GLOBAL GOVERNANCE: Group (re)think
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Emerging Markets

GLOBAL GOVERNANCE: Group (re)think

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The G20 may have proved itself three years ago as an adept fire-fighter in the face of crisis. But it has yet to carve out a role as an effective steward of the global economy

Just five years ago any question outside the ivory towers of academia and the world of policy wonks over the role of the G20 group would have been met by a stark “G-who?”

Founded in 1999 to supersede the G33 and G22, the organization acted for a decade as a useful talking shop to discuss key global economic issues – until crisis struck.

Everything changed in 2008 thanks to the need of the developed country members of the G7 group of nations to tap the resources of the fast-growing and – at that time – recession-immune emerging markets. The swiftly-arranged Washington summit of the G20 leaders saw the heads of countries such as China, India and Brazil stand alongside President George Bush on the global stage.

This was followed by the London summit in April 2009 when leaders rubber-stamped a $1 trillion increase in the resources of the International Monetary Fund.

At that September’s Pittsburgh summit, leaders declared the G20 would replace the G7 as the premier forum for international economic cooperation.

Gordon Smith, a former Canadian politician who is a fellow at the Centre for International Governance Innovation (CIGI), says the G20 did a “creditable job” of framing the solutions to the financial crisis. “In the years since the first summit in November 2008, the G20 has proven itself as a crisis manager, but it has yet to lay the foundation for a role as an ongoing coordinating committee for the global economy,” he says.

Amar Bhattacharya, director of the G24 group of emerging and developing nations, agrees there had been a feeling a year ago that its power was “ebbing” and that the G8 was in the “ascendancy”. “My sense now is there is no doubt the G20 will be the forum not just now but going ahead,” he says. “I don’t think you can turn the clock back, and that discussion is over.”

But with the extra power have come questions about the group’s right to set global economic policy and its accountability to the rest of the world. Despite the mantle it has assumed and the huge attention devoted to the summits, the G20 is not a legal entity, has no secretariat and is not governed by a strict set of rules.

TALKING SHOP?

Observers such as Holger Schmieding, chief economist at Berenberg Bank and a former economic adviser to the IMF, warn against resting too much importance on the G20. He says that despite the general consensus of unified action in 2008, the decisive steps to get the Lehman debacle finally under control had little to do with any G20 initiative. Instead, it took the unilateral Fed decision to buy a massive amount of bonds to end the market panic and the global recession, he says.

“The G20 is mainly a talking shop, and its purpose is to let policymakers understand what their counterparts elsewhere are up to and why. That is very useful,” he says. “Coordinated policy action is rare and has been rare in the past, except for occasional joint central bank interventions in cases of extreme market dislocations.”

This has led to criticism that the G20 will struggle to find a role when it is not staring into the face of economic Armageddon.

WIDENING THE FOCUS

Recently the G20 has sought to move away from finance and economics to include other areas such as development, food security, climate change, health and energy. Smith at the CIGI says it is hardly surprising if the leaders of the 20 most powerful nations seize on the most pressing issue of the day.

“Although the arguments in favour of maintaining a focus on financial and economic issues may make technical sense, as other large issues come to the fore leaders will want to expand the range of issues they discuss at G20 meetings, for understandable political reasons,” he says. “A clear measure of its success is the high probability that, if the G20 ceased to meet tomorrow, some new version of it would undoubtedly have to be cobbled together.”

Indeed it cannot be said the G20 has had no success in meeting the goals it sets. A study by the University of Toronto rated the commitments the G20 had made since 2008. On a scale of -1 to +1, representing a range from no action taken to full compliance, the G20 scored +0.65, far exceeding the overall G20 average of +0.44.

The university’s G20 research group has called for a standing accountability working group, similar to one that monitors the G8, to be set up to ensure the G20’s work stays on track.

Ella Kokotsis, a director of the group, says Los Cabos offers an opportunity for the G20 not only to reach consensus on the global challenges, but also to be accountable for the broad spectrum of commitments its leaders will make. “To maintain their credibility and legitimacy as the centre of global economic governance, the G20 must seize this key opportunity to demonstrate to the world its continued value, leadership and effectiveness,” she says.

The Nicholas Burggruen Institute, a think tank set up by the German billionaire retailer that counts former G20 leaders Gordon Brown, Paul Martin and Gerhard Schroder as members, has urged the G20 to reform itself. In a statement sent to Mexican president Felipe Calderon and seen by Emerging Markets, it rejects a secretariat or a “bureaucratic edifice”, favouring a permanent team of “sherpas” from each G20 member to work together ahead of the summits.

“When joined with the ‘troika leadership’ – the past, present and future rotating presidencies – the seconded sherpa system could effectively close the gap of knowledge and institutional memory that now exists,” it said.

But Bhattacharya believes reform of the G20 is “for another day”. While there is a “gap” in global economic governance at leader level, the G20 is still best-placed to fill that space. “It helps to have at least one structure that is at least one that people are looking to for guidance,” he says.

He highlights the work done on financial regulation by the Financial Stability Board that was set up by the G20, and its Mutual Assessment Programme (MAP), which acts as a peer review exercise of each other’s economies. “My feeling is that we should use the G20 to fill the gaps that exist but push it to be as inclusive as it can be, as supportive and non-displacing of the established institutions,” he says.

“My own view is that if they do that, the calls for a totally universal body will dissipate, but that does imply you need continuing reforms to ensure you are tackling the inherent deficiencies in the structure.”

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