It is instructive to study the origins of the Group of Twenty (G20). It will give us an idea of its innate strength and ability (or lack of it) to reach globally binding agreements. It was formed in December 1999 during the years of Asian Financial crisis. The intention was to assuage the developing countries and form a group which would take care of the interests of both the advanced and the developing countries. Ritualistic meetings of the G20 were held alongside the Annual Fund/Bank jamborees. The G20 was expected to rubber-stamp and legitimise the decisions already taken by the G7. No wonder, the G20 went into limbo in the coming years. (Partha Shome details these failings in the introductory part of this book.)
The early years of this century witnessed the extraordinary growth of China, India, Brazil, etc. BRIC became the cynosure of western investors and was specially promoted by investment banks like Goldman Sachs which coined the term ‘BRIC’ in the first instance as a marketing ploy. (Since last year, the soothsayers have declared its demise!) Globalisation, both in manufacturing and financial sectors, tilted the balance towards the South. Cross-border flows of capital fattened the profits and bonuses of western banks and, to a large extent, promoted the growth of emerging economies. To cut the long story short, excessive financialisation, liberalisation, deregulation and financial innovations, etc. resulted in the Great Financial Recession (GFR) in 2008.
The U.S. and European authorities were in panic and did not wish to watch the collapse of their economic universe. They realised that, unlike in the earlier crises like those in Latin America in 1980s or in Asia in the late 1990s, unilateral measures would not be effective and concerted action involving both the developed and developing countries was required. Further, there was the fear that if emerging economies shut their doors against capital and trade flows, the crisis would deepen and get out of control. Indeed, emerging economies also did not wish to be denied their share in the global pie. This was the background to the decision of President Bush to revive the G20. It was indeed a diplomatic tour de force .
When the G20 was revived, it was not representative in character . Critics alleged that members were chosen with due regard to the strategic compulsions of the west. It lacks legitimacy and has no special status or link with the U.N. system. It has no formal secretariat or mechanism to enforce its decisions. The surprise was that with all these infirmities, the G20 did succeed in the early years, i.e. 2008-09. As Partha Shome writes, “The G20 to a large extent succeeded as a firefighting committee in 2008-09, though it has not been fully successful as a lightning rod for anticipating and preventing crises such as the newest Euro crisis …”
In fact, it has not succeeded in any of the major objectives it had set for itself in its long and ambitious communiques issued from Summit to Summit. As Prof. Debra Steger of the University of Ottawa said, “The G20 has reached a turning point at its fifth anniversary. It is now time to reflect on its purpose and objective, to determine whether it is meeting those objectives and what kind of forum it will be in the future.”
The basic weakness of G20 is that it is expected to work within the IMF system even as it is committed to reform it! It has to conform to the accepted western codes, norms or standards. Unlike the Stiglitz Commission set up by the U.N. to rework the global financial system, the whole endeavour of the Anglo-Saxon group was to save the banking system. They were ready to pump in trillions of dollars as bailouts. Though the November 2008 Summit stated that one of the reasons for the crisis was “inconsistent and insufficiently coordinated macroeconomic policies and inadequate structural reforms” and called for policy response “based on closer macroeconomic cooperation to restore growth, avoid negative spillovers and support emerging markets and developing economies”, these proved to be pieties not to be acted upon.
As many critics have observed, efforts at coordination faded even as the crisis abated somewhat and there were signs of growth (green shoots!). There was reluctance even to consult members on ‘exits’ from bailouts.
A recent research paper of Chatham House (Is International Economic Policy Cooperation Dead? June 2014) draws attention to several instances of lack of cooperation. For instance, the US Federal Reserve offered liquidity support selectively to those considered to be its ‘key’ allies. The earlier cooperation in deciding interest rates was given up once the major countries like U.S., ECB and Japan began to adopt unconventional policies such as Quantitative Easing (QE). These created excessive financial volatility and began to affect adversely the emerging economies. It led to bickering within the G20. Governor Raghuram Rajan held forth against uncoordinated QE exits and was rebuffed by Ben Bernanke. Some of these concerns are well covered by Renu Kohli (Chapter 7) and Alok Sheel (Chapter 8).
The attempt of advanced economies is to use the G20 as a shield to protect the western banking system and also put pressure on emerging economies to adopt the same codes, norms, etc. The work in the Financial Stability Board (FSB) is elaborate and more suited to ensure the safety of globally operating banks than those in developing countries.
In fact, this work is a continuation of the work which has been going on for some years, long before GFR, and some analysts doubt whether adoption of these codes and standards would avert another crisis considering that the earlier ones did not! The package devised thus far is too nebulous and fungible. As a Report of the U.S. Government Accountability Office (GAO-14-261, April 2014) said, “… legal, economic and political factors can create implementation challenges for jurisdictions.” It added that regulators in different jurisdictions may apply or interpret the standards differently and inconsistent implementation by different jurisdictions could facilitate ‘regulatory arbitrage.’
The advanced economies have concentrated more on the global imbalances and charge the developing countries such as China as responsible for them. This game has gone on for more than a decade. Earlier attempts of the IMF to resolve the imbalances were of no avail. It is rather ironic that the work has been tagged on to the agenda of the G20 under the rubric G20 Mutual Assessment Process or G20MAP. David Vines deals with this in Chapter 4. His paper was done in 2011 and sounded upbeat. Since then, after three years and recent developments, his optimism is belied.
The earlier attempt was to lean on the technical expertise of the IMF. Sadly, the IMF is suspect and not acceptable to many members. Presently, the G0MAP is supposed to gets its expertise from the IMF. Prof. T.N. Srinivasan adds, “... the IMF’s capacity for proper and effective surveillance has proved to be limited.” All the members swear about the importance of the work. Unfortunately, they are not moving forward. The pity is that although successive G20 communiques call for enhanced international cooperation, they lack details about what economic policy adjustments should be made.
As narrated above, the work under the auspices of the G20 has not progressed at all. There is more rhetoric than action. Even commitments given earlier are disregarded. By and large, the work has not been balanced or even handed and has not gone in favour of developing countries. The unseen hand of G7, especially the U.S., is at work. The attempt, it appears, is more to subject them to the codes, norms and standards regardless of their suitability in the current state of their financial depth.
This book contains papers prepared for a project on G20 sponsored by the Finance Ministry and undertaken by the ICRIER in 2010-11. Some papers in this volume are dated and have not been revised. Raising of some larger policy issues is relevant. Much water has flown since these papers were written and the optimism underlying them has also vanished. Indeed, that optimism was misplaced. This was perhaps because many of the authors have had their stint with the IMF and inherited the neo-liberal mind-set. In retrospect, it seems that working within the G20, China has been able to safeguard its interests more than other emerging economies, including India. One harbours grave doubts about the future course of the G20. Will it perish due to agenda overload and inner tensions? This book helps, to some extent, to understand the frictions simmering within the G20.
