The Future of the G20
The European American Press Club, Paris
Speech. Check against delivery, E&OE
27 April 2011
Over the last 20 years, globalisation has become the dominant discourse of the international community.
The globalisation of the economy.
The globalisation of security.
The globalisation of the environment.
All turbo-charged by the emerging technologies of the 20th and 21st centuries.
This has caused international relations theorists to write extensively on what they call "the collapse of the great divide" – that is the merging of the historically discreet domains of the "national" and the "international"; the "internal" and the "external"; the "local" and the "global".
As an international policy community, we are now increasingly dealing with a more seamless public policy space, as the actions of one nation on one side of the world can now more radically impact the well-being of nations on the other side of the world – once safely removed by geography, but no longer so.
The same applies to non-state actors, be they large corporations, international terrorist organisations, or, for that matter, global think tanks.
What that means for all of us, therefore, whether we are French or Australian, whether we are in Europe or whether we are in Asia, is that the challenges of global governance, multilateral governance, or what is sometimes called mini-lateral governance, are now more acute than ever before in human history.
And this now tests both our national and international institutions in a way they have never been tested before.
Just as it now tests international political leadership – that is the capacity to harness global political capital, across often unfamiliar lines, to produce the range of solutions necessary to deal with the global challenges we now confront.
These therefore are testing times for all of us.
We've seen this in recent years with the global financial crisis, the resulting recession and the rising unemployment that followed.
We see it too in the emerging world of cyber-threats and cyber-security. In politics we see it with the rapid transmission of the forces of political change – be it in the Arab spring or in its reverberations across the world where freedom is yet to be found.
We see it too in the humanitarian dimension with unprecedented levels of unauthorised people movements across the world.
And with the environment, we see it both in the unfolding scientific reality, and in the uneven policy response, to the global challenge that is climate change.
The result is that our national and international institutions must cope with unprecedented challenges.
Not to mention the domestic political stress that accompanies this - as national governments are required to explain complex global realities and their policy response to them, to an often sceptical local audience.
We live in a time, therefore, when there is a greater and greater call on limited political capital to deal with the complex challenges of our age.
The importance of the G20
Nowhere has this been more apparent than in the international response to the global financial crisis of 2008 and 2009.
To respond to this crisis following the collapse of Lehman Brothers, the G20 was formed at summit level.
That was only two and a half years ago.
Since then G20 Leaders have met five times.
And in this time collectively the G20 worked to avoid a repeat of the Great Depression and to begin the difficult task of reforming the global financial architecture.
And while the depth of the crisis we faced in late 2008 and early 2009 has now passed, the ingredients for sustainable global economic recovery as of today are far less than certain.
Many of the underlying causes of the crisis also still linger.
There are continued uncertainties surrounding parts of the European banking sector.
More publicly, and more dramatically, the debate continues to rage on what is called the "sovereign debt crisis" across a number of European states.
Of course the connection between the two is plain to see.
The actions of many governments, in particular in Europe, by way of bank guarantees and fiscal stimulus, both necessary to haul the global economy back from the brink, have now placed unprecedented pressures on sovereign debt in those countries.
The irony is extraordinary: states taking unprecedented measures to prevent financial market failure precipitating general economic collapse; only for financial markets then to take fright at the sovereign liabilities taken on by some of these states to avert such a collapse.
We also still face the human legacy of the crisis: continuing high unemployment in many advanced economies. After all, economic growth and stability are not mere ends in themselves, but rather the means to providing sustainable jobs and rising living standards to our populace.
These ongoing challenges in the global economy, together with the rest of an increasingly complex global agenda, ranging from trade liberalisation to climate change, mean expectations placed on the G20 process are great indeed.
As we approach this year's Cannes Summit, which is now only six months away, we must therefore be clear-sighted about what the G20 can achieve.
And in so doing we must be mindful of the boutique industry emerging in parts of the global commentariat that raises the bar to unachievable levels.
My argument today is simple:
- That the G20 represents the best combination of global legitimacy and global effectiveness in dealing with the great challenges of our time;
- Second, that the G20 in its two and a half years of institutional existence at Summit level has a sound record of achievement; and
- Third, that the prospects for a robust reform agenda at the Cannes Summit are both reasonable and deliverable.
The legitimacy of the G20
In 2008, the debate in the international community about how to deal with the emerging economic storm focussed on how we could evolve a coordinated, global policy response in a manner which both maximised the political legitimacy of that response, while at the same time maximising the effectiveness of that response.
The G20 had existed at finance ministers-level for the previous decade, having been created in the aftermath of the Asian Financial Crisis of 1997/8.
