The world has changed significantly since the financial crisis of 2008. Challenges that were once thought to be regional and a function of devolving economies instead manifested themselves in the developed world and had global consequences. The need for global coordination to address the crisis paved the way for one of the most significant changes in global governance with the G-20 replacing the G-7 as the global economic steering committee. However, despite the G-20’s success in averting a deeper economic crisis, many see the G-20 as an ineffectual instrument for global governance.
Much of the difficulty the G-20 has faced is rooted in the tensions that are inherent in global governance. Take the primary issue of dealing with the aftermath of the global financial crisis. Prior to the crisis, there were increasing imbalances between exports and imports in the global economy.
These imbalances were largely a response to the prior Asian financial crisis and efforts by Asian economies to promote export lead growth. After the crisis of 1997, many countries in Asia realised that to protect themselves against sudden shifts in capital flows and exchange rate volatility they needed to follow a self-help policy and began building up foreign exchange reserves. This was necessary because the International Monetary Fund’s (IMF) response to the 1997 crisis was viewed as having made the crisis worse and most of their debts were denominated in dollars rather than local currency. While not the proximate cause of the financial crisis, self-help had made the crisis worse and was the potential source of a future crisis.
At the G-20, all of the members agreed that policies prior to the financial crisis had created distortions in the global economy and that there needed to be a global rebalancing of national economies to create sustainable growth. To promote the need for sustainable policies, the members of the G-20 have even gone so far as to submit themselves to the IMF’s new Mutual Assessment Process.
However, imbalances still exist. The United States still consumes too much, while exporting too little. China at the same time continues to export too much and consume too little. While China and the United States are the clearest examples of this problem, they alone are not the problem. The resolution to this issue is difficult to achieve because it requires nations to undertake different sets of policy prescriptions and there is a concern that some nations will bear the burden of rebalancing.
This problem of burden sharing became clear shortly before the Seoul G-20 Summit last year. As the nation with the world’s single greatest trade deficit, there is universal agreement that the United States needs to increase its exports and reduce its imports. To do this, the dollar will have to decline against other currencies to make U.S. exports more globally competitive. However, as other nations were also seeking to jump start their economies with export driven growth, the policy prescriptions needed to fix the global imbalances were at a head, as not everyone can simultaneously boost their growth through exports.
The U.S. Federal Reserve announced before the summit its second round of quantitative easing, or what has become known as QE2. The goal was to reduce long-term interest rates and hence help to increase growth in the U.S. economy. One side effect of the policy is to reduce the value of the dollar, something which is necessary for global rebalancing. However, this policy undermined U.S. efforts to achieve definitive means to reduce imbalances as other countries became concerned that they would bear the burden of the United States’ rebalancing.
The other significant challenge for global governance is legitimacy. In an address to the Peterson Institute for International Economics, then Acting Director of the IMF John Lipsky harshly critiqued the legitimacy of the G-20 as the leading global economic institution. He pointed out that it was self- appointed and that it was not fully representative. While there is a merit to his critique, one of the noteworthy achievements of the G-20 was that it was significantly more representative of the global community than either the G-7 or the UN Security Council have ever been.
Legitimacy will always be an issue for international institutions dealing with global governance. In many ways, the G-20 is one of the world’s most representative organisations. It has members from all of the continents and represents the significant majority of the world’s population and economic output. The G-20 has successfully brought the developing world into the global decision making process in a way that perhaps no other institution has. If one were to create a new organisation from scratch to serve as a global steering committee, it is hard to imagine it looking much different. Yet, that inclusiveness is not enough to ensure legitimacy.
The challenge for the G-20 going forward will be to earn legitimacy, but to also maintain its representative nature. This will require it to approach global problems in a manageable fashion that achieves results that are in the interest of both the developed and developing world. This will require two things. First, for the G-20 to avoid the ossification that has occurred on the UN Security Council to ensure future representativeness as the balance of global economic power changes, and secondly for emerging nations to embrace both the prestige, and more importantly, the responsibility that comes with being a leading global power.
Beyond the G-20, the other significant success in global governance, despite perhaps constant criticism, is the World Trade Organization (WTO). While the Doha round has been floundering as a negotiation, the WTO has been extremely successful as an organisation. Having created perhaps the only truly respected and enforceable global dispute mechanism, the WTO has achieved something that most organisations involved in global governance lack.
However, the WTO also finds itself in the shadows of what may be one of the most significant future global disputes – how to address climate change. Any measures to address climate change will likely impact global trade, and if they are not designed in a manner that is WTO compliant, any global deal on climate change could quickly unravel in a trade war. To date, the WTO has been hesitant to become involved in talks on climate change, but a change in this stance would be prudent to ensure that any deal on climate change is both enforceable and lasting.
In the last few years, there have been significant shifts in the nature of global governance. However, if these gains are to be consolidated, they will require the G-20 to address issues dealing with legitimacy by taking practical, partial steps that will provide benefits to both developed and developing nations. At the same time, it must manage the gradual integration of the major emerging economies into true leadership roles. This will be a significant challenge, but the success of the WTO in establishing a global governing body for trade may also provide insights for how the G-20 can succeed in this task.
Troy Stangarone is the Senior Director for Congressional Affairs and Trade for the Korea Economic Institute. The views expressed here are his own.