The challenge of repairing G20

The Challenge of Repairing G20

Stephen Grenville

Nikkei Report

25 February 2014

SYDNEY -- Finance ministers and central bank chiefs from the G-20 leading rich and developing nations meet in Sydney this coming weekend. Their gathering will not feature the fanfares, glad-handing and red carpets reserved for the G-20 leaders summit, set for Brisbane in mid-November. But it is critical to the future of G-20.

For Australia, also, as G-20 chair this year, the challenges are formidable. The objective should be to reinvigorate the G-20 in its role as the foremost global economic coordinator. This comes as some emerging economy members are buffeted by the spillover of uncoordinated macro-policies in the advanced countries. Their complaint is that international policy coordination has been accorded a low priority by the major advanced economies.

Nevertheless, G-20 is the best chance to fill the gap in international governance. The chair of the forthcoming finance meeting, Australian Treasurer Joe Hockey, promises to "enscribe a rich chapter in the history of G-20."

G-20 leaders first met in 2008, in response to the global financial crisis. They had a clear policy imperative. The member countries, making up 85% of global GDP, needed to ensure that the world avoided a depression. They collectively undertook to shun the protectionist spiral that shrank world trade in the 1930s, to shore up the failing financial sector and to provide enough fiscal stimulus to kick-start growth.

By most reckonings, they succeeded. But since then, without the urgency that accompanies a crisis, the G-20's focus has been blurred by an expanding agenda. The success in 2009 encouraged everyone with an idea for global betterment to bring their proposals to G-20. Meetings were weighed down by excess participation. Effectiveness was sacrificed for inclusiveness. Turgid communiques expanded beyond the patience of any reader. Often enough, the important economic issues were overshadowed by brush-fire crises: first Greece's economic collapse in 2010 and more recently by the disaster of Syria.

Thus, the first task of this weekend's meeting is to signal that things will be done differently. Symbolically, but with a powerful message, the G-20 communique will be squeezed into a few pages.

Finance ministers and central bank governors have the advantage of a narrower remit than national leaders, with a larger technical content. Thus, it should be easier to tighten the focus. Even with operational issues clearly defined, demonstrating the benefits of closer global cooperative endeavor will not be easy.

The shift from the long-established G-8 format of leading industrial nations to a G-20 format in 1999 was an acknowledgement that the world had changed and a more inclusive forum was needed. But G-8 has not let go: it still meets, and its small coterie of leaders with many years of familiarity gives it an advantage of intimacy that G-20 cannot match.

For their part, the emerging economies have not yet found a common voice at G-20 commensurate with their new-found importance. While G-8 and the Europeans have many opportunities to lobby and bring consensus views to the table, the emerging economies have no equivalent beyond the narrow and embryonic BRICS forum (named after Brazil, Russia, India, China and South Africa).

That is not all that hinders harmonious accord. There are bureaucratic territorial disputes. Climate issues, for example, need global coordination but are off the G-20 agenda because the United Nations has the running. The Organization for Economic Cooperation and Development has researched international tax issues for decades. The International Monetary Fund has worked on international economic cooperation since its founding. All these institutions (represented around the G-20 table) are sensitive to G-20 becoming "one G to rule them all." They all value their autonomy.

At the same time some issues are intrinsically technical, with a degree of complexity which does not lend itself to decisions at a one-day meeting. Other issues are inherently domestic, with few international ramifications.

The international environment throws its share of curve balls. Many of the emerging-economy members have experienced the whip-saw spillovers from America's quantitative easing. When QE was being actively expanded, between 2008 and 2012, it sent capital flows surging into emerging economies, which drove up their exchange rates, eroding international competitiveness. Brazil's finance minister famously dubbed this "currency wars."

Last May, when the U.S. Federal Reserve reminded the world that QE at some point would be slowed and eventually unwound, it caused a sudden reversal of these flows, pushing down emerging economies' exchange rates, deflating equity prices and driving up interest rates.

Raghuram Rajan, India's central bank governor since September, was just one of the complainants, but his voice had more weight as has worked as a top Chicago professor and IMF chief economist. He referred to the 2009 fiscal expansion undertaken by emerging economies to help shore up global growth, and sought the same spirit of international cooperation now that QE was being unwound. He declared that "International monetary cooperation has broken down."

His complaint received no sympathy from Fed Chairman Ben Bernanke, who argued that it was in everyone's interest to boost U.S. growth. Janet Yellen, the new Fed chair, is adamant that the Fed's duty is to the domestic economy.

To further undermine the environment for global cooperation, the U.S. Congress has not passed the enabling legislation needed to redress the long-standing anomalous under-representation of emerging economies (and gross over-representation of Europe) in IMF decision-making. In 2010, G-20 unanimously agreed to fix this, but three years later the job remains undone, with the U.S. to blame.

Can Joe Hockey set the G-20 on a new and more fruitful path? He is making the right noises.

On tax matters, it should be possible to get a quick win through securing agreement for the next step -- automatic information sharing. The financing side of infrastructure could provide opportunities for cooperation. On the complex issues of financial sector reform, the meeting can whip the technocrats along with an unambiguous call to resolve these issues quickly.

What about the discordant environment, with emerging economies feeling that cooperation is a one-way street and that G-20 is a rich mans' club, just an outgrowth of G-8 where the real action happens? Getting this right is as important as making progress on the specific agenda items.

The first priority here is to defuse the current major irritant, the QE issues. Will Hockey's first task be to referee a punch-up between Rajan (supported by other emerging economies such as South Africa, Brazil and Indonesia) and Yellen, attending her first G-20 meeting as Fed Chair?

It should not happen like that. America can find a better formula, with a less-strident tone. It can still say its monetary policies must be based on domestic consideration. But it would help to acknowledge that the reason why monetary policy has had to resort to these unconventional policies is because fiscal policy was not able to respond fully to the needs of the recovery.

It would help, too, to acknowledge that QE has interacted unhelpfully with global capital markets, which are flighty and not always rational. It would assist the meeting's atmosphere if the U.S. Fed undertakes to redouble its efforts to communicate clearly its aims, actions and intentions. Refraining from delivering the usual self-help lecture to emerging economies would also keep tensions down. A pledge to "try harder" on IMF voting reform would be seen by the emerging economies as an acknowledgement that the advanced countries have to adapt, however belatedly.

From the emerging economies' side, they should acknowledge that the ball is in their court to strengthen their resilience and growth prospects

If Hockey manages to do all this, where would it leave the G-20? The group cannot hope to repeat the "saving-the-world" act it performed in 2009. We have to accept that many issues are principally domestic and that room for international policy cooperation is tightly constrained not only by national interests but by vested interests within countries.

An important function will be to create a link to the November leaders' meeting, not just in terms of agenda topics (such as the promised growth strategies), but also of precedents on how to make the meeting more interactive and action-oriented. There is an advantage in a face-to-face meeting of leaders getting to know each other. When things go really wrong globally, leaders need to know who to call. While this may, at the deepest level, justify G-20, it is unlikely to be enough to ensure that all leaders continue to attend G-20. Hence this meeting should aim to chalk up some specific completions, pour soothing balm on global irritants and provide the G-20 summit in November with a demonstration of sharp focus. Achieve this, and Australia could declare its G-20 chairmanship a success.

Stephen Grenville, a former deputy governor and board member of the Reserve Bank of Australia, is a visiting fellow at the Lowy Institute for International Policy in Sydney; he works as a consultant to the IMF, Asian Development Bank and World Bank on financial sector issues in East Asia.