The political debate held almost exclusively behind closed doors in 2008, was whether to continue to rely upon the G8; to broaden that grouping marginally, to include the major emerging economies of China and India, or whether to take the existing framework of the G20 Finance Ministers meeting and elevate it to Summit-level.
The inherent problem of the G8 was one of legitimacy; it virtually ignored the fact that the greatest engine of global economic growth for the decade ahead would be the dynamic economies of the Asia Pacific region.
The problem with just having China and India in an expanded G8 was that it would deny a voice for Africa, for South East Asia, for the South Pacific, for Latin America and for the entire Muslim world.
The advantage of the G20 was that it contained within its ranks five states from Europe, six from Asia, five from the Americas and four from elsewhere.
The G20 contained both significant developed economies, emerging economies and developing economies.
It brings together the countries that will be the key drivers of economic growth in the century ahead.
The G20 contained three countries from the Muslim world including the most populous Muslim country on earth – Indonesia.
It ensures representation from all corners of the globe.
And more than three quarters of its member states were functioning democracies.
Together, in terms of critical economic mass, the member states of the G20 also accounted for:
- 90 % of global stock market capitalisation;
- 85% of global production; and
- Nearly 80% of global trade
In terms of legitimacy therefore, the G20 was about as good as we were going to get.
As for efficiency, its five Summits to date have by and large underlined the fact that a group of 20 heads of government around a single table is capable of performing as an effective decision making group.
In essence the G20 brings together critical global stakeholders who have a combined interest in sustaining the fabric of the future global order.
As Bob Zoellick has stated in his treatment of the concept of responsible global stakeholders: "All nations conduct diplomacy to promote their national interests. Responsible stakeholders go further: They recognize that the international system sustains their peaceful prosperity, so they work to sustain that system."
Achievements to date
So what precisely have been the achievements of the G20 to date in sustaining the global order?
The Washington Summit of November 2008 constructed the agenda of the G20 including its financial action plan which formed the framework for much of the subsequent Summits' work on crisis management.
Critically, the Washington Summit also adopted a normative position on trade protectionism.
Mindful of the lessons of economic history from the 1930s, leaders recognised that the political expediency of resorting to protectionism would only help transform the impending recession into a fully fledged global depression.
It is true that subsequent Summits and subsequent WTO Ministerial Meetings have failed to bring about a further round of trade liberalisation under the Doha round.
Nonetheless, the anti-protectionist norm established at the Washington Summit, and reinforced with an institutional arrangement, entrusted to the WTO, of "naming and shaming" those who resorted to protectionist measures, have constituted important measures that have helped the process of global economic recovery.
The London Summit of March 2009 was the most critical of all - both in terms of the measures it adopted to avert the continued threat of global depression, and the beginnings of the restoration of confidence in global financial markets.
The London Summit agreed to an unprecedented global fiscal package of USD$5 trillion to help kick start the global economy back into life.
The G20 also agreed to an additional to $1.1 trillion in resources for the IMF and the Multilateral Development Banks to assist developing countries in weathering the crisis.
London also agreed to the establishment of a new Financial Stability Board, the FSB, made up of G20 central bank governors and finance heads to deliberate on the raft of financial regulatory reforms deemed to be necessary to avoid a repeat of the Lehman's phenomenon.
The IMF subsequently concluded that following an examination of an aggregation of financial and economic indicators in the period following the London G20 Summit, that London had in fact "effectively broken the fall".
As a participant of that Summit, I well recall the looks on Leaders' faces as they stared into a collective economic abyss.
And further, their absolute resolve to take immediate action to avoid that abyss.
Markets responded accordingly as confidence slowly began to recover.
Six months later, the Pittsburgh Summit of September 2009, became a turning point in beginning to transition the global economy from crisis management to recovery.
After intensive negotiation prior to the Summit, agreement was reached on the "Framework for Strong, Sustainable and Balanced Growth".
This Framework sought to embrace a broader responsibility for global macroeconomic management for the post crisis period.
In doing so, it sought also to create a policy framework for what was euphemistically referred to as "global economic imbalances" – short hand for the range of policies and behaviours individual countries experience which collectively have resulted in anomalies in the global economy, including excessive levels of sovereign debt.
This Framework has proven to be a critical document in the evolution of the G20 against the wider remit of long term global economic management.
Pittsburgh also agreed that a program of financial regulatory reform was needed to deal with private financial institutions that were simply "too big to fail".
This agenda lay at the core of the great debate between systemic risk on the one hand, and moral hazard on the other, in seeking to prevent a repeat of the Lehman's experience.
