The G20 summit: a transition moment

Stephen Browne
1 April 2009

The accumulating cacophony of protests that accompany the preparations for the Group of Twenty (G20) meeting in London on 2 April 2009 reflects the widespread popular anger at the evident failures of the world's financial institutions and systems of global governance. This time, the representatives of a high-level gathering must listen to - indeed share - the hunger for change of those outside. It is late in the day for them to be embarking on an ambitious agenda for reform: but the very speed and scale of the deep economic crisis the world faces makes this unavoidable - not least to address the plight of those in the global south living on the very edge of survival.  

The Group of Twenty (G20) was created in 1999 as a forum for finance ministers and central-bank governors in the advanced and developing countries to discuss global economic issues

The current members are: Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, and the United States

The first meeting of the G20's heads of state and government was held in Washington on 14-15 November 2008. This was also attended - as will be the London summit on 2 April 2009 - by the European Union (represented by the rotating presidency and the European Central Bank), the International Monetary Fund (IMF), and the World Bank

The participating states together represent approximately 90% of global GNP, 80% of world trade, and 63% of the world's population

A year of precipitous change suggests what the priorities should be in four areas: finance, trade, aid and global governance. It is hard to recall now that even in early 2008 it was still possible for cheerleaders of the dominant financial and economic model to regard what was happening as the best of all possible worlds. They cited vigorous global growth in both output and exports as evidence that the boom years would continue, and saw inflationary pressures (reflected in exceptionally high prices for food, energy and minerals) as indicators of buoyant demand and confidence in large emerging economies (notably China, India, Brazil, South Africa and Russia).

Yet the ingredients of a very different view were already emerging, especially in the serious pressures on a large number of food- and fuel-importing countries. The soaring food prices sparked riots and unrest across nearly forty countries, in the global north as well as the south (see Paul Rogers, "The world's food insecurity", 29 April 2008).   

In the real economy, growth was vigorous in both output and exports for the first part of 2008, but by the last quarter some economies were shrinking at annual rates of over 10%. For the year as a whole, global growth declined from 3.7% in 2007 to 2.5%. During the first half of 2008, trade was growing at an annual rate of 20%; but by September, growth was negative. Export growth in 2008 fell from 7.5% to 6.2% compared with 2007. In the early months of 2009, exports were falling precipitously for some countries. Japanese exports were down over 40% year on year in January; in Brazil and China, 25%. Global trade will fall in 2009 for the first time since 1992, and by the largest percentage since the mid-20th century. The World Trade Organisation anticipates a fall of 9% in 2009.

Problems and portents

The reasons for the slowdown are well known. Weaknesses within the financial sectors of the high-income countries were the core of the problem, with serious mismanagement of financial risks provoking an evaporation of global liquidity. Whereas sound banking practices suggest a leveraging ratio of one to twelve - lending at most $12 dollars for every $1 of paid-up risk-bearing capital - large segments of the financial sectors in OECD countries had engaged in excessive lending at ratios of up to 100 times paid-up capital. During the second quarter of 2008, several high-profile bankruptcies undermined confidence and brought systemic risk to the global financial system. This time, many developing countries did not follow the path of irresponsible deregulation, especially in Asia following the 1997-98 financial crisis. They are all nevertheless paying the price of bad governance by the north.

Globally, foreign direct investment inflows fell overall by over 20% in 2008. Private capital flows to developing countries fell by 50% to less than $500 billion in 2008. Remittances by workers abroad (which account for more than a quarter of GDP in some small developing countries) are beginning to decline. Tourism receipts are down. The International Labour Organisation (ILO) predicts the loss of over 50 million jobs in 2009 in developing countries, and a huge rise in the numbers of those in income poverty.

The G20 leaders should learn at least two very important lessons from the 2008-09 crisis into their London meeting on 2 April 2009. First, bad financial governance on a large scale has been more a rich-country than a poor-country phenomenon. Second, the emerging economies, which have now shown their economic muscle and which begin to have a major tangible influence on global economic conditions, have seen their prospects sabotaged by this bad governance. Boom from the south, bust from the north.

