Headlines proclaim the G20 summit in Seoul a failure and editorial pages lament that leaders did little more than reaffirm policies already in place. In what was, in the eyes of many, the biggest disappointment, the summit did not agree on hard targets for rebalancing the global economy.
However, such characterizations misread what the G20 can and should do. Going forward, the G20 should function not as a chief financial officer, but as a board of non-executive directors: establish broad objectives, set agendas, provide a forum for consensus building, and conduct periodic monitoring. To this end, the summit took important steps by endorsing financial and IMF governance reforms that the G20 had nursed along. Furthermore, by placing development and corruption so squarely on the menu—these were the only issues for which new concrete actions plans were developed—G20 leaders expanded their purview, and sent a strong message that these agendas are ones developing countries own and on which they want a greater voice.
Many observers incorrectly assume that hard and fast targets on current accounts and/or currencies would benefit the global economy when, in fact, the summit’s rejection of such targets was one of its most reassuring outcomes. The goal of the G20 is not to rebalance global demand but rather to promote strong, sustainable, and balanced growth—an end result that can benefit all countries, and of which reduced imbalances may or may not be an ancillary outcome. Viewed this way, the IMF-executed mutual assessment process mandated by G20 leaders can help guide the global growth agenda.
The point here is not to claim that the G20 is a resounding success, but to bring expectations back to earth. To be sure, the new set-up has many problems. To start, the summit has lost much of the cohesion of its early days, when the crisis threatened to bring the world economy crashing down. Its preparations have become too elaborate, the group is too big and yet does not adequately represent smaller countries, and it runs the risk of agenda creep and overreach. But, because it involves the large developing countries as equals with the large advanced countries, it remains a large improvement on the anachronistic G8, and an essential forum for forging broadly shared global agendas.
The G20’s Role
Measured against the standard of a board of directors of the global economy, the Seoul summit made tangible progress. It endorsed the Basel III financial reform framework and the restructuring of the IMF; though the reforms were the result of separate institutional processes, the G20 provided the legitimacy and impetus necessary to reach agreement.
- Financial Reform: The G20 committed to begin implementing the Basel Committee’s new bank capital and liquidity framework in 2013 and finish by 2019. The G20 also endorsed the Financial Stability Board’s less specific framework on systematically important (i.e., “too big to fail”) financial institutions.
- IMF Governance: In addition, the G20 endorsed the IMF’s plan to shift more than 6 percent of quota shares to developing economies by October 2012, as well as to comprehensively review its quota formula. The leaders also supported changes to the IMF Executive Board, which are designed to increase the representation of developing countries and are scheduled to be implemented by late 2012. In addition, the G20 called on the IMF to modernize its Article IV consultations, by systematically including financial sector assessments, for example, and also to deepen its work on reforming the international monetary system.
In addition to delivering mandates to the relevant international institutions in many areas, the G20 committed to various actions through national governments. The two action plans endorsed by the summit—the Multi-Year Action Plan on Development and the Anti-Corruption Action Plan—placed development and corruption on the G20 agenda, expanding the group’s purview from crisis prevention and taking over issues traditionally left to the less-inclusive G8.
- Multi-Year Action Plan on Development: While vague, this plan gives developing countries a bigger voice in setting development priorities. Already, the approach may have led to somewhat different priorities than those that emerged from other forums: while many donor agencies in the developed world lament the omission of health from the plan’s nine key pillars and the lack of specific aid commitments, for example, infrastructure has gained a more prominent position, perhaps better reflecting the growth priorities of developing countries.
Much like the Plan on Development set an important precedent for the G20 agenda, the Anti-Corruption Plan put transparency and governance on the G20 table. Though the plan largely stuck to highlighting principles laid out in the UN Convention Against Corruption (UNCAC), it increased the UNCAC’s legitimacy as a result, and also set concrete deadlines for certain actions, including the implementation of whistleblower protection rules.
External Imbalances and Currency Wars
The summit’s supposedly biggest failure—its lack of hard targets for global rebalancing—was, in fact, one of its most reassuring outcomes. Setting hard targets for current accounts and currencies would have been a mistake.
As we have argued before, current account targets miss the point. First of all, governments lack the tools necessary to control their country’s external balance, making such targets moot in the best case and divisive in the worst. Second, countries with a current account surplus and those capable of growing domestic demand are not one and the same, suggesting that current account targets are not by themselves a useful growth coordination mechanism. On the contrary, they place the focus on a zero-sum game, fueling international tensions, when instead the focus could be on global economic growth that arises from cooperative efforts to grow demand.
Third, no one target would fit all 20 economies—many are rich in natural resources, and others vary in how attractive they are to investors; any defined number would necessarily result in lobbying for exceptions. Finally, the targets distort attention from the real issue that must be addressed, namely how to grow domestic demand sustainably.
Rather than define current account targets, the G20 agreed to assess external imbalances against “indicative guidelines” and to examine the root causes of those deemed “persistently large” after national or regional circumstances are taken into account. Whether this approach will prove useful depends on establishing clear objectives and the choice of guidelines and indicators, however.
As we have argued previously, the purpose of the MAP and similar exercises should be primarily to assess a country’s ability to grow its domestic demand sustainably; such growth is, after all, the end objective. Current account and currency policies should be entirely subordinate to this objective. Identifying appropriate policies requires consideration of:
- The Output Gap: GDP substantially lower than estimates of potential output indicates capacity to grow demand without triggering inflation.
- Fiscal Space: Manageable debt levels indicate that a government can use fiscal stimulus. Undertaking long-term fiscal reform may be necessary to assure sustainability and also can provide more fiscal space in the short run.
- Monetary Policy: Low inflation and a large output gap indicate scope for looser monetary policy.
- External Balance: Current account surpluses or modest deficits indicate capacity to grow domestic demand and imports.
Using these indicators in the “Can the G20 Grow Faster?” report, we concluded that, with the exception of Italy and potentially Japan, advanced G20 countries—including external deficit countries—have the greatest capacity to grow domestic demand, while most developing G20 countries—except for Mexico and possibly Saudi Arabia and China (surplus countries)—have the least capacity.
Much like its position on current account imbalances, the G20’s position on currencies—moving toward market exchange rates, refraining from competitive devaluation, and maintaining the focus on price stability—was vague but wise. It eschewed any Plaza Accord-type currency coordination. As discussed in “How to Avoid a Currency War” and “The Dog that Didn’t Bark,” forcing exchange rates into straitjackets does not make sense: the international currency system—messy and arbitrary as it is—served the world well during the crisis. China’s currency policy remains a divisive issue, and gradual but accelerated renminbi revaluation is desirable. However, adopting current account or currency targets would be a cure worse than the disease.
The G20 outcome on trade was disappointing, with another general call for Doha Round conclusion and little of significance agreed to on duty-free-quota-free access for Least Developed Countries.
All in all, therefore, the G20 is proving to be a fairly effective coordinating mechanism for the world’s major economies. Those observers who expect it to be a short-term change agent, as it was when the crisis began, will continue to be disappointed, but those who expect it to provide strategic direction to international economic relations over the long term will be reassured.