Amid global tensions over currencies—notably the U.S. federal reserve’s decision to pump more money into the American economy and China’s exchange rate policy—the leaders of the Group of 20 economic powers meet in South Korea this week. In a video Q&A, Moisés Naím analyzes the importance of the G20 meeting, the stability of the global economy, and what leaders from developed and developing countries should do to spur economic growth.
Naím says that one of the original strengths of the G20, the diversity of its makeup, is now becoming a weakness as there are divisions among key countries over how to rebalance the global economy. The big players—not necessarily the entire group—will need to work together to help avert a currency war and reduce trade tensions.
- What's on the agenda for the G20 summit in South Korea?
- Who will be participating in South Korea?
- Why should we care about the G20?
- What issues are dividing the G20?
- How successful was the G20 in dealing with the global financial crisis?
- How can the G20 help to avert a currency war, reduce trade tensions, and rebalance the global economy?
- What is minilateralism? Is the G20 the right group to solve economic problems?
- How strong is the global economy?
- What are the prospects for economic growth?
- Should today's international monetary system be reformed?
The general theme of the G20 meeting in South Korea is the role of the G20 in the post-crisis world. There is a recognition that the world is still in crisis. Some countries are beginning to see an end to the crisis, but there are still remaining issues, including the choice between growth now and long-term sustainability of growth, concerns about protectionism, and strengthening the financial system to make sure there are safety nets and safeguards to avoid another financial crisis.
And, of course, what is going to be at the center of the conversation are currency wars and what countries are doing to boost their exports and inhibit imports—in some form of protectionism—by using their exchange rates. Those are going to be very, very difficult and critical issues.
Who is invited and who belongs to the G20 continues to be a thorny issue. The countries that are excluded, of course, criticize and lament the composition claiming that it is not representative. But the countries represented account for 85 percent of the world’s GDP, so it is an assembly of big players. Plus, it has the advantage of being highly diverse. It is no longer the G7 of advanced countries that included only the developed countries, but it now has countries like Saudi Arabia, Brazil, Mexico, Indonesia, and so on.
There are also the surprises that are reflective of how the world is working these days. Small countries are trying to elbow their way in and be at the table where conversations take place and decisions are made. Holland, which is typically invited, was not invited this time. The government of South Korea decided not to invite Holland and instead invited Singapore. And this shows that this is Asia (and its alliances and priorities), but it also shows a very interesting dynamic between countries and regions and where the balance of power is shifting.
We should care about the G20 because if things don’t work out, it will have consequences on employment, if people can get a mortgage again, how much people are going to pay for their mortgage, what people are going to pay for imports, and how much food will cost. All of the things covered at the G20 summit sound remote, but they have direct consequences on the pocketbooks, lifestyles, and living standards of people around the world.
One of the strengths of the G20 when it began was the diversity of its composition. It had all kinds of members—China and the United States, Brazil and Indonesia, Mexico and Turkey—and this was an important element in giving the world the sense that this group of diverse countries had a common vision ahead.
That diversity is now becoming a weakness, because they are in effect very different countries. Some countries never stopped growing during the crisis and others are mired in recession. Some countries continue to be very strong exporters and others are net importers. Some have high levels of savings and others have high levels of consumption. This needs to be rebalanced. So, what is dividing the G20 is how to deal with these imbalances and with the dislocations created by the ascent of new players.
It was a good thing that the G20 existed during the financial crisis. The G20 sent markets the signal that someone was in charge, even if that was not completely true. It gave the notion that you had all these leaders, who accounted for such a big chunk of the global economy, getting together and finding a common path toward recovery, how to deal with the banking crisis, and how to stimulate growth. That was an important signal to the world; it was a very important signal to financial markets and a very strong signal of confidence.
So at that moment—the moment of the deepest, darkest stage of the crisis—having the G20 was very important. Now we know that the execution of those promises did not come to fruition. The countries are still squabbling and fighting over things, but some progress has been made.
