On April 2, the leaders of the Group of 20 (G-20) will meet in London to address the worst economic crisis since the 1930s. However, they have allotted only one day to accomplish what their predecessors couldn’t do in weeks: create a plan to confront the current economic crisis and reform the global financial system.
As if this challenge wasn’t large enough, achieving these objectives has been made more difficult by the different priorities and tensions within the G-20. The tensions were made public at the gathering of European finance ministers on March 9 and 10. Luxembourg’s prime minister, Jean-Claude Juncker, remarked that the Obama administration’s call for the G-20 to focus on increasing global demand was “not to our liking.” While America would like its counterparts to do more to boost demand through fiscal policy, other members of the G-20 would like America to adopt stricter regulations of hedge funds. America has acquiesced a bit — it is prepared to regulate systemically important hedge funds and is supportive of a more stringent, coordinated global regulatory system. Since the last meeting of the G-20, the delegations from each country have been working on reforms to the broken global financial system, specifically through the Financial Stability Forum (FSF). However, these reforms have been piecemeal — it is time to take dramatic action.
Superficially, the priorities of each country seem vastly different. However, each country has two basic objectives. According to the Richard Samans of the Center for American Progress, these are:
1) In the short run, avoid the worst-case scenario of a spiraling negative feedback loop of falling economic activity and deflation around the world.
2) In the long run, creating a stronger positive feedback loop of more broadly shared participation in the benefits of global economic integration among and within countries.
Let us begin with the short-term objective. In order to avert the worst-case scenario, the G-20 leaders must agree on a comprehensive set of macroeconomic policies that will boost global aggregate demand. Mainly, this includes an appropriate, detailed fiscal stimulus package for each country. Also, the International Monetary Fund (IMF) should be given a mandate to monitor the implementation of each country’s stimulus program and identify which countries are not fulfilling their commitment. By giving support to IMF monitoring, the G-20 will show that cooperation will halt the downward spiral of the economy.
Besides agreeing upon monetary and fiscal policy, the G-20 must show a resounding commitment to avoiding “beggar-thy-neighbor” policies. It should charge the World Trade Organization (WTO) with reporting regularly on each country’s trade policy and have the ability to shame countries headed towards protectionism.
Finally, in order to achieve the short-run goal, the G-20 must greatly increase the IMF’s resources for short-term emergencies. For many low-income and emerging-market countries, the IMF will probably be the only possible lender. Treasury Secretary Tim Geithner has suggested that IMF’s credit line with 26 developed nations be raised from $50 billion to $500 billion. In order to increase IMF resources, Ralph Bryant, Senior Fellow at the Brookings Insitution, proposes two possible approaches:
1) A large one-time immediate Special Drawing Right (SDR) allocation of at least $200 billion. An SDR serves as the unit of account of the IMF and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Although the largest portion of an allocation would go to countries for whom the direct benefits would be negligible, the effects for the world as a whole would be positive.
2) Increased bilateral borrowing from specific IMF members like the special borrowing of $100 billion from Japan. However, this approach will be more difficult because reserve-rich countries like China will demand that their voice and representation better reflect their stature in the world economy.
Realizing the short-term goal requires greater global collaboration, which cannot happen without strengthening global economic institutions like the IMF and WTO. Not surprisingly, achieving the long-run goal of more inclusive and sustainable globalization also necessitates the bolstering of global economic institutions. By strengthening the powers and stature of international institutions, the G-20 will make global cooperation easier.
There are three ways that the G-20 can set the foundation for fundamentally reforming the international institutions on April 2. First, they can agree to restart international negotiations on the financial resources available to the IMF and a whole array of IMF governance reforms. Some of the reforms that can be discussed include a large increase in the size of aggregate quotas, refining the rules for member borrowing from the IMF’s Short-Term Liquidity Facility and an improved formula for determining quota and voting-rights shares. Second, the IMF and World Bank can do away with the archaic selection process of its leader. Since the Bretton Woods agreement, the leader of the IMF and World Bank have been either European or American. The G-20 should agree to choose a leader for the IMF and World Bank solely based on merit, regardless of nationality. Finally, the G-20 can commit to increasing participation in the discussion of reforming the global financial regulatory system happening through the Financial Stability Forum.
While the end of the economic crisis may not yet be in sight, the G-20 summit can set the world economy in a new direction by taking collective, short-term and long-term action. History has already shown us the price paid for lack of cooperation in 1933. Let us not make that mistake again.