In the Toronto Summit of June 2010, G20 developed economies, consistent with the "Framework for Strong, Sustainable and Balanced Growth", made commitments to at least halve fiscal deficits by 2013 and to stabilise sovereign debt ratios by 2016.
Finally, the Seoul Summit of November 2010 also saw the conclusion of the reform agenda for the IMF with increased quotas for developing economies and therefore an enhanced capacity to influence IMF decision making across the world.
Seoul also saw the adoption of the "Seoul Development Consensus for Shared Growth" which for the first time introduced a new growth framework for developing countries onto the G20 agenda – a framework that recognises the importance of strong and resilient growth that is led by a well-regulated private sector.
This new G20 development agenda represents a potentially rich policy agenda for the future as developed and developing countries collectively conclude that official development assistance is only one part of the solution for low-income countries striving to achieve middle-income status.
Critically, the Seoul Summit also saw agreement on new financial regulations aimed at reducing the likelihood of a repeat of the global financial crisis in the future.
Important new financial safety nets were also agreed which will help countries cope with volatile capital flows during times of crisis.
My overall point is this – over two and a half years the G20 has arguably achieved more across the entire spectrum of improved global economic governance, than at any other time since the formation of the Bretton Woods' institutions in 1944.
The Cannes Summit, November 2011
Notwithstanding this strong record of achievement, the challenges for this year's Cannes Summit are great.
I've already referred to the challenges presented by prevailing economic conditions in an uncertain global recovery.
I've also referred to the at times unrealistic expectations of the global commentariat concerning the outcomes of any individual summit.
There are, nonetheless, real opportunities to advance the global economic and financial reform agenda that still lies before the international community.
First, it will be important for the Cannes Summit to register further progress of the implementation of the Pittsburgh Framework for Strong, Sustainable and Balanced Growth.
This work, being driven in the Finance Ministers' Process, is ultimately focused on jobs.
Global unemployment remains too high, in both developed and developing economies, and it is imperative that the work of the G20 have at its heart an agenda to tackle global unemployment, in particular youth unemployment.
Specifically, the advances achieved in the April Finance Ministers' meeting in what is called the Mutual Assessment Process (MAP) represent a significant technical advance.
Furthermore, the application of the principles within that process to the world's major economies would represent another significant step forward.
The indicative guidelines for this Mutual Assessment Process agreed in April incorporate
- A structural approach to external imbalances based on agreed economic theory;
- Each country's historical data;
- Comparative historical trends; and
- Comparative G20 historical trends.
The scope of the Mutual Assessment Process would include
- Public debt and fiscal deficits;
- Private savings rate and debt; and
- Trade balances, net investment income flows and transfers.
Indicators are to be analysed in the context of exchange rates, fiscal and monetary policy settings.
Moreover, the assessment period would be over a significant amount of time covering 1990 until 2015 to eliminate statistical anomalies.
Major economies are therefore likely to face independent major assessment by the IMF in relation to particular government policies that may be driving distortions that lead to unsustainable imbalances.
This type of global macroeconomic assessment is designed to focus on unsustainable global imbalances across the G20 that might present a medium term threat to global growth.
And it is also focused on driving the reforms that will help lift global growth, not just shift it.
This drives home the importance of major developed economies tackling their budget deficits and public debt.
And emerging economies transforming to a new growth model based more on domestic consumption, wage reform and greater social protection.
Harmonising these two great policy challenges within a global framework of balanced growth will be critical to our collective global economic future.
Second, in addition to the Pittsburgh framework, a parallel debate is emerging on the future of the international monetary system.
As well as what role additional currencies may play in the future of the composition of the Special Drawing Rights (SDR) regime managed by the IMF.
Obviously the structural changes that are underway in the global economy will bring with them changes in global currency markets, but obviously this will not happen overnight.
Third, there is the continued work on the regulation of private financial markets and private financial institutions.
It is important the G20 begin to bring to conclusion its work on a proper definition of a globally significant financial institution as well as the content of any additional regulatory impositions on globally significant financial institutions in the future.
I think we all know which were the globally significant financial institutions at the heart of the crisis and therefore which should be at the heart of our work now.
Fourth, it will be critical for the G20's global credibility that the Seoul Development agenda is taken further. This applies most particularly to specific new measures in the areas of:
- Food security
- Agricultural productivity
- Properly functioning global agricultural markets;
- The reform of key global institutions such as the FAO
Fifthly, there is an emerging debate concerning commodity price volatility in both food and energy markets.
