South Korean President Lee Myung-bak, in his bi-weekly radio address identified the four main items on the agenda: currency exchange rates, global financial safety nets, reform of international financial institutions and development. These issues are being considered in the context of challenges to continued global recovery and global economic rebalancing. This article presents the dynamic among G20 members on exchange rates, institutional reform, and global rebalancing.
Exchange Rates: The Flash Point
The global economic recovery continues to be disrupted by the imbalances between export-led economies such as Germany, China and Russia, on the one hand, and countries with current-account deficits, such as the United States or Turkey, on the other. (The current-account balance is a nation’s net trade in goods and services, see NYT Imbalances Chart).
This situation has ignited conflict over the strategic use of currencies by, for example the Chinese government, which devalues the Yuan in order to promote its exports or the Obama administration, which is indirectly devaluing the dollar through quantitative easing. German Finance Minister Wolfgang Schäuble entered the discussion ahead of the G20 summit by saying “it doesn’t add up when the Americans accuse the Chinese of currency manipulation and then, with the help of their central bank’s printing presses, artificially lower the value of the dollar.” As a result, American President Obama defended the additional $600bn that are being pumped into the ailing US economy: “I will say that the Fed’s mandate, my mandate, is to grow our economy – and that’s not just good for the United States, that’s good for the world as a whole.” Consequently, the G20 is called upon to ease these tensions and find a compromise at their meeting in Seoul.
Institutional Reform: Historic Progress
As can be seen, the G20 is trying to define its role within global economic governance both in terms of the issues it tackles and the institutional framework for doing so. In fact, the French President Nicolas Sarkozy started a discussion on a possible establishment of a G20 secretariat to “ensure the effective implementation of their accords.” Barry Carin, senior fellow at the Centre for International Governance Innovation, sees a clear need for a professional secretariat in order to provide institutional memory, continuity for monitoring and follow-up of commitments, as well as to support outreach and consultation.
Moreover, the international financial institutions – the International Monetary Fund and the World Bank – are asked to assist the G20 through the so-called Mutual Assessment Process (MAP) . In particular, the IMF was asked to provide “analysis of how the G20s respective national and regional policy frameworks fit together” and “… develop a forward-looking analysis of whether policies pursued by individual G20 countries are collectively consistent with more sustainable and balanced trajectories for the global economy.”
After tripling the IMF’s capital base, the G20 has continued to expand the mandate of the institution, making it one of the winners of the G20 process. Civil Society has voiced concern over this shift in responsibilities to the IMF and will continue to critically assess this matter during the G20 process.
As is customary since the G20 was elevated to a heads of state forum, finance ministers and central bank governors meet about one month ahead of the actual summit. Often, this gives pundits a sense of what might be delivered at the Summit in terms of concrete decisions. At the finance ministers’ October meeting in Gyeongju, the participants sealed the politically important issue of control over the International Monetary Fund. While a power-shift within the IMF towards emerging markets has been demanded for a while, the agreement among finance ministers was still seen by many as a surprise.
Europe agreed to give up two of its board seats in order to allow a shift of more than 6 percentage points towards emerging market countries in the quotas that determine voting power on the IMF’s 24-member executive board. Dominique Strauss-Kahn, managing director of the IMF, called the agreement “historic”. While this shift does not affect the ability of the United States (and Europe, if acting collectively) to wield a veto over important decisions (which require an 85 per cent super-majority), it still represents an important change in the balance of power that could make reaching compromises between developed and developing countries at the G20 somewhat easier.
Global Economic Imbalances
Another important issue that was discussed at the Finance Minister meeting in Gyeongju were global economic imbalances; United States Secretary of the Treasury Tim Geithner kick-started negotiations by proposing a cap of 4 per cent on large current account surpluses and deficits. In a letter, Geithner argued that “G20 countries should commit to undertake policies consistent with reducing external imbalances below a specified share of GDP … this means that countries running persistent surpluses should undertake structural, fiscal and exchange rate policies to boost domestic sources of growth and support global demand.” Of course, this proposal is aimed at China due to its artificial devaluation of its currency and its refusal to implement policy changes to boost domestic demand. However, other countries at the table were also unwilling to go along. German economic minister, Rainer Brüderle told reporters that the American proposal could be viewed as a reversion to “planned economic thinking.”
