Group of 20: Stabilizing the Global Financial System

          The G-20, a group of developing countries, was set up as an informal dialogue forum in 1999 primarily to address the multiple challenges to international financial stability that had arisen in the wake of the East Asian financial crisis in 1997. However, it was formally established in August 2003, just before the WTO’s Cancun Ministerial that year, in response to the June 2003 Brasilia Declaration by the Foreign Ministers of Brazil, India and South Africa. The G-20 is comprised of the following nineteen countries and the European Union: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, Republic of Korea, Turkey, the United Kingdom, and the United States.

          The composition of the forum was not just representative of all regions of the world and the Bretton Woods institutions, but was also an acknowledgement of the growing contribution of the emerging market economies to global growth and trade. Since the early 2000s, emerging economies such as China, Brazil, India, South Africa and Turkey have made their presence felt in the global economy. Discussing global economic issues at the G-8 platform was no longer accurate, constructive and representative. The G-20 came out as a more appropriate platform to discuss various issues affecting the global finance and economy including the measures to reform the same.

          G-20 was lauded as an innovative and timely move forward in global financial governance despite the constant debate on its legitimacy and efficacy. Subsequent G-20 meetings retained the focus on financial stability, but did not shy away from discussing regional economic integration, financial markets, capital inflows, banking sector norms and other such issues in support of a deeper process of global cooperation. Largely dormant in its first decade of existence, the Group of Twenty (G-20) in 2008 began to play a more assertive and constructive role in coordinating a global effort to adopt measures for the prevention of future economic crises.

          In 2008, when the world was struck by the onset of global financial crisis, the G-20 underwent a transition from being merely a meeting of the Finance Ministers and central bank governors to a summit level meeting of the heads of state. The fall of Lehman Brothers was one of the most catalysing economic events that the West experienced since the Great Depression in 1929. It was the first sign that showed that the so-called global financial crisis (GFC) would spread across the world.

          The US President George W. Bush convened a G-20 Leaders Summit to discuss the fault lines that caused the GFC and to evolve a strategy to fix them. This was an intelligent manoeuvre since this was a global crisis and, therefore, the problems needed a global solution to be solved in a coordinated and comprehensive manner. The 2008 summit not just lent greater legitimacy to the forum but also to the institutionalization of a cooperative framework to confront and combat financial challenges of a global magnitude.

          If President Bush had not summoned the G-20 leaders to Washington in November 2008, the IMF, already on life support, could have become totally irrelevant, after IMF lending had almost collapsed. By marshalling nearly a trillion dollars to give the global economy some shock absorbers, the G-20 earned an ample supply of legitimacy and effectiveness points. In 2010, the Chinese could have initiated the long-mooted Asian Monetary Fund which was stopped in its tracks by the timely G-20 move to prime-pump the IMF.

          The Action Plan agreed upon at the 2008 Washington DC Summit inter alia committed to provide more impetus to the Basel III framework, to upgrade and broaden membership of the Financial Stability Forum (FSF), to expand the resources available to the IMF and reform its governance, to refrain from raising new barriers to investment or to trade in goods and services or imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports in future.

          The London Summit in 2009 delivered some US$5 trillion of coordinated fiscal measures, along with more than US$1 trillion of measures for the International Financial Institutions, including new resources to the IMF, and a strong declaration of intent regarding reform of the Bretton Woods institutions.

          At the 2009 Pittsburgh Summit, the leaders introduced the ‘Framework for Strong, Sustainable and Balanced Growth’ (FSSBG), ‘a compact that committed them to work towards policy coordination for a more sustainable and balanced growth. The 2010 Seoul Summit, however, showed the fissures in the grouping as by then cooperation had  already given way to open disagreement on such issues as US monetary policy, China’s exchange rate policy and the so-called ‘currency wars’.

