G-20

The Carnegie Endowment for International Peace's Uri Dadush and Bennett Stacil have released The G20 in 2050, in which you learn the following:

China will become the world’s largest economy in 2032, and grow to be 20 percent larger than the United States by 2050. Over the next forty years, nearly 60 percent of G20 economic growth will come from Brazil, China, India, Russia, and Mexico alone. However, these emerging markets will not rise among the world’s richest countries in per capita terms: their average income in 2050 will still be 40 percent below that of the G7 states today. The end of the decades-old correlation between economic size and per capita income will have profound effects on global economic governance.

Hmmm.... yes, this sounds familiar:

  

Studies by Goldman Sachs and Deutsche Bank on growth trends for big developing economies contains some startling predictions. By 2010, the annual growth in aggregate demand from Brazil, Russia, India, and China will be greater than the combined growth of the United States, Japan, Germany, Italy, and Great Britain. By 2020, China and India are projected to have the second and third largest economies.  By 2025, the annual growth in aggregate demand from the four leading developing economies will be twice that of the G-7.  By 2030, the combined purchasing power of China's and India's consumers is projected to be five times that of today's United States.  While simple extrapolations from the recent past can be misleading, economic and demographic trends suggest that growth of India and China will shift what is currently a bipolar economic distribution of power into a more multipolar world.

As the number of actors increases, the likelihood of creating a concert of common preferences among them necessarily declines.  This holds with particular force if these countries achieve great power market size while still having low per capital incomes.  In addition to the current tension between the American and European varieties of capitalism, another source of preference divergence could emerge among the great powers:  the tension between rich countries willing to trade off economic growth for quality of life issues, and still-developing countries that are more reluctant to sacrifice growth.

The Carnegie report does have some nicer visuals, however.  Give it a look. 

Over at the Financial Times, Gideon Rachman looks back at the G-20 Pittsburgh summit and thinks that Europe will take over the G-20 process: 

The realisation that the G20 is Europe’s Trojan horse struck me at the G20’s last summit in Pittsburgh a couple of weeks ago. The surroundings and atmosphere were strangely familiar. And then I understood; I was back in Brussels, and this was just a global version of a European Union summit.

It was the same drill and format. The leaders’ dinner the night before the summit; a day spent negotiating an impenetrable, jargon-stuffed communiqué; the setting-up of obscure working groups; the national briefing rooms for the post-summit press conferences.

All of these procedures are deeply familiar to European leaders – but rather new to the Asian and American leaders whom the Europeans are carefully entangling in this new structure. Watching an Indonesian delegate wandering, apparently carefree, through the conference centre in Pittsburgh, I felt a stab of pity. “You don’t know what you are getting into,” I thought. “You are going to waste the rest of your life talking about fish quotas.” (Or, this being the G20, carbon-emission quotas.)

The Europeans did not just set the tone at the G20 – they also dominate proceedings, since they are grossly over-represented. Huge countries such as Brazil, China, India and the US are represented by one leader each. The Europeans managed to secure eight slots around the conference table for Britain, France, Germany, Italy, Spain, the Netherlands, the president of the European Commission and the president of the European Council. Most of the key international civil servants present were also Europeans: Dominique Strauss-Kahn, head of the International Monetary Fund; Pascal Lamy of the World Trade Organisation; Mario Draghi of the Financial Stability Board.

As a result, the Europeans seemed much more tuned into what was going on than some of the other delegations. Puzzling over the new powers given to the IMF to monitor national economic policies in the Pittsburgh conclusions, I was interrupted by an old friend from the European Commission, who recognised the language immediately. “Ah yes,” she said, “the open method of co-ordination.”

Hmmm..... no, I'm not buying this.  Or, to put it another way, if the G-20 is a European plot, then it would be the worst plot since.... insert your least favorite M. Night Shyalaman film here.

