2, 2009, London meeting of broadly concerted fiscal expansion and a green light for tripling the “firefighting” capacity of the International Monetary Fund (IMF) did make a critical contribution to turning around expectations and arresting what was threatening to become a global economic free fall.

Five Years Later

Five years after those first two meetings of the leaders’ G-20, the key question is whether these summits, which have become an informal institution, can really add ongoing value to global economic governance. At the time of writing, in early 2014, it is anticipated that the Brisbane meeting in November 2014 will take place at the end of a year of overall global recovery, which has not only allowed gradual normalization of monetary policy in the United States but has also seen a tentative recovery in the euro zone.

The recent past is full of examples suggesting that such predictions should always be treated as tentative. A bad surprise cannot be ruled out. A great deal of uncertainty still characterizes the situation in Europe, and question marks have also appeared in China relating to local debt, other possible contingent liabilities of the public sector, and the shadow banking sector. We may yet witness plenty of instability because of the adjustment in the monetary policies of the United States and other countries (see chapter 5, this volume) or the political consequences of Russia's approach toward Ukraine (see chapter 4). The political tensions in Eastern Europe could still derail the G-20 process in 2014, which would be a great pity and have long-term costs. But apart from this danger, the world will not have been in economic crisis mode in 2014, and G-20 leaders will be meeting at a time when the gathering could demonstrate that it has lasting value for the stability and good health of the world economy.

The absence of an acute crisis could lead the G-20 meetings to become purely ceremonial gatherings, which continue to take place because of the inertia in such processes, leading to cynicism and disappointment all around. Alternatively, the absence of an immediate crisis could be an opportunity for the G-20 to tackle in a sustainable way the major structural medium- and long-term issues that continue to face the world economy. World growth in the past few years has relied on a degree of central bank support that may already be leading to new unsustainable asset bubbles while unemployment remains unacceptably high. The challenge now is to create sustainable world growth based on real investment that stimulates total factor productivity gains and new long-term jobs in the value added chains of the products and services of the future. It is also time to make sure that key economic institutions are robust and able to withstand unexpected shocks if and when they occur.

The Australian National University and the Brookings Institution joined forces and assembled the chapters in this book with the expectation that the leaders will indeed see 2014 as an opportunity to address longer-term challenges and to transform the G-20 from a “crisis committee” into a “steering committee” for the world economy, making it part of a lasting and useful feature of global economic governance.

The G-20 and Global Public Goods

It is possible to group the big issues before the G-20 under six broad headings: macroeconomic interdependence, financial-sector interdependence, trade, energy and climate, development, and economic governance in the global system. The chapters in this book address the issues under all six headings. The emphasis is on interdependence, spillovers, or the global public-good nature of good policies. Scott Barrett, in his excellent book Why Cooperate? The Incentive to Provide Public Goods (2007), distinguishes three types of global public goods: those that can be delivered unilaterally (or minilaterally) by the “single best effort” of a country (the invention of a vaccine, for example), those public goods the delivery of which depends on the performance of “the weakest link” country (such as securing fissile material), and those public goods that depend on the combined “aggregate efforts” of all states (reducing the amount of carbon in the atmosphere is an excellent example). The “aggregate efforts” and “weakest link” global public goods generally call for international cooperation, although delivery of the “single best effort” public good may also require international cooperation—because those who can provide the good may hope that some other country can, and it will not want to bear the cost alone.

Fiscal and monetary policies, financial-sector policies and regulations, trade policies, energy and climate policies, and development policies all have associated spillover effects and free rider problems typical of public goods. Major monetary policy decisions in one large country have effects way beyond its borders. If the U.S. Federal Reserve had decided to stop its US$85 billion quantitative easing, asset-buying program overnight, the immediate effects would have been devastating from Rio de Janeiro to Istanbul and Delhi, and this would have triggered negative chain reactions around the globe. If the European Central Bank in mid-2012 had not forcefully declared that it would do “whatever it takes” to preserve the integrity of the euro, the European crisis would no doubt have gotten out of hand. If most G-20 countries had not engaged in large fiscal stimulus programs in 2009, the world economic slowdown could have become a depression. These are all examples of the way in which global macroeconomic interdependence makes appropriate macroeconomic policies into a global public good with both aggregate-effort and weakest-link characteristics.

