The G-20 Must Get Serious About Its Commitments
Ernesto Zedillo and Felipe Gonzalez are respectively, a former president of Mexico and a former prime minister of Spain.
Madrid—The August jitters, which brought memories from the panicky fall of 2008, have left little doubt about how fragile the recovery from the great crisis has been and how rocky the road ahead will continue to be. This should not be entirely surprising given the magnitude of the shock endured in 2008-2009. But is also in good measure due to the failure by leaders of the major economies to deliver on key commitments to pursue coordinated action.
The long overdue G-20 was born in November of 2008 precisely to undertake the collective response deemed necessary to tackle the root causes of the crisis erupting harshly at the time. At that first summit, the G-20 leaders themselves wholly admitted that inconsistent and insufficiently coordinated policies propelled the catastrophe then being confronted. On that occasion and at their two subsequent meetings, leaders made concrete commitments to bring about the purported cooperation.
Among many pertinent pledges, the G-20 agenda for reform included strengthening the IMF’s mandate, scope, governance and surveillance authority; reinforcement not only of each country’s system of financial regulation and supervision, but also the goal to make each system globally consistent; and a clear-cut commitment not just to prevent an explosion of trade protectionism but to conclude the Doha Round in 2010.
At their September 2009 Pittsburgh G-20 summit, a framework for strong, sustainable and balanced global growth was adopted to ensure that fiscal, monetary, trade and structural policies were collectively coherent. The agreement was trumpeted as a milestone to improve international macroeconomic policy coordination. In reality, and unless a significant rectification happens soon, the Pittsburgh announcement could go down in history as the beginning of the G-20’s journey towards sheer irrelevance.
Far from seeing strong growth on the horizon, a new dip into recession in the developed economies and even renewed global financial havoc seem quite possible. The cause is not only that the pertinent countries have failed to accomplish the necessary domestic reforms, but also that they have failed miserably to coordinate effectively among themselves to execute the G-20 agenda.
Reform of financial systems—apart from a Basel III still full of holes—has proceeded unilaterally, not cooperatively, leaving much to be desired on several other accounts; transformation of the Bretton Woods institutions has not moved along significantly; and, needless to say, the Doha Round is now even more of a zombie than it was before the G-20 pledged solemnly to conclude it.
In retrospect, the framework announced at Pittsburgh was doomed to fail given the way in which leaders agreed it had to be implemented. They opted for a mutual assessment process relegating the IMF to a purely advisory and secretariat role. Thus, the content of the framework was at once made hostage to a complex and possibly unsolvable negotiation among the key players.
It should have been obvious at the outset that the largest contributors to the global macroeconomic imbalances—such as the United States, China and Germany—would try all along the way to influence the process in order to minimize their respective share in correcting those imbalances which are standing in the way of sustained growth. Given the approach followed, it took more than a year and a half just to agree on a general methodology to assess the sustainability of national economic policies, and the outcome is overly prescriptive on some aspects and quite ambiguous on others. It is very telling that exchange rates have been excluded from the set of indicators to be assessed. Considering that the pending task—identifying the causes of imbalances and agreeing on the policies to fix them—is much harder than agreeing on basic methodological questions, it is highly doubtful that an action plan can be ready to be agreed at the upcoming Cannes summit in early November.
In order to arrive at that action plan, the G-20 has recently asked the IMF to conduct an analysis which is “independent,” a label that is unwarranted since such an analysis is subject to endorsement by the G-20 itself, and furthermore characterized only as a complement to the G-20’s own analysis.
From the outset, rather than relying on an ineffectual peer review process, a third, trusted and independent agent should have been charged with producing the evidence, diagnosis and policy options that would be brought to the table for discussion and decision by the G-20 leaders. But such a third party simply does not exist under present arrangements. The IMF—which in principle should play that role—is crippled by obsolete governance stemming both from its current articles of agreement as well as long-standing practices. Sensibly, the G-20 leaders had committed at their London summit to address the institution’s issues of relevance, effectiveness and legitimacy; but so far only modest steps to that end have been taken.
Inaction to seriously reform the IMF is not due to any lack of ideas on how to go about it. Rather, it is about some of the key players’ reluctance to undertake changes that may lead them to formally relinquish long enjoyed power and influence at the IMF, even if this would result in an institution that could more effectively contribute towards those players’ own long term interests. Still, unless the major economies are content to accept a scenario of a totally irrelevant or nonexistent IMF, the indispensable reforms will happen one day. It is, however, too risky to wait for those reforms to attend competently to the crucial issue of effective macroeconomic policy coordination.
Urgent steps must be taken to alleviate the parsimony instilled until now in the G-20 process. To this end, the G-20 must do anything within their significant influence over the IMF to enhance that institution’s independence to be prescriptive about what policies must be implemented by each key member to contribute fairly towards an effective global growth pact. The idea is to enable the IMF at once, at least politically—if not with full formality because it takes time to reform its articles of agreement—to point out with total candor and transparency what are the policy decisions that each of the large economies should be expected to undertake in their own interest and in coherence with the others’ contributions to balanced, substantial and sustained global growth. Accordingly, the present strings imposed on the IMF staff to name-and-shame the culprits of the global economic fragilities must be removed by a special and interim authority promoted by the G-20. This could be initiated through an exhortation to the IMF Managing Director by the troika (Korea, France and Mexico) plus China and the US to release publicly its staff’s diagnosis and proposals before they are commented on with the IMF Executive Board and the G-20 itself.
Admittedly, the practical value of an IMF’s truly independent report on the rebalancing for growth of the global economy would be at best to provide a sharper focal point of comparison with the G-20’s own conclusions, but this step alone would constitute a significant improvement over the present situation. It would also signal that the G-20 is beginning to acknowledge seriously the need for multilateral surveillance. That signal would be greatly reinforced if in addition to a robust action plan for policy coordination to execute a global growth pact, the G-20 leaders committed at Cannes to pursue, with a precise timetable, the governance reforms necessary to empower the IMF on a permanent basis with a significantly stronger surveillance capability and authority.