Sure, the Europeans are overrepresented at the G-20.  But compare that to the G-8, where (when you factor in the EU), they occupied more than half of the chairs around the table.  The G-20 doesn't augment the power of Europe -- it dilutes it. 

This interpretation fits with what I heard from some of the G-20 participants as well.  There was a surprising degree of common cause between the BRIC economies and the United States in the run-up to Pittsburgh.  Given the outcome, there is an obvious explanation for the BRIC economies' behavior. 

Why did the U.S. go along?  Washington maintains stronger bilateral ties with each of the other G-20 members than most do with each other.  If one thinks of the United States as the central node in a more networked governance arrangement, then one can see how the reforms made to date do not weaken American influence.  The primary loser, then, is Europe.

Maybe Gideon will be proven correct -- it's certainly true that the Europeans might have a comparative advantage in this kind of diplomatic death-by-detail approach.  On the other hand, the Americans and Russians aren't exactly newbies at this.  The Chinese and Indians have been moving down the learning curve pretty fast.  And the Brazilians already have a reputation for being diplomats who punch above their weight. 

Developing....

 

As previously noted, the G-20 has done a much better job than I would have thought possible a year ago.  It now looks like the Obama administration is close to earning consensus on a framework arrangement on macroeconomic policy coordination.  The devil's in the implementation, of course, but the fact that they're close to consensus on such a framework is truly surprising. 

Naturally, the French like to focus on peripheral issues that they are convinced contributed to last year's financial meltdown.  Last April it was tax havens; this time France's pet peeve is placing a cap on bank bonuses (admittedly less peripheral than the tax havens). 

It now looks like there will be agreement on that issue -- in part because the caps will not include specific monetary caps. 

I raise all of this because Nicolas Sarkozy's "bonus tsar", Michel Camdessus, gave an interview to the Financial Times in which he was refreshingly candid about the issue: 

 

France’s bonus tsar on Thursday said that traders’ bonuses were a largely symbolic issue for G20 leaders, and that in terms of money they were the “least important” item on the agenda.

Michel Camdessus, the former head of the International Monetary Fund, said: “If you look at this issue of remuneration in the global agenda of the G20, it is certainly – in terms of cash, money – the least important of all issues on the table.”

Mr Camdessus, charged by Nicolas Sarkozy, the French president, last month with monitoring bonuses of traders at state-aided banks, added: “But if you look at the symbolic value of the issue, it is one of the most important.”

Fine -- it's symbolically important.  But if a symbolic agreement can allow the G-20 to keep their eyes on the macroeconomic prize, then three cheers for symbolic gestures. 

To put it gently, international macroeconomic policy coordination has not had a glorious history over the past century.  Usually, the domestic political and economic costs were large enough to impede most efforts to coordinate.  Sham coordination was far more common than genuine coordination. 

Most successes in global policy coordination occurred when two of the following three conditions held.  First, when there was a state powerful enough to go it alone, coordination was usually a matter of the hegemon unilaterally providing the necessary public goods to facilitate coordination (see:  Marshall Plan, Dodge Line).  Second, when countries were being asked to take actions that boosted their domestic economies, they were willing to coordinate policy.  Contractionary fiscal or monetary policies have proven to be far more difficult to coordinate than expansionary actions.  Third, policymakers needed to be right on the economics.  Agreements to coordinate on an unsustainable set of policy prescriptions - such as the interwar gold exchange standard, Bretton Woods, or the Growth and Stability Pact - had a short half-life. 

Now, to give the G-20 some credit, this current crisis has led to greater levels of coordination than in the past -- and more than I expected.  This might be a function of policy learning from the debacles of the interwar period.  But it could also the fact that, to date, governments have been asked to pursue expansionary policies.  Each country was going to do something like what they are doing anyway -- the G-20 just acted as a useful focal point to cajole some of the more reluctant countries. 