Trade, financial sector, and climate and energy interdependencies are for the most part of a somewhat long-term nature. In these areas too, there are large spillover effects as well as the go-it-alone temptations inherent in public goods. The collapse of a single large financial global institution, for example, can precipitate a worldwide crisis. Furthermore, robust and well-functioning financial markets are needed to support growth across national boundaries. Thus financial-sector regulation is a global public good with both weakest-link and aggregate-effort characteristics. The weakest-link characteristic is the linking of, for example, the failure of a single bank (Lehman Brothers) or of a single even smallish country (Greece) to massive cross-border effects. It is an aggregate effort because each country's financial-sector reforms can contribute to growth worldwide and the strengthening of each country's regulatory system can affect financial stability on a global scale. An international trade system that maintains confidence and prevents beggar-thy-neighbor protectionism is also a global public good. In the energy and climate area, the greenhouse gas emissions of one country or of one city merge in the atmosphere with those of all other parts of the world to create global warming. Each part of the world benefits, therefore, from all efforts—its own and all others’—to mitigate carbon emissions. Limiting climate change is therefore very much an aggregate-effort-type global public good. In the area of climate change, in particular, each country may be tempted to rely on other countries’ emission reductions so as to minimize its own costs.

The promotion of economic development and the fight against poverty is also an international public good, in addition to its direct importance for those who have yet to enjoy the benefits of economic, social, and political security that it delivers. The global development and poverty reduction agenda of the G-20 is therefore of interest to the entire global community. In contrast, what small countries do in some areas of policy may not have much effect on others. If Cambodia, Honduras, or Malawi, for example, choose to put up large trade barriers, it would hardly have an effect on the rest of the world, although it would still hurt their own consumers and exporters substantially. But there are circumstances in which what small countries do matters greatly to others. This is the case, for example, with eradicating contagious diseases, combating money laundering or tax evasion, and controlling fissile material. Dealing with these problems requires providing weakest-link-type global public goods. Take the eradication of a disease like polio: if it reappears in a place like Afghanistan, it can spread from there and become, again, a global threat. Thus negative spillovers from very poor or fragile states can be very serious. Small rich states, too, can create negative spillovers, an example being the difficulties experienced by the entire world because of tax havens and small noncooperative jurisdictions facilitating tax fraud, money laundering, crime, and corruption.

While one should not underestimate the importance of weakest-link challenges, in many policy domains, the larger the country, the greater the likelihood of spillover effects from national policies. This provides a rationale for a G-20 grouping of large economies: their decisions are critical for the world as a whole. Yet, as discussed above, small countries can also affect the whole world. For both reasons, therefore, the G-20 must find ways to involve the global community as a whole in its deliberations and work programs.

Fortunately, the possibility of mutual spillover effects increases the chances for cooperative outcomes in groups such as the G-20. There is an incentive to cooperate. A good example is the way the U.S. Federal Reserve defines its mandate and its policy objectives. Its overall policy is based on purely domestic U.S. objectives, as Dennis Lockhart, president of the Atlanta Federal Reserve Bank, notes: “You have to remember that we are a legal creature of Congress and that we only have a mandate to concern ourselves with the interest of the United States. Other countries simply have to take that as a reality and adjust to us if that's something important for their economies.” The effects of U.S. policies on others are not relevant to decisions of the Federal Reserve unless there are feedback effects from other countries on the American economy.

Lockhart's straightforward statement—as well as other pronouncements by Federal Reserve officials, including former chair Ben Bernanke himself—make it clear that the Federal Reserve's tapering policies are included in its mandate to consider only effects on the U.S. economy. If the pace of tapering (that is, reducing the size of its bond-buying program) plunges the South African or Turkish economy into recession because of abrupt capital flow reversals, it would be of no concern to the United States, because South Africa and Turkey by themselves are too small to cause significant feedback effects on the U.S. economy. But if the capital flow reversals were more widespread, affecting a large number of emerging market economies, including large countries such as Brazil and India, there would be a nonnegligible negative feedback effect on U.S. exports to these countries, as well as on U.S.-based financial institutions—and therefore on U.S. employment. If the tentative recovery in Europe also were affected, the feedback loop would be even stronger. Moreover, there would be second-round effects: financial markets could suffer globally, and the decline in effective demand in the immediately affected countries would trigger further rounds of demand contractions in their trading partners. This implies that, even with only American interests in mind, the Federal Reserve still has to take into account the impact its actions may have on others. The same can be said for the policies of the European Union, the policies of Japan, and the policies of China—and in fact the policies of all members of the G-20, if these policies would be carried out by a large enough group of countries. Size increases the importance of positive or negative spillovers and strengthens the incentive to cooperate within the G-20.

