Now that it's over, next challenges for the G-20
Besides resolving to clamp down on bankers' bonuses, the G-20 summit in Pittsburgh produced two major results. The first was a pledge to expand emerging markets' say and sway in the IMF by increasing their quota by five percentage points to 43 percent of the total. The U.S.-sponsored idea will go some ways to addressing the grudge held by China and India vis-Ã -vis the IMF's founding fathers and dominant members, Europe and the United States. The second result was the "framework for strong, sustainable and balanced growth," code for macroeconomic policy coordination among the main economies, presumably overseen by the IMF.
While purported 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 U.S.-bound exports -- a pattern that the Obama administration has deemed unsustainable in the face of the debilitating U.S. fiscal deficit and dampened U.S. consumer demand. In addition, the leaders reiterated their commitment to conclude the Doha trade round, now setting the end of 2010 as the target. This is good progress, particularly considering the unruly medley of members summiteering only for the third time. But three immediate challenges lie ahead. The first is the very same issue that has faced the G system throughout its incarnations from a G-4 to G-5, G-7, G-8 and, now, G-20: 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 the-then China was the other Asian dragon, Japan. The renowned 1985 Plaza Agreement succeeded at committing the United States -- also then the world's consumer of last resort --to tighten its fiscal policy, Japan to boost private demand through tax reform, and Germany to stimulate 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 G-20 is to defeat this daunting past and see the pact to recalibrate the world economy through -- including major cuts in the self-defeating U.S. 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 specter of meaningful reforms in the export-led economies to spur growth from within would surely have not materialized without the seriousness of the U.S. 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 G-20 summit in April. Beijing is taking the claim seriously, at Pittsburgh signaling commitment to stimulate its economy further.
The second challenge for the G-20 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 fall's U.S. mid-term elections, while the bulk of trade watchers argue for 2011. In the United States, 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 United States and Europe.
A less discussed issue at Pittsburgh, the 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 still struggle to get at the ideal and politically feasible domestic (and, in Europe, regional) regulatory frameworks, contesting such terms 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 cross-border finance, lest their tax payers 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 United States -- in the stringency of rules, such as on banks' capital requirements.
That valves are screwed tighter in one jurisdiction than in another leaves banks room for arbitrage, a situation that in many ways may not be salutary for transatlantic relations. The best outcome would be to preempt a row with some form of compromise. A more general issue is the very usefulness of today's G-system of the nearly fully overlapping G-2 (between Washington and Beijing), the resilient G-8 (among industrial nations plus Russia), and the G-20 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 customize policies and drive at deeper commitments than would be possible in a G-20 alone, let alone in some bigger forum. Pittsburgh helpfully clarified the division of labor between the G-8 and the G-20, 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 strength of the G system -- agility, responsiveness, customization -- is also its weakness: no real-time whistle-blower mechanism, no overarching system of truly sturdy surveillance, let alone enforcement. The IMF is now expected to serve as the referee of the G-20 pledges, a good idea in light of the Fund's readily available armory of capable PhDs. But to be seen is whether the Fund has the political heft to effectively shame shirking players. The main litmus test to the G-20 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 globalization, the very force that made the new G members prosper and enter the global club -- and which would not have blossomed without strong commitments, made since the 1940s, by the core G nations to open markets and global economic stability.
The views expressed in GMF publications and commentary are the views of the author alone.