What happens when it's time to clamp down?  Australian PM Kevin Rudd and South Korean President Lee Myung-bak proffer some recommendations in the Financial Times for the hard part of macroeconomic policy coordination: 

At Pittsburgh, G20 leaders should agree to a three-stage process. First, national governments should develop their own national strategies for recovery. Second, they should agree to deliver these strategies to the International Monetary Fund before the end of the year and ask the IMF to report back on their consistency with balanced and sustained global growth. Third, G20 leaders should meet again in 2010 (when South Korea is the chair of the G20) to agree their responsibilities and actions to achieve this goal within the framework of post-crisis global economic management. 

Steps one and two make a great deal of sense, and even have a good chance of being implemented.  The wording of step three is a bit vague, for it to mean anything it boils down to, "make everyone scales back on priming the pump in a coordinated manner." 

If that actually happens, well, tip your cap to the G-20, because the G-7 -- a much more homogenous group of countries -- never succeeded at that task. 

Question to readers:  does the G-20 have a chance in hell of succeeding in their next task? 

Back in the 1970's, Henry Kissinger used to joke that, "When I want to call Europe, I cannot find a phone number." 

In a cruel irony, the roles appear to be temporarily reversed, according to the Financial Times: 

The US-European differences are casting a shadow over next month’s summit in London of leaders from the G20 group of advanced and emerging economies, an event to be attended by Barack Obama on his first visit to Europe as US president.

It also emerged that Gordon Brown, UK prime minister, was struggling to organise the summit. Britain’s most senior civil servant claimed it was hard to find anyone to speak to at the US Treasury. Sir Gus O’Donnell, cabinet secretary, blamed the “absolute madness” of the US system where a new administration had to hire new officials from scratch, leaving a decision-making vacuum.

“There is nobody there. You cannot believe how difficult it is,” he told a conference of civil servants.

This sounds like a familiar complaint.  Oh, wait....

Dani Rodrik is somewhat disappointed with the G-20 communique: 

What I was looking for were three things: (i) coordination on fiscal stimulus; (ii) a commitment to provide more liquidity support, as needed, to prevent a further spread of the crisis to emerging nations; and (iii) a clear commitment not to engage in trade protection, with a monitoring mechanism to ensure the pledge is being observed. How does the statement do in these regards?  So-so.  There is no coordination in the fiscal arena, the promises made to emerging markets are vague, and even though there is a clear statement on protection and export subsidization, there is no monitoring or enforcement mechanism.

My take is slightly different.  The expectations of this G-20 meeting had to be pretty low, given that the focal point actor has a lane duck president.  What I found interesting, rather, was some laying of the groundwork for actual reform of global governance structures: 

We are committed to advancing the reform of the Bretton Woods Institutions so that they can more adequately reflect changing economic weights in the world economy in order to increase their legitimacy and effectiveness.  In this respect, emerging and developing economies, including the poorest countries, should have greater voice and representation.  The Financial Stability Forum (FSF) must expand urgently to a broader membership of emerging economies, and other major standard setting bodies should promptly review their membership.  The IMF, in collaboration with the expanded FSF and other bodies, should work to better identify vulnerabilities, anticipate potential stresses, and act swiftly to play a key role in crisis response.

What's interesting about this is the above paragraph mirrors the below paragraph put out a few weeks ago by the BRIC Finance Ministers: 

We called for the reform of multilateral institutions in order that they reflect the structural changes in the world economy and the increasingly central role that emerging markets now play. We agreed that international bodies should review their structures, rules and instruments in respect of aspects like representation, legitimacy and effectiveness and also to strengthen their capacity in addressing global issues. Reform of the International Monetary Fund and of the World Bank Group should move forward and be guided towards more equitable voice and participation balance between advanced and developing countries. The Financial Stability Forum must immediately broaden its membership to include a significant representation of emerging economies.

This kind of structural reform is not going to happen overnight.  But the fact that this got into the final communique suggests that there is at least some recognition by the G-7 that the rules of the game are about to change for good.