An institution that has met only four times, created enough drama around the world esp. in Toronto, with leader from countries as as disparate as Germany and India, is now astonishingly close to achieving its objective of rebalancing the global economy. Kudos!
By contributing to the strengthening of the international financial architecture and providing opportunities for dialogue on national policies, international co-operation, and international financial institutions, the G-20 helps to support growth and development across the globe. In the recent summit that took place in Toronto, Canada, countries have promised to explain in some detail how their domestic policies are helping to achieve the G20’s goal of reducing the excessive mismatches in spending and saving that exacerbated the financial crisis. With the help of the IMF, members can access whether each partner is doing enough.
Trust, credibility and transparency increase as the leaders put their cards on the table and peer review each other’s economic policy. Since the review remains a voluntary exercise without penalties, success will depend on G20 members taking the process seriously, both by submitting credible policies and showing the courage to offer tough, but fair, criticism. Given how these countries allowed the global economy to get out of control in the first place, there is reason to be doubtful of their capability to improve the shape of the economy.
In Pittsburgh, the G20 acknowledged that self-interested policy making had fashioned the conditions for the global recession that was sparked by the 2008 credit crisis. In was unclear whether the G20 was fully committed to create a forum in which they would shape their domestic policies in way that would ensure “strong, sustainable and balanced” global economic growth.
As we know, uninhibited spending and borrowing led to the recent recession which was happily exploited by the major exporters all around the world. China underwrote the spending as it purchased US debt and hence kept its currency low against the dollar. This in turn lowered the American interest rates. Instead of investing in their domestic economy, oil exporters bought US bonds. Continental European countries refrained from confronting rigid labour markets that inhibited investment and productivity.
Previous failures led economists and policy makers to doubt the success of sovereign nations to tailor domestic policies for the sake of the greater good. Going into Toronto, some countries, including China, were reluctant to accept country-level reviews under the framework, saying instead that G20 members should be divided as surplus countries and deficit countries.
A noted economist remarked that the framework introduced at the Pittsburgh summit would only be a passing phase, a temporary political convenience that will help leaders’ intentions to unite at a time of global crisis.
The confidence in the summit increased as the IMF and World Bank submitted studies that showed the G20 could generate GDP of $4-trillion, create tens of millions of jobs and lift even more out of poverty if countries actually made the changes necessary to achieve more balanced growth.
Any boost in credibility the G20 gets from embracing country-by-country peer review will be lost if the promises the process accepts lack ambition or commitment.
PS- This is a summary I made for a course in International Business about the G20 summit. Hopefully it will give a good idea about the most talked about issue of the year.