Opinion Get serious,G-20
This new crisis is because of G-20 failures especially its unwillingness to reform the IMF
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The summer jitters,which brought memories from the panicky fall of 2008,have left little doubt about how fragile the recovery from the great crisis has been and how rocky the road ahead will continue to be. This is,in good measure,due to the failure by leaders of the major economies to deliver on key commitments to pursue coordinated action.
The Group of 20 was formed to undertake the collective responses deemed necessary to tackle the root causes of economic crises. At its summit meeting in November 2008,G-20 leaders themselves admitted that inconsistent and insufficiently coordinated policies propelled the catastrophe. Then and at two subsequent meetings,the leaders made concrete commitments to bring about that purported cooperation.
Among many pertinent pledges,the G-20 agenda for reform included: strengthening the International Monetary Funds mandate,scope,governance and surveillance authority; reinforcing each countrys system of financial regulation and supervision and making each system globally consistent; and a commitment to not just prevent an explosion of trade protectionism,but to conclude the Doha Round in 2010.
In reality,and unless a significant rectification happens soon,the announcement could go down in history as the beginning of the G-20s journey toward sheer irrelevance. Reform of financial systems has proceeded unilaterally,not cooperatively. Transformation of the Bretton Woods institutions has not moved along significantly. The Doha Round is even more of a zombie.
In retrospect,the framework announced at Pittsburgh was doomed to fail,given the way the leaders called for it to be implemented. They opted for a mutual-assessment process relegating the IMF to a purely advisory and secretariat role. Thus the content of the framework was at once made hostage to a complex and possibly unsolvable negotiation among the key players.
It should have been obvious at the outset that the largest contributors to the global macroeconomic imbalances the United States,China and Germany would try all along the way to influence the process in order to minimise their respective share of correcting those imbalances which are standing in the way of sustained growth. Given this approach,it took more than a year and a half just to agree on a general methodology to assess the sustainability of national economic policies,and the outcome is overly prescriptive on some aspects and ambiguous on others.
From the outset,rather than relying on an ineffectual peer-review process,a third,trusted and independent agent should have been charged with producing the evidence,diagnosis and policy options that would be brought to the table for discussion and decision by the G-20 leaders.
But such a third party simply does not exist under present arrangements. The IMF,which in principle should play that role,is crippled by obsolete governance stemming both from its current articles of agreement as well as long-standing practices. At their London summit,G-20 leaders sensibly committed themselves to address the institutions issues of relevance,effectiveness and legitimacy,but so far only modest steps to that end have been taken.
Inaction to reform the IMF is not due to any lack of ideas. Rather,it is due to the reluctance among some of the key players to undertake changes that may lead them to relinquish long-enjoyed power and influence. Still,unless the major economies are content to accept a scenario of a totally irrelevant or nonexistent IMF,the indispensable reforms will happen one day.
It is,however,too risky to wait for those reforms to address crucial issue of macroeconomic policy coordination. The idea is to enable the IMF at once to point out with candour and transparency what are the policy decisions that each of the large economies should be expected to undertake in their own interest and in coherence with the others contributions to balanced,substantial and sustained global growth.
Accordingly,the present strings imposed on the IMF must be removed by a special,interim authority promoted by the G-20. Admittedly,the practical value of a truly independent IMF report on the rebalancing for growth of the global economy would be,at best,to provide a sharper focal point of comparison with the G-20s own conclusions,but this step alone would constitute a significant improvement over the present situation.
It would also signal that the G-20 is beginning to acknowledge seriously the need for multilateral surveillance. That signal would be greatly reinforced if in addition to a robust action plan for policy coordination to execute a global growth pact,the G-20 leaders committed themselves at Cannes to pursue,with a precise timetable,the governance reforms necessary to empower the IMF on a permanent basis with a significantly stronger surveillance capability and authority.
Brown was PM of the UK. González was PM of Spain. Zedillo was president of Mexico
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