After a long negotiation session, the finance ministers agreed on the goal of “reducing excessive imbalances” – without the specified limit put forward by the US – and called on the IMF to examine the causes of “persistently large imbalances”. This vague last-minute deal might not have a lot of teeth for reinforcement, but some still see it as a critical moment in preventing the outbreak of a much talked-about currency war. To sum up, the agreements reached at the level of financial ministers may give forward momentum to the talks at the Summit among head of states. While the finance ministers’ meeting demonstrated that the G20 is able to compromise in designing economic and monetary policies, it remains to be seen how much the leaders are willing to invest on other issues on the agenda, such as the phasing out of inefficient fossil fuel subsidies, combating corruption, preparing for climate negotiations at the Cancun Climate Conference (COP 16) or a new growth-oriented G20 development agenda.
Moving beyond Finance – the Seoul Agenda
The fact that the G20 is moving beyond monetary and economic policy has been widely criticized by some and lauded by others. Some analysts see “agenda-overload” as threatening the effectiveness of the group and possibly undermining other established groups that have a mandate to discuss these issues. Others believe that it is imperative that the G20 tackle environmental, including climate questions.
Especially contentious is the multi-year development action plan, drafted by the G20 Development Working Group (co-chaired by South Africa and South Korea) that is to be agreed upon in Seoul. South Korean president Lee argues that a shift is needed – one that emphasizes establishing the foundation for growth rather than providing aid. In other words, he argues that “the international community should help them (low-income countries) catch fish instead of giving fish.” A leaked draft of the report has shown that in many ways it appears to be a throwback to the Washington Consensus in its calls for unfettered market based growth and its obliviousness to global warming or gender and human rights considerations (for a critique of the G20 development policy, see Nancy Alexander’s article in the October edition of the G20 Update e-newsletter).
Responding to the rather unsuccessful G20 summit in Toronto in June, many politicians argued that they saw it merely as a “preparation” of proposals to be adopted later in Seoul. This line of argument has put a lot of pressure on the Seoul summit to deliver on earlier promises. The heated discussion on global imbalances and currency policies has again put the G20 in the spotlight and member-states continue to believe that it is the appropriate forum to find compromises on international economic and financial policies. However, at the same time, the group is contemplating a widening of its agenda and the possible set-up of a secretariat in order to further institutionalize the G20 process. This could distract members from their core task of easing international economic tensions as the global recovery is picking up unevenly across the globe.
Finally, while the private sector is seen as a valuable partner (the Korean government has invited the CEOs of international corporations to attend the G20 Business Summit), civil society continues to be sidelined in the G20 process. The balance of representation of non-state actors is clearly tilted towards the private sector. Indeed, the October Civil G20 process in which CSOs entered into discussion with sherpas was labeled “unofficial,” since some governments rejected the notion that the G20 has any accountability to civil society. Moreover, the South Korean government is not only denying CSOs formal media accreditation at the Summit, but also making it difficult for CSOs to gather informally in an alternative media process.
For the Heinrich Boell Foundation, it is crucial to monitor these developments closely in order to assess the balance of the three sectors (governments, private sector and CSOs) in the new governance process and promote engagement by CSOs in designing, analyzing and critiquing the G20 agenda. In other words, the Foundation is dedicated to increasing the voice and expertise of a broader spectrum of CSOs, parliamentarians, and think tanks in those countries where it has a presence. From our point of view, this is necessary in order to balance the G20’s cozy relationship with the private sector and ensure that the voices of citizens are taken seriously.
Sandro Gianella is a graduate student at the Hertie School of Governance. He works part time at the Department for International Politics of hbs and contributes regularly to the G20 update e-newsletter.