Trade Negotiations Insights • Volume 8 • Number 4 • April 2009

Was the G20 London Summit a success?

by Augusto López-Claros

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Whether to view the G20 London Summit as a success or as a disappointment is very much a function of one’s point of reference. (1) Viewed against the needs of the moment—a global economic crisis without parallel since the Great Depression—it could be argued that the Summit did not go far enough. The fact is that in the past 30 years the global economy has become both more complex and more interconnected, but the mechanisms and institutions we have to deal with crises have not kept pace with the tempo of change. Consequently, what has emerged is a “governance gap:”an inability to cope with complex global problems either because the institutions we have are woefully unprepared or, in some cases, because we do not even have an institution with the relevant jurisdiction to address the problem in question (e.g. climate change). Against these challenges the Summit’s achievements—a combination of well-meaning declarations and a few hard decisions—were at best a mixed bag.

On the positive side, it is no doubt an achievement of sorts to have brought some of the larger emerging markets into the decision making process. The G7, accounting for 11% of the world’s population, was clearly not a broad enough forum. The G7 was originally created to discuss “major economic and political issues facing their domestic societies and the international community as a whole.” In time, it became a good forum for open debate about global problems, but not a particularly effective problem-solving vehicle. In the public’s imagination, its semi-annual meetings were largely perceived as excellent photo opportunities, not as brain-storming sessions focused on particular problems requiring urgent solutions as was, for instance, the 1944 Bretton Woods conference; G7 meetings are actually intended—as noted by a former G7 prime minister—to preserve the status quo.

The creation of the G20 in 1999 was seen as recognition of the new economic and political realities, but neither the Swiss nor the Dutch nor the Spanish were particularly happy at being excluded. Switzerland manages a third of the world’s private wealth and the Netherlands is the most generous donor and, by far, the country with the most development-friendly policies. Spain, a country whose economy is more than five times the size of Argentina’s (a member of the G20!), took great exception to being excluded from the November 2008 G20 Summit—only strenuous lobbying delivered a last-minute invitation.

Of course, both the G7 and the G20 remain, in fact, official bodies. Their deliberations bring to the table heads of state and a small coterie of civil servants. There is no representation from the business community, nor does civil society participate. Given the global nature of the problems we face and the increasingly shared perception that solutions to these will require broad-based collaboration across various stakeholder groups, for many, these groups still suffer from a deficit of legitimacy. They are not a fair representation of humanity and, as such, cannot be expected to make any important decisions on its behalf. There are no low income countries among the G20—their voices simply do not count. Despite these flaws, some progress was made in London and I would like to focus on those that pertain to the International Monetary Fund.

During much of the past decade the International Monetary Fund (IMF) has found itself in the middle of virtually all major emerging market crises and questions about its effectiveness have been raised; indeed some have argued that the organisation is no longer needed in a world of largely floating exchange rates. It is clear, however, that with fully globalised financial markets in which policy missteps in one country have costly spillover effects on others (as we have seen over the past year), an institution that will have sufficient resources to deal with episodes of financial instability and that will help cushion or prevent the effects of future crises is indispensable.

Like a central bank, the IMF can create international liquidity through its lending operations and the occasional allocations to its members of Special Drawing Rights (SDRs), its composite currency. The IMF already is, thus, in a limited sense, a small international bank of issue. As seen during much of the past decade and a half, the Fund can also play the role of “lender of last resort” for an economy experiencing debt-servicing difficulties. But the amount of support it can provide has traditionally been limited by the size of the country’s membership quota and there is an upper limit on total available resources; as of early-2009 this amounted to about USD 250 billion, a puny amount when compared with the sorts of sums that are necessary to intervene in industrial or larger emerging markets countries in distress.