The G-20 and Global Economic Governance

Size alone does not, however, solve the problem of legitimacy, or the problem of the enforceability of G-20 decisions in some kind of legal or treaty-based framework. Even a “club” representing more than 80 percent of world GDP and more than two-thirds of world population cannot alone resolve the threats coming from weakest-link-type global public goods. G-20 decisions, which really take the form of policy proposals rather than enforceable policy strategies, must in most cases be brought before the governance organs of treaty-based institutions, such as the International Monetary Fund, and be adopted by them on behalf of the global community. For example, consider the decision at the London meeting in 2009 to create almost 200 million units of new special drawing rights. This G-20 proposal was then brought before the IMF executive board and adopted by that board in September 2009. The G-20 cannot decide for others, although the voting power that G-20 members have in most international institutions that have governance systems where votes are weighted by size (however measured) means that the proposals are likely to become decisions. These decisions will then become as binding as decisions of international institutions can be.

The nature of the public global goods and interdependencies involved, as well as the form that global economic governance takes, are the underlying topics that bind together the thematic chapters of this book. The volume also includes a chapter focusing on the role of China, a country that is now clearly the second “giant” on the world scene, as well as a chapter dealing with the role of regional organizations as complements to or competitors of the G-20. Both of these issues are crucial. China in 2014 accounts for about 12 percent of world GDP when measured by market prices and close to 20 percent when measured by purchasing power parity prices. Given that neither the European Union nor the somewhat smaller eurozone yet acts as a single player at the G-20, or in other settings, the United States and China are the two giants on the world scene. China is a newcomer to this role, and how China approaches the G-20, and global economic governance more generally, will have a determining effect on the prospects for international economic cooperation (see chapter 12). In this context, the way the United States approaches China, in turn, will have a great deal of influence on China's own behavior. China's rapid rise and strong growth trajectory mean that it is having a new and large effect on established markets. Although the Chinese economy is not yet as large as that of the United States, the incremental effect of China on the global economy is huge.

Finally, not everything can or should be dealt with in a global context. Regional affinities and strong within-region interdependence make it essential that global economic cooperation is complemented by regional cooperation (see chapter 13). Regional institutions can also play the very valuable role of bridges between the large G-20 member countries and their smaller neighbors. The Chiang Mai Initiative and the Asian Development Bank can complement the IMF and the World Bank. They can, of course, also be regarded as alternatives to these global institutions. In practice, they are both complements and competitors, and they point the way to the interaction among regionally inclusive institutions, globally inclusive institutions, and the G-20. This interaction will determine the nature and the efficacy of global economic governance.

Looking Forward

As the G-20 enters its fifth year, what are the priorities to which it should now turn? In this section we consider mutual assessment and stability, growth and development, infrastructure investment, structural reform, trade, investment, and the agenda for the next G-20.

Now that the troika organizational structure—in which the immediate past, current, and next G-20 hosts cooperate in setting the agenda—is established, the top priorities of the G-20 are avoiding agenda creep, focusing on key issues, and ensuring that there is follow-through. Entrenching the G-20 as an effective institution for shaping global economic governance and for establishing its value requires using the heft of the summits to effect change and set policy direction. In the coming year or two, Russia, Australia, and Turkey make up the troika charged with driving the process.

The macroeconomic prudential systems that have been recommended to buttress macroeconomic policy coordination—and that might assist in ongoing crisis management—are still in the making (see chapter 8). Some important reforms to the governance of international institutions are already agreed upon but are not yet fully implemented. Major gaps exist in global governance, for which leadership is required. As a global economic steering committee, the G-20 could help prioritize issues for the global community—and for international financial institutions in particular. The G-20 can in fact bring focus to the work of these international institutions.

The G-20 was notably effective during the peak of the global financial crisis. Now that the global economy has moved from crisis mode to recovery and the Bretton Woods momentum of 2008–09 has waned (see chapter 2), the group is seen as adopting a stance of lesser urgency. The problems are claimed to be not urgent, the agenda is said to be too broad, and the need and possibility for...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Acknowledgments
• Part One: Principles of Global Governance
• Part Two: Managing the G-20
• Part Three: The Core G-20 Economic Agenda
• Part Four: Other Issues for Reform of Global Governance
• Contributors
• Index
• Back Cover