For example, they have agreed to restructure the governance structure of the International Monetary Fund, which is one of the decisions that will be made in South Korea. The governance—the board of directors and the executive board of the IMF where decisions are made—is going to better reflect the realities of this new world in which China is going to have more weight and countries like Belgium and other small European countries are going to have a lower representation (before they had a disproportionate presence). There is still progress being made.
How can the G20 help to avert a currency war, reduce trade tensions, and rebalance the global economy?
There are big challenges that need to be tackled by 20 different countries. So, we are going to see progress when the big players that account for a big part of the problem get together. The currency wars and everything that’s happening with currencies can be attenuated if the United States and China agree to a package of measures that is not only related to the exchange rate. This would include things that China can do and the United States can do in order to alleviate some of the frictions that have an expression in the exchange rate. And so, within the G20, one has to find subgroups of countries that can work together—you don’t need the whole group. Some countries acting together can move the ball forward more effectively.
What I’m suggesting is some form of mini-minilateralism inside the G20. The G20 is not multilateral as it does not include all the countries in the world, but it’s a subset of countries that matter. Eighty-five percent of the world’s economy is represented in that group, so there is more chance of having agreements between those countries than if you bring everybody to the table in conversation.
This has a problem as it can be called non-representative, exclusionary, and creating a democratic deficit because it’s not fair that some countries are not represented—and all of that is true. Those are valid criticisms. But in my judgment it’s better to have those criticisms and those defects than to have a situation where nothing happens. Minilateralism, which is the alternative to multilateralism, is defective in many ways, but multilateralism that represents everyone but nothing happens is even more defective.
So, I would rather have a group of countries that is small, manageable, can reach an agreement, and account for a big part of the problem or a big part of the solution—or both—getting together. The smallest number of countries that account for the largest consequence for a problem working together is what I call minilateralism.
The global economy today is much stronger than what it was a year ago, but, as we have seen, there are still very, very weak spots. Some countries are recovering quite nicely, some never slowed down significantly, and others are deeply mired in terrible situations. Some hard hit countries in Europe are going through a very difficult process, including Spain, Ireland, and Greece. We know where the things aren’t going well.
But in the rest of the world, the situation is much better than what experts told us it was going to be when the crisis hit. The same experts that did not call the crisis did not call the recovery.
It’s important to emphasize that the crisis and the crash caught us by surprise. Very few experts anticipated the size and scope of this crisis, and then they told us it was going to go on for a decade. We’re still talking about a double-dip recession that could be much deeper, broad based, and all encompassing than it has turned out to be. While we’re still in the middle of it in many ways, we are doing much better than what the experts told us at the time the crisis exploded.
The world is growing and the world will be growing in some places quite significantly. But, again, growth is going to be uneven and there is still a lot of apprehension and nervousness. Financial markets are still very volatile and there are no clear signals about the direction of some important variables—we still have debates about stimulus or controlling the deficits. There are experts that predict a deflationary environment, while others are worried about inflation. We are still in a very, very confusing world, but the world is growing and in some places, regardless of these debates, is doing quite well.
The reform of the international monetary system is a subject that emerges every time there is a financial crash in the world. If you read the communiqué of the heads of state, or the ministers of finance, or the governors of central banks after the Asian crisis, Russian crisis, or the Tequila crisis in Mexico—or any financial crisis we have seen—you will always see that there is a commitment to redesign the global financial architecture.
Then they start with great emphasis and enthusiasm trying to reform it. And two things happen. One is that it turns out to be more complicated than anyone anticipates and important players—including interest groups and those affected by the reforms—react and try to block reforms. At the same time, growth comes back faster than anyone anticipated. This lowers the appetite for the difficult and politically costly decisions. With reforms being more complicated, more difficult, and more costly than expected and things beginning to go better at the same time, the urgency for reform dwindles. The redesign of the global architecture is always postponed until the next crisis.