There are a number of ways to deal with these funding shortfalls. One proposal some years back was to create a Financial Stability Fund, to supplement IMF resources. This would be a facility that could be financed by an annual fee on the stock of cross-border investment; a 0.1% tax could generate some USD 25-30 billion per year, which could then be used over time to create a USD 300 billion facility. An alternative and more promising proposal would be to give the Fund the authority to create SDRs as needed, as a national central bank can in theory, to meet demands by would-be borrowers. When this idea was first put forward in the early 1980s, concerns were raised about the possible inflationary implications of such liquidity injections, but international inflation was a serious problem then in ways that, in the midst of a global recession, it is clearly not; measures could be introduced to safeguard against this.

The London Summit made some progress toward strengthening the capacity of the IMFto play a supportive role to emerging marketcurrently suffering the effects of the international financial crisis. This was achieved mainly by significantly expanding the resources available to the organisation under special borrowing arrangements negotiated with a few central banks and by allowing a USD 250 billion SDR issue. But the Summit seems to have been less successful inmoving more quickly to update the voting power of its member countries to better reflect the changes that have taken place in the structure of the global economy during the past quarter century. Slowly and grudgingly, kicking and screaming, EU members finally appear to recognise the absurdity of a system where the voting powerof the EU currently stands at 32.4%, whereasthe combined voting power of the United States, China, India, Brazil, and Russia, accounting for about half of the world’s population is 26.9%, though, collectively, these countries account for a much larger share of global GDP. This distribution of power leads to such anomalies as Belgium having a larger quota than India, and China having a quota only marginally higher than Italy’s and well below that of France. These are facts that have undermined the institution’s credibility. Not surprisingly, Asian countries do not see they have a stake in empowering the IMF, rather regarding it increasingly as embodying power relationships that no longer reflect contemporary economic and political realitiesAn IMF without credibility, of course, is of no use to the international community, particularly at a time of global crises. That these so-called “voice reforms” have to wait until 2011 is a good indicator of the enormous inertia that has to be overcome to modernise our sclerotic global institutions, at a time when it is of the utmost urgency to strengthen mechanisms of international co-operation.

Also welcome was the decision to finally break with the convention adhered to ever since the IMF’s creation, which establishes that it’s managing director (MD) must be an EU citizen. (2) Like the veto power in the UN Security Council this practice is an aberration and should have been done away with long ago. It is, in fact, surprising that this practice has persisted for so long given that IMF lending operations have no budgetary implications for members such as the US and the EU (indeed they earn a return on their SDR reserve assets). The salaries of the Fund’s MD and its entire staff, as well as all other administrative expenditures, are entirely financed by the interest paid by borrowing countries. In other words, the IMF functions thanks to taxpayers in middle and lowincome countries, not the rich countries who have run it since it was first founded.

Despite the important symbolism of the G20’s decision, efforts will have to be made not to allow the new system to turn into something actually worse. The main risk is that we could now move to the system in place at the UN, where the Secretary General is chosen on a rotating basis, from different regions of the world. The problem with that system is that it tends to breed mediocrity, with the top job going to someone who is acceptable to all constituencies—a process which then leads to the lowest common denominator.

It remains an open question whether, in retrospect, the London Summit will be seen as a good starting point for a more multilateral approach to global problem solving. In my view, the main risk we currently face does not stem from the financial crisis itself. Rather, the risk is that within a year the global economy will be perking up again (because the housing sectors will have bottomed and the unwinding of commodity prices will boost consumption among oil importers) and governments will go back to business as usual, missing a once-in-a-lifetime opportunity to address the serious vulnerabilities in the world’s financial system that the current crisis has revealed. In that scenario, the next crisis would find us with little ammunition left – that is the real danger.

Author
Augusto Lopez-Claros was IMF resident representative in Russia and chief economist of the World Economic Forum. In 2007 he was co-editor of The International Monetary System, the IMF, and the G-20: A Great Transformation in the Making? published by Palgrave Macmillan.

Notes
1. For the record, the G20, in fact, is the G22 as it also includes Spain and the Netherlands, two countries originally excluded from membership.
2. A similar recommendation applies to the World Bank, whose president has traditionally been an U.S. citizen.