Global Trends by Martin Khor

Monday 28 September 2009

Feeling left out of the elite club

The G20 Summit last week saw the leaders pledging to do more for economic recovery and fiancial stability, but it also made the controversial decision to designate itself as the world’s premier economic club.


The Group of 20 summit in Pittsburg last week marked some progress in tackling the global economic crisis and re-regulating the financial sector of the developed countries.

However it did not tackle key issues of immediate concern to the developing countries, such as providing more liquid funds to help them cope with a reversal of capital flows, or to help countries from falling into a foreign debt crisis caused by the crisis.

Some progress on reforming the governance of the international financial institutions was made, by giving a figure of at least 5 per cent, as the shift from developed to developing countries in the quota (denoting equity share) in the IMF and 3 percent of the voting rights in the World Bank, when the reforms of decision-making power in these two organisations is completed. 

That reform process will still go on for several years, and 5% or 3% is too little to re-balance the quotas of equity and votes, if the rights of different categories of developing countries (the bigger countries like India, China and Brazil, as well as others like African, Asean and other middle-income countries) are to be enhanced.

Perhaps the most important decision of the Summit was to designate the G20 to be “the premier forum for our international economic cooperation”. This is a code for phasing in the G20 as the informal governing body for the global economy, which may thus gradually replace the G8, which is the club of the rich and powerful developed countries.

This move is bound to be controversial.  On one hand, it will be hailed as spreading international governance more evenly between developed and developing countries.  This is because the G20 includes developing countries such as China, India, Brazil, South Africa, Mexico, South Korea and Indonesia.

Thus the power of the developed countries is made more dilute, and the talk is that European countries as a whole have been over-represented and now some of them may have to give way to the bigger developing countries. 

However, an even bigger issue is that most developing countries are not in the G20 and they have not accepted the G20 as the “premier” body that will decide on global economic issues in their absence.

Many developing countries have argued that the G20 is a grouping whose membership was decided on by the big developed countries like the United States and the United Kingdom, who between them hosted the three G20 summits since last November.

The Minister of a Latin American country that is not in the G20 has said that even if a few developing countries in his region are in the G20, this does not mean that his country or region is represented, as he was not consulted nor did he agree that those countries would represent his country and other countries left out of the G20.

Similarly it can be argued that although Indonesia is an ASEAN member, this does not mean that Asean countries as a whole are represented in the G20.

There is no internationally agreed system of election, selection or appointment in the membership of the G20, and this makes its legitimacy a question in the eyes of a majority of countries.

Recently, the United Nations General Assembly held its own meeting on the economic crisis, and several developing countries proclaimed that the Assembly is the Group of 192, that it represents almost all the world’s countries, and is thus legitimate and democratic.

There was a lot of discussion on the merits of setting up a Global Economic Council inside the UN, with its members to be selected or elected by all the UN members, and in which the various regions and their regional organisations would appoint countries to represent them, including some on a rotation basis.

Thus, the debate on how legitimate and representative the G20 is, and how the UN should be the proper forum for decisions on global economic matters, will continue or even increase, especially since the G20 has now proclaimed itself as the “premier forum”.

The next G20 summit (in Canada in June 2010) will also consider proposals on how to maximise the effectiveness of the “cooperation” among them -- a code for how to make the G20 the effective premier body of the global economy.

In the Pittsburg summit declaration, the G20 leaders congratulated themselves for succeeding in their measures, which they described as the largest fiscal and monetary stimulus ever undertaken, which helped to “ensure recovery, repair our financial systems and maintain the global flow of capital.”  They said that their forceful response stopped the dangerous economic decline, stabilized financial markets, with industrial output now rising, international trade starting to recover, and confidence has improved.

The G20 said that recovery is incomplete, unemployment remains high and the conditions for a recovery of private demand are not yet fully in place. They pledged to sustain their strong policy response until a “durable recovery” is secured and when growth returns, jobs should also return.

“We will avoid any premature withdrawal of stimulus,” said the G20.  “At the same time, we will prepare our exit strategies and, when the time is right, withdraw our extraordinary policy support in a cooperative and coordinated way, maintaining our commitment to fiscal responsibility.”

The statement comes with an annex containing:

  • The launch of a framework for policies for strong and balanced global growth.   This will meet the need to shift from public to private sources of demand, establish a pattern of growth across countries that is more sustainable and balanced, and reduce development imbalances  It will avoid destabilizing booms and busts in asset and credit prices and adopt macroeconomic policies that promote global demand.
  • Measures to ensure the banking and financial regulatory system reins in the excesses that led to the crisis.  There are measures to raise capital standards, set up international compensation standards to end practices that lead to excessive risk-taking, to improve the over-the-counter derivatives market and to create more powerful tools to hold large global firms to account for the risks they take.
  • Reform of the global architecture, which recognises that “critical players need to be at the table and fully vested in our institutions.”  The measures include making the G20 the premier forum for international economic cooperation, including major emerging economies in the Financial Stability Board, and reforming the IMF and World Bank.
  • New steps to increase access to food, fuel and finance among the world’s poorest while clamping down on illicit outflows.
  • Steps to phase out and rationalize inefficient fossil fuel subsidies while providing targeted support for the poorest.
  • A promise to maintain trade openness and move toward greener, more sustainable growth.