It managed to fix the gross currency imbalances of the 1980s. It was quite successful in managing post-Cold War tremors. It was the G-7 that helped forge the Washington Consensus, which left its imprint on the 1990s. Through this consensus, the adopted fiscal measures became the ground rules of globalization. The 1990s marked a paradigm shift in development policies whereby debt, trade and good governance became focal. The G-20 inherited these considerable achievements. But it has colossal tasks ahead to claim success that cannot be measured by the promising rhetoric heard at the Pittsburgh summit last month. Will the G-20 really change the world as power shifts from the G-7 to the G-20? Well, according to some recognized commentators, the G-20 took control of the world economy at Pittsburgh from the aging giants of Europe and North America, which have lost their vigor and innovation. The baton is now in the hands of more ambitious and vigorous actors from the developing world.
The Pittsburg meeting made one thing certain: The G-20 is the legitimate and accepted new institution of global economic governance. It is not dominated by Americans and Europeans, as was the case with the G-7 and the G-8. Hence it is far more representative. It is more sensitive to economic and social realities because of its new members and it is easier to be acknowledged as a legitimate actor by developing countries in Asia and Africa.
Yet there are difficulties that lie ahead. Consensus building among 20 countries will be much harder. Rather than precise policies that are agreed upon unanimously, general principles are to be adopted in general. But deliberations among member states will create a sense of responsibility sharing on a wider scale. Officials will develop common understanding of problems and produce mutual solutions to common problems. This is good for a wider consensus on global matters because, so far, there is hardly any consensus on key issues such as exchange rates and reserve capital for banks. The G-7 nations were all industrialized countries. Some of the G-20 are not. Hence the differences of interest between developed and developing countries will be harder and will need better management of relations. The structural difference between members, some whom are savers while others are spenders, or those that are free-traders and neo-mercantilists, will definitely cause many problems in reconciling differences. Despite the fact that the G-20 met only twice before, its confidence grew considerably since its first meeting in Washington a year ago. This organization has managed to lead the world away from the brink of another Great Depression.
This is no exaggeration; the sum total of the liquidity injected into the world economy is approximately 10 percent of global gross domestic product (GDP). Not neglecting factors like restocking degraded inventories and getting generous support from Chinese companies that kept piling up commodities because they thought they were cheap for the time being, the G-20 put the global economy on the path of recovery. That much is for sure.
The short history of the G-20 reads like a success story. But the emergency measures that have been taken so far harbor the seeds of a heavy future price to be paid in debt and inflation. No doubt the G-20 has successfully treated the symptoms of the crisis. But the causes of global imbalances and poor financial supervision are still there to be properly understood and dealt with. Another problem to be addressed is getting China and India to take some share of the burden involved in reducing carbon emissions. In any case, a successful institution has been born out of the G-20 with an executive committee for financial policy. The Financial Stability Board comprises central bank officials of member states, finance ministers and regulators from all G-20 nations. However, has the determining power of nations really passed on to less developed countries? This remains to be tested because China has a GDP of less than $5 trillion, about one-third of the US level ($14.5 trillion) or the EU ($16.5 trillion). Brazil, Russia, India and China combined have a total GDP that is about half that of Europe. In total, all the other 12 developing economies of the G-20 do not equal the GDP of the United States.
What does this mean? Well, it means some of the members will be more equal than others in the organization. The United States and Europe will still continue to be the global economic heavyweights in the new future. But this fact does not change the reality that wider participation has been accomplished in global economic decision making and management. This is good for reducing risks and poor decisions by a handful of countries and will beef up the fire brigade in times of crisis. The G-20 remains a work in progress, but it is a very good beginning.