          Over three quick and successive summits that were held in a span of a year in 2008-2009, the G-20 member economies were able to evolve a cooperative and coordinated response to the contagious impact of the financial crisis. Alongside, global financial regulatory reform and resolution of global imbalances continued to be a part of the agenda in these meetings.

          At Los Cabos summit in 2012, major emerging economies committed to provide $65 billion to beef up the IMF’s emergency fund and build a bigger bulwark against escalation of the Eurozone’s problems. At Los Cabos, the G-20’s Growth and Jobs Action plan called for China to slow its accumulation of hard currency reserves and move toward market determination of exchange rates, Brazil and major oil exporters to boost investment, Turkey to raise its savings rate, and Korea, Germany, and Japan to liberalize services.

          Today, as the world continues to grapple with the consequences of the global financial crisis and uncertain growth in a recessionary atmosphere of impending looming doom and gloom, it would only have been fair for the 2016 Hangzhou summit to take up for discussion the slowdown of the fastest growing economy prior to the crisis, that is the Chinese economy, and its spill-over implications for the Asia Pacific region.  

          China’s economic slowdown, with structural changes accompanying the move away from an investment-led growth strategy towards a consumption-led growth path and the underlying shifts in comparative advantage are bound to have momentous implications for the region and the global economy. Financial sector weaknesses, particularly in the banking sector, may also be reinforced as the Chinese economy moves to a new normal growth rate. The Asia-Pacific region is most likely to feel the brunt as trade and production links with China-centric value chains are intense and complex for the member economies.

          While the impact may differ across the region depending on the nature and extent of inter-linkages with the Chinese economy, there is no doubt that the developments need to be closely monitored and the world needs to be prepared for any eventualities. Having been caught unawares when China chose to undertake its multiple currency devaluation exercises in recent times, a coordinated approach to containing and preventing financial volatility as also seeking transparency of policy reform in China as an outcome of the G-20’s 2016 Summit would have done justice not just to the objectives of the grouping, but also to its representative character vis-à-vis the world economy.

          So far the G-20 has made significant progress in reshaping the governance of global finance by implementing prudential macro-economic policies, developing specific binding rules for emergent global financial problems, increasing the lending capacity of the IMF, synergizing collective action plan for the imperilled banking system and devising alternative financial mechanism for facing the slump in the global economy.

          But this progress is not deemed to be sufficient. There still remains much more to be done. Probably the most important subject for the behemoth group has been the IMF reforms. In 2010, the G-20 members agreed to double the IMF's total quota resources and redistribute voting power from developed countries to developing countries.

          But these reforms, far-reaching structural reforms as they are, must be approved by an 85 percent majority of the total voting power in order to be implemented. So far 146 of the 188 members of the IMF with 77.07 percent of the votes have approved these reforms. But his approval is not sufficient because the US voting share is 16.7 percent, making approval by the US necessary. However, there is hardly any consensus in the US to lend support to the proposed reforms in the IMF even though the US President Barack Obama has expressed his support for the same.

          The GFC drove home the need for a more transparent and non-aligned credit rating agency system. Moody's, Standard & Poor's and Fitch which dominate this system globally have been found to be non-transparent and ridden with the problem of conflict of interest. There is an imperative need for revisiting the entire system of credit rating so that the same can function more efficiently and effectively. G-20 country leaders have emphasized the importance of reducing reliance on credit ratings by these agencies while also stressing the need of finding alternative ways to quantify risks. However, no effort has yet been made to come out with a concrete proposal to put in place the desired alternative mechanism.

          Another area where the G-20 has been found to be wanting is building of the global safety nets. Although IMF resources have been supplemented and reinforced, the current level of international safety nets is not sufficient to stabilize the global economy. The international financial system ought to provide stronger international safety nets in order to reduce the tendency among some powerful economies to accumulate vast amounts of foreign currency reserves, which cause global imbalances and carry huge social costs.

