The summer 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 it 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 Group of 20 was formed to undertake the collective responses deemed necessary to tackle the root causes of economic crises. At its summit meeting in November 2008, G20 leaders themselves admitted that inconsistent and insufficiently coordinated policies propelled the catastrophe. Then and at two subsequent meetings, the leaders made concrete commitments to bring about that purported cooperation.
Among many pertinent pledges, the G20 agenda for reform included: strengthening the International Monetary Fund’s mandate, scope, governance, and surveillance authority; reinforcing each country’s system of financial regulation and supervision and making each system globally consistent; and a commitment to not just prevent an explosion of trade protectionism, but to conclude the Doha Round of trade negotiations in 2010.
At the G20’s September 2009 meeting in Pittsburgh, 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 G20’s journey toward 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.
Reform of financial systems has proceeded unilaterally, not cooperatively. The one cooperative effort, Basel III, which sets stricter capital reserve requirements for banks, is still full of holes. Transformation of the Bretton Woods institutions has not moved along significantly. The Doha Round is even more of a zombie than it was before the G20 pledged to conclude it.
In retrospect, the framework announced at Pittsburgh was doomed to fail, given the way the leaders called for it 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 of correcting those imbalances, which are standing in the way of sustained growth. Given this approach, 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 ambiguous on others.
It is telling that exchange rates have been excluded from the 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 agreed at the Cannes summit in early November.
In order to arrive at that action plan, the G20 has recently asked the IMF to conduct an analysis that is “independent,” a label that is unwarranted since such an analysis is subject to endorsement by the G20 itself, and furthermore characterized only as a complement to the G20’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 G20 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. At their London summit, G20 leaders sensibly committed themselves 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 reform the IMF is not due to any lack of ideas. Rather, it is due to the reluctance among some of the key players to undertake changes that may lead them to relinquish long enjoyed power and influence at the IMF, even if this would result in an institution that could more effectively contribute toward 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 address crucial issue of macroeconomic policy coordination.
Urgent steps must be taken to alleviate the parsimony instilled until now in the G20 process. The G20 must do everything within its influence over the IMF to enhance that institution’s independence in prescribing what policies must be implemented by each key member to contribute fairly toward an effective global growth pact.
The idea is to enable the IMF at once to point out with candor and transparency what are the policy decisions that each of the large economies should be expected to undertake in its 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, interim authority promoted by the G20. This could be initiated through an exhortation to the IMF managing director by the troika of past, present, and future chairs, South Korea, France, and Mexico, plus China and the United States, to release publicly its staff’s diagnosis and proposals before they are commented on by the IMF executive board and the G20 itself.
Admittedly, the practical value of a truly independent IMF report on the rebalancing for growth of the global economy would be, at best, to provide a sharper focal point of comparison with the G20’s own conclusions, but this step alone would constitute a significant improvement over the present situation.
It would also signal that the G20 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 G20 leaders committed themselves 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.
© 2011 Global Viewpoint Network/Nicolas Berggruen Institute. Hosted online by The Christian Science Monitor.