Commentary | 15 July 2017

'The G20 is dead. Long live the G20'

Originally published in the Australian Financial Review (Photo: Presidencia de la República Mexicana)

  • Roland Rajah

Originally published in the Australian Financial Review (Photo: Presidencia de la República Mexicana)

  • Roland Rajah

The G20 leaders' summit in Hamburg has come, gone and attracted much criticism. But the real result is that while multilateralism is now much harder it has never been more important, especially for middle powers like Australia.

President Trump's lack of interest in global leadership was to be expected. The more striking development was the emergence of what looked like a G19 counterbalancing Trump's key policy positions. Despite his presence, the G19 managed to basically stick to the G20's pre-Trump agenda, most notably on climate change but also on resisting trade protectionism. The US was simply noted as an exception on the former and a reluctant signatory on the latter.

Splitting the group into "the US and everyone else" is a far cry from the unity usually displayed by the group. But it is a much better outcome than the alternatives of a complete breakdown in dialogue or, worse, acquiescing to Trump's agenda of noncooperation on climate change and hostility to international trade.

True, the G20 failed to deal with pressing security issues, most notably North Korea's nuclear missile program. But that misses the point of the G20, which has always been about shared economic rather than security concerns. The common characteristic of all G20 members is their economic size and thus shared interest in global economic cooperation, not geostrategic power and security interests. For that, better mechanisms exist.

Varied interests

To be sure, while the idea of a "G19" aptly described what happened in Hamburg, ongoing global economic leadership by such a group is not a realistic proposition. The G19 contains too many varied interests, and is only really defined by its exclusion of the US. Long-term, it would struggle to hold together.

In many ways, the time when America could have provided effective global economic leadership may have passed. That capacity stemmed from its status as the world's largest economy by a wide margin, making it the world's single indispensable economy. This status meant that cooperative policy actions by the US helped crowd-in cooperation by others. America also invested heavily in its role through its willingness to shoulder the burden of leadership. Neither is true today.

No other country is up to the task of providing effective global economic leadership. Germany's economy, despite its strength, is far too small to corral the cooperation of others. China and the EU carry significant economic heft. But China is not really as interested in taking on a global leadership role as it would like others to think – at least not yet. Meanwhile, the EU is ultimately a group of nation states each subject to their own domestic politics. The reality is that no single economy now dominates as the US once did, and so the days when a single actor could provide credible leadership are largely gone.

That is why the international coordination of economic policy moved into the G20 in the first place, as a kind of goldilocks grouping: large enough to carry economic clout, small enough to be effective, and diverse enough to be somewhat representative of developing and advanced economies.

Pivotal role

When the world needed to respond to the global financial crisis, it was the G20, not the G7, that rose to the occasion. The group was able to play a pivotal role in developing a coordinated policy response (particularly through simultaneous fiscal stimulus) and avoiding a descent into beggar-thy-neighbour policies (especially a tit-for-tat resort to trade protectionism).

That experience was a classic example of why global economic leadership is needed – to foster cooperative actions that benefit everyone if implemented collectively but would not otherwise be pursued by individual countries (either at all or to the extent needed) if they were acting in isolation. In other words, the promotion of global public goods.

Still, despite any picture of success at Hamburg, the G20's effectiveness is certainly going to be hurt by the division that was on display. The world's largest economy playing free-rider and potential spoiler, will pose a major obstacle to future cooperation. A rotating G20 presidency also creates a challenge, and Argentina as the next chair probably won't be able to match the diplomatic deftness of Germany.

But it is also clear that there are few real alternatives to filling the current void in global economic leadership. For all its shortcomings and difficulties, the G20 is the only game in town.