The core of this policy challenge lies in balancing global supply and demand given the rapid expansion of global demand from the rise of China and India and the sticky response of supply networks.
Again, trade policy liberalisation is a critical element of this agenda to make sure that food and energy markets are functioning properly.
Similarly, ODA flows may need to be more effectively utilised to enhance infrastructure investment in developing countries where domestic and international markets are be functioning ineffectively because of inadequate transport infrastructure. Growing food is one thing. Being able to transport it effectively to markets is another.
There is also a debate about greater transparency for commodity market financial derivatives.
In this context, Australia supports efforts to improve the quality, timeliness and reliability of the JODI, Joint Oil Data Initiative, database, covering oil, gas and coal.
Australia also supports the direction of the FSB's existing work stream on Over The Counter derivatives more broadly, though greater clarification about its implementation will be important.
And specifically the work of IOSCO's taskforce on commodity futures markets.
Finally, Cannes will also need to address the question on the imperilled Doha Development Round on trade liberalisation.
A successful conclusion of this round would provide a significant boost to global trade, growth and employment.
A failure to do so would not only remove this prospect but run the severe risk of triggering an outbreak of new protectionist measures which would strangle growth.
There are, of course, other challenges looming on the G20 agenda.
But progress in this critical group of needed economic reforms will be vital for the future of the G20 as the critical institution of global economic governance.
Future long-term G20 principles
Beyond the dynamics of this year's Cannes Summit, the governments of the G20 have a collective interest in sustaining the legitimacy, credibility and effectiveness of the G20 for the decade ahead.
There are real perceptual challenges that continue to confront us in seeking to maintain G20 momentum for the future.
The reality is that nothing is forever in international politics and the G20 will continue to attract support only so long as it remains focussed on delivering its core economic objectives.
We must therefore avoid making the institution itself the objective – rather than the agreed reform agenda that the institution is charged with delivering.
There are perhaps seven over-arching core principles we should collectively consider for the G20's future:
- First, the G20 should be used to manage the global transformation – by which we mean creating the global political ballast necessary to manage shifting geo-economic and geopolitical power balances that will continue to become manifest through the greater role of new, emerging and non-status quo powers;
- Second, the G20 should focus on harnessing its scarce political capital on dealing with genuine global problems which cannot be resolved elsewhere;
- Third, in harnessing their collective political capital, G20 leaders should embrace genuinely strategic decisions which should then be transmitted to functional agencies to implement.
- Fourth, the G20 must remain focussed on its strategic mission as a leaders-level forum and then measure its success step by step, rather than assuming that "big bang" solutions will inevitably follow in a single summit;
- Fifth, within this framework, the G20 should continue to have as its focus the delivery of its core financial and economic agenda. Failure to do so runs the risk of eroding the institution's credibility;
- Sixth, the G20 should only begin to significantly broaden its agenda, for example to include wider foreign policy challenges, once leaders are confident that its core economic agenda is progressing and that the G20 can have a material impact on reform; and
- Finally, the rolling machinery of the G20 should be kept as lean as possible – it should be leader- led and country owned. The specific policy challenges which the G20 will face from time to time will differ in both content and complexity.
But if the G20 remains mindful of these core guiding principles, it is more likely to remain on course for the future.
The G20 has achieved extraordinary outcomes over its five leaders' summits so far, from avoiding a repeat of the Great Depression, to setting the path for long term reform of the global financial architecture.
Faced with the worst global economic conditions in 75 years, the G20 acted and it acted decisively.
As David Shorr has argued, "inertia is not a good option" in international relations and that "the essential issue for the 21st century is whether the world will be shaped by the entropy of disorder, or by the social contract of a rules-based international order. So, if a nation is truly strategic about foreign policy, it must calculate the opportunity costs of diplomatic deadlock or drift."
Put within a more positive frame, Weber and Jentleson have argued what they call the "principle of mutuality" – whereby enlightened national interests are reflected when leaders mull over tough diplomatic compromises or tithes they might contribute towards global public goods. Under this argument, such compromises should be recognised through some form of international accounting system that can effectively measure "the long view".
Whether it is the fear of "the entropy of disorder" or the "principle of mutuality" that is at work, the bottom line is that in six months time, we must once again make this institution work. The stakes have now become far too high to contemplate any other alternative.
As Dan Price, who was President Bush's Sherpa in the early days of the G20, noted recently, "the G20 now functions as a steering committee that provides political energy and direction to international standard-setters and also assesses progress and implementation."
Dan Price was right.
The mission of G20 leaders is to ensure this "steering committee" continues to fulfil its mandate.
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