          The critics feel that the G-20 has failed to go beyond rhetoric since 2013 compared with the first five years after the GFC. In this environment of sluggish global growth, increasing investments and proactive coordination to tackle global financial situation through an institutionalised consultative process should be high on G-20 agenda. As recessionary pressure has been building and spreading all across the globe, promotion of economic growth is an important challenge that the G-20 needs to address.

          While the G-20 focuses mostly on reforming the global financial system to spur global economic growth, the world is also experiencing severe socio-economic problems such as increasing income inequality, youth unemployment and gender inequality. These problems not only multiply social tensions, but also undermine the liberal democratic financial system as represented by the Washington Consensus. Therefore, making economic growth more inclusive should be on top of the G-20 agenda.

          The G-20 has disappointed some observers’ high hopes for major reforms in global economic governance and a substantial boost in multilateral cooperation. Another view of the G-20 offers an even more pessimistic take, focusing on prominent failures like the continuing inability to successfully conclude the Doha Round of trade negotiations despite associated leaders’ repeated pledges to do so.

          But, it is important to note that the G-20 is not a full-fledged institution. It is a consultative forum without an institutionalised secretariat. Therefore, it is advisable that the agenda of G-20 is not so overloaded. However, the past successes of G-20 amply demonstrate the value and potential of international negotiation, coordination and cooperation thereby eventually paving the way for the democratization of the largely aristocratic UN system.

          But observers should neither be too disappointed with the successive unproductive G-20 summits including the 2012 Los Cabos summit and 2016 Hangzhou summit, nor place too much expectation on these issues. Failure to implement reforms does not necessarily mean that the G-20 process itself has failed. Rather, it points to the multiple challenges to evolving a consensus on such reforms. The very fact that the leaders continue meeting and discussing important global issues with expressed commitment for increased functional cooperation is itself a positive sign for the shape of things to come in future.

          However, the G-20 is said to be doomed to fail because of the way it is structured presently. While the most difficult and sensitive issues are deferred to the leaders while other less difficult and more technical issues are resolved at the levels of Ministers and officers. The tricky issues have often got stuck for final decisions because of lack of consensus in their national legislatures even if the leaders agree on some decisions.

          For example, even though Barack Obama agreed to the IMF reforms, the Congress did not approve of the same as mentioned above. More than decisions, it is the execution which has been found to be complicated and difficult. After partial economic recovery in the US, UK and Germany, these dominant players' enthusiasm for reforming global financial architecture diminished, which only meant that their earlier quest for change was not real, but a self-centred exercise. Besides, commitments made at the G-20 are non-binding and there is no formal enforcement system. Animosity, shifting coalitions and potential blocs within the G-20 — such as the G-7 and BRICS — also compromise the effectiveness of the grouping.

          While trilateral cooperation among Japan, South Korea and China is on the rise, their bilateral relations have reached rock bottom. Suspicions over the G-7 dictating the G-20 agenda or the United States using the Trans-Pacific Partnership (TPP) to contain China and so on continue to constrain the cooperative spirit within the G-20. The G-20 needs to take some immediate measure for having an effective say in the international relations.

          First, the G-20 must have clear goals and deliver on its agenda of reforming the global financial regulatory system that contributed to the financial crisis of 2008–09 or the ones before that. Second, the institutional reforms in the global financial bodies including IMF quota and voting reforms must be completed. The G-20 cannot work with an anachronistic international framework that no longer represents the global economic structure.

          Third, there needs to be better coordination among institutions. International organisations tend to concentrate on one specific issue area. But most problems are inter-related and span multiple issue areas. So organisations need to coordinate with each other to come up with the best possible response to issues affecting them. For example, the issue of climate change is linked to poverty because poor farmers will lose the most from its effects. The issues of globalisation and economic liberalisation are also issues of inequality.

            Fourth, there needs to be a clear division of labour between global and regional institutions. Otherwise, the G-20, APEC, ASEAN, the East Asia Summit and other institutions could end up repeating and revisiting one another’s good work. The world needs to know how regional and global institutions relate to one another and how each country, whether rich or poor, relates to the global system.

          The G-20 must make its tasks and priorities clear so as to adopt a focused approach towards attainment of its sundry objectives. It is also important for the G-20 to ‘compartmentalise’ issues to avoid mixing economic and geo-political matters. Lastly, the G-20 must have finite and well-defined goals otherwise it will end up stretching itself thin. According to some commentators, the group should narrow the scope of its agenda and home in on its core responsibilities for global economic growth, financial stability and reform of the international financial institutions (IFIs).

          In the long run, only success can preserve the credibility of the G-20. The G-20 is a valuable process right now because it provides an opportunity for dialogue at the highest possible level. The importance of that dialogue must not be undermined. The G-20 should not be judged solely by its failure to implement reforms and achieve cooperation, especially in relation to the European crisis. The debate over the G-20 needs an accurate image of the group on which to judge its performance. It is important to understand the nature of this informal, loosely structured, leader-focused entity and its relationship to formal elements of the multilateral global financial system dominated by hegemonic powers.

          We have also learnt from hindsight that a large number of prerequisites are needed to sustain successful macroeconomic policy coordination, including agreement on the need for such coordination, agreement on a common diagnosis of the problems to be tackled, agreement on the appropriate policy objectives, and agreement on the appropriate economic model linking policy actions to economic outcomes. Empirical studies suggest that international policy coordination is most likely to succeed when it centres on narrow, technical issues rather than high profile policies, when it is institutionalised and when it focuses on preserving a policy regime rather than transforming it.

          On this basis, moving from a smaller and more homogenous grouping like the G7/G8 to a larger and more diverse group would pose a range of challenges. In addition, given the great political sensitivity of many of the issues on the agenda, including exchange rates, fiscal and monetary policies as well as fundamental questions about the nature and structure of the international monetary system, we would have expected significant difficulties in reaching any agreement on many of these matters. The multi-power policy coordination through G-20 becomes more complicated given the increasing shift to a more multi-polar world economy, the growing diversity of the key economic players, the complexity and political sensitivity of many of the issues involved.

          All said and done, the record of the G-20 can be said to be as one of surprising success rather than the disappointment. Concrete initiatives such as the creation of the FSB, the raising of resources for the IMF and the moratorium on protectionism represent successful outcomes. But the G-20 has also achieved success in the more general, but still important sense of forging a body that recognizes the new realities of the distribution of international economic power and that has meaningfully incorporated a diverse range of economic players into the mechanisms of international economic governance.

          It needs to be understood that G-20 is not only an economic policy forum but also the multilateral system’s new venue for rising and established powers to sit together to discuss global issues as equals. The group is merely an ongoing series of informal consultations of senior officials, punctuated once or twice a year by summit meetings of leaders from the world’s major economic players. G-20 has organized itself as a process-oriented forum for first helping to build a consensus and then providing the required political momentum to ensure implementation.

          While binding rule-making is better left to the established or future institutions, the G-20 seems well-positioned to support the progressive convergence of different political and normative perspectives. In a more heterogeneous and polycentric world, the search for a common ground is an important function of global governance. The reason that there is a need for the G-20 is that the leading economies of the world are no longer compatible, either culturally, historically, or economically. These various cross-cutting differences are symptomatic of the fluid international politics of the 21st century, making the work of the G-20 complex yet vital. The successes of G-20 are closely tied to its effectiveness of managing the diversity and divergence of views within the group.

          A developing country like India which has been one of the founding members of G-20 needs to be continuously engaged in the consultative process so as to be able to influence the group for better reflection of the extant global realities, but also to be able to secure its own national interests. The fact that India has successfully coordinated its efforts with other aspiring developing countries like Brazil, China, South Africa, Russia and other important G-20 members amply shows the value India puts on such engagements. One just hopes that India shall further frame an action plan supported by an effective diplomatic strategy to ensure its continued influence and role in G-20.