If the world were more rationally organised, and if global economic governance were equitable, a G20 meeting would be putting the needs of the victims before those of the perpetrators. But while the agenda in London will concentrate on fixing the causes of the crisis in the north, will there be enough attention to the remedies that could help the south?

In practice, the G20 will be about stimulating the faltering economies of the north, fixing their financial systems and strengthening the roles of the World Bank and International Monetary Fund (IMF) that they can be of more help to the developing countries.

The portents of success are not good. The global impact of stimulus programmes is directly undermined by protectionism. There was not the political will in the north to reach a framework agreement on the Doha round in 2008, when clearly the onus was on the stronger rather than the weaker and more vulnerable countries. At their last meeting in November 2008, the G20 solemnly pledged to "fight all forms of protectionism and maintain open trade and investment". The spirit and letter of that communiqué were quickly torn up. Many countries - including the large majority of the G20 - have imposed new trade restrictions, and the impact of the measures taken by the rich countries will be much greater. For example, 80% of the nearly $50 billion being spent on subsidising car manufacturing worldwide is accounted for by the rich countries.

Stephen Browne is deputy executive director and director of operations at the International Trade Centre (ITC), Geneva. He is the author of Aid and Influence: Do Donors Help or Hinder? (Earthscan, 2006)

Also by Stephen Browne in openDemocracy:"

Whatever happened to ‘development'?" (17 April 2007)"

G8 aid: beyond the target trap" (6 June 2007)"

A green wall? Kenya, organics, and ‘food miles'" (25 January 2008) - with Alexander Kasterine"

The progress of trade: why Doha matters" (25 July 2008)

The financier George Soros has pointed out that financial "protectionism" could have a much greater negative impact on the developing countries. Europe and the United States have had the resources to shore up their financial systems and guarantee no further failures. Most developing countries, and the economies of eastern Europe, could not afford such guarantees; in consequence - and with the encouragement of the rich-country banks - their own capital has taken flight, exacerbating the general shortage of global liquidity.

The to-do list: four areas

What, then, should the G20 do in London? Here are four areas that need to be at the top of its agenda:

Finance The G20 meeting must agree to pump more finance back into developing-country banks. The summiteers have decided to double the resources of the IMF, but the amounts will not be enough to help all those in need. That is why China and others are calling for a large new issue of Special Drawing Rights (SDRs) - essentially the international creation of money for the rest of the world that has no reserve currencies. This won't happen in London, but it should.

Trade The financial bailout has to ensure that trade credit (on which about 90% of international commerce is based) is restored. The current estimate of the liquidity-gap in trade finance is $25 billion. The World Bank - through its private-lending arm the International Finance Corporation (IFC) - and the regional-development banks need to expand the ceilings on their trade-finance guarantee programmes for developing countries.

Protectionism must be rolled back. The WTO cannot prevent a rise in protectionism, for example as countries raise tariffs from their effective to their upper-limit rates. But it can discipline the process by closely monitoring and widely publicising any new trade restrictions. The G20 should endorse the practice of naming and shaming.

Aid It would seem reasonable to expect that the same rich countries that have agreed to a collective fiscal bailout of $4,000 billion ($4 trillion), would be able to guarantee and augment the less than 3% which their official development assistance represents. However, after falling in 2007-08, aid to developing countries may be further sacrificed by some donors on the pretext of unaffordability. For Africa alone, the donors are $40 billion behind on the commitments they made at Gleneagles in July 2005. There may be the same aid pledges made in London again, but why should they be trusted?

Global governance London could - and certainly should - mark the beginning of the end of the way the world has been ruled. The responsibility for the most disastrous recession since the late 1920s lies with the countries that have been so vocal in preaching good governance. The naked emperors have pushed liberalism and