The real G20 agenda: From technics to politics

The efforts of world leaders to find solutions to the economic crisis are intensifying. The last preparatory meeting before the leaders' summit on 2 April 2009 shows what needs to be done, says Katinka Barysch.

The summit of finance ministers and central bankers from the Group of Twenty (G20) countries took place in the southern English town of Horsham on 13-14 March 2009. It was the last major gathering before the global economic summit in London on 2 April, concluded with a declamation that does not quite conceal the lack of substance within:The Group of Twenty (G20) was created in 1999 as a forum for finance ministers and central-bank governors in the advanced and developing countries to discuss global economic issues The current members are:

Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, and the United States.

The first meeting of the G20's heads of state and government was held in Washington on 14-15 November 2008. This was also attended - as will be the London meeting on 2 April 2009 - by the European Union (represented by the rotating presidency and the European Central Bank), the International Monetary Fund (IMF), and the World Bank.

The participating states together represent approximately 90% of global GNP, 80% of world trade, and 63% of the world's population

"We agreed further action to restore global growth and support lending, and reforms to strengthen the global financial system", the statement says. "We have taken decisive, coordinated and comprehensive action to boost demand and jobs, and are prepared to take whatever action is necessary until growth is restored. We commit to fight all forms of protectionism and maintain open trade and investment... We reaffirm our commitment to take all necessary actions to ensure the soundness of systemically important institutions."

The meeting's agenda - which included such issues as clamping down on tax-havens, regulating hedge-funds and cutting bankers' bonuses - is all very well. But the sheer scale of the current recession makes them look more of a diversion than a strategy for restoring financial stability, improving global economic governance, and creating the conditions for revival.

There is not much time for world leaders to get their act together if the London summit is to be a success. In light of the finance ministers' meeting, the G20 heads of state and government must now focus on two things: how best to work together to prevent an even deeper global recession; and how to avoid future crises of such magnitude.

The political test

The first issue is as divisive as it is urgent. The United States is pushing for more fiscal spending, the Europeans are reluctant, and most emerging powers are keeping quiet. Many countries (Germany, for example) are loath to commit to more spending before they know whether and how their existing emergency packages are working.

The second issue is both longer-term and fiendishly complicated. An unwieldy group of around twenty-five leaders (since the attendees will include representatives of international institutions as well as governments, making the term "G20" a misnomer) cannot be expected to discuss - far less agree on - the minutiae of capital-adequacy ratios or cross-border supervision. But this also underlines the fact that the G20 (as used to be said of the search for peace in Ireland) is a process not an event, and that its summits are political exercises not technical ones.

In this light, what the 2 April meeting is really about is maintaining faith in multilateral solutions at a time when the temptation to embrace go-it-alone and self-defeatingly selfish policies is growing. If leaning on Liechtenstein or forcing disclosure onto hedge-funds helps this cause then so be it. But if the aims of collaborating to avoid a deeper recession and avoiding a repeat of such crises are to be met, two themes appear paramount: the role of the International Monetary Fund (IMF) and governments' commitment to avoid protectionism.

The emerging task

The IMF has since the near-meltdown of September 2008 lent over $50 billion to a range of countries from Pakistan to Ukraine. It is in desperate need of more cash. The United States and European Union member-states are supporting a doubling of the fund's resources to $500 billion; in the event the Horsham summit only agreed on the "urgent need to increase IMF resources very substantially". These countries have appeared less willing to redress their own overrepresentation in international financial institutions, though again the summit agreed to end the informal rule guaranteeing American and European leadership of (respectively) the World Bank and IMF.

This would be a precondition for emerging powers (such as China and other of the "Bric" countries [Brazil, Russia, India] to contribute significantly to an increase in IMF resources, and - perhaps even more importantly - accept its legitimacy at the heart of the global financial system (see Krzysztof Rybinski, "A new world order", 4 December 2008).

In this respect, the results of the Horsham meeting clearly reflect the pressures exerted on the established powers; the communiqué says that "(emerging) and developing economies, including the poorest, should have greater voice and representation and the next review of IMF quotas should be concluded by January 2011". Indeed, the IMF needs the enhanced legitimacy that would come from reform as well as more money in order to fulfil two other functions that will be equally essential for future financial stability.

First, the world needs better surveillance of national macroeconomic and exchange-rate policies to address the kind of global imbalances that have contributed to the current crisis. The IMF already has such mechanisms in place but they need to be strengthened. Second, the fund needs to expand its new, conditionality-light lending facility (with $100 billion available in the short term) for emerging markets that are well run. It could also encourage the healthier recipients of such loans to pool their foreign-exchange reserves to make them available for emergency lending.

If emerging markets do not have easy access to available emergency finance, they will conclude that the best insurance against future pain is to accumulate more reserves. They will do this by keeping the value of their currencies low and running big external surpluses. This kind of policy, as practiced by China, has already caused lots of friction. In an environment where global trade is shrinking, its continuation would fuel a nasty protectionist backlash in the west. That is why the G20 summit needs to produce a firm commitment to increasing the IMF's role and resources, while setting in train a thorough reform of its governance structures.

The bigger think

There are already some signs that protectionism is rising. World Bank economists have counted forty-seven new trade restrictions since late 2008 alone. More than a third have been put in place by the G20 countries that pledged to such measures at the inaugural summit of heads of state and government in Washington on 14-15 November 2008.

The real risk, however, is less a return to a 1930s-style tariff war but what two analysts from the Centre for Economic Policy Research (CEPR) call "murky protectionism": industrial subsidies, requests that banks lend to only local companies, or the use of environmental arguments to discriminate against foreign goods and services (see Richard Baldwin & Simon J Evenett, "The collapse of global trade, murky protectionism, and the crisis: Recommendations for the G20", VoxEU, 5 March 2009).

There are many current examples, from the "buy American" provisions in the US stimulus programme to Nicolas Sarkozy's idea that French motor companies should make cars only in France. These instances provoked a degree of international outrage, and the governments in question backtracked. But the dangers remain high.

The best response would be for the G20 leaders to broaden the "no protectionism" pledge agreed in Washington to cover non-tariff measures. They could also task international organisations such as the Organisation for Economic Cooperation and Development (OECD) and the World Trade Organisation (WTO) with alerting the world to national measures that could be harmful for that country's trading partners.

The finance-ministers' meeting has revealed how much remains to be done. There is still time for the G20 to think big and agree to implement measures that will make a real difference in addressing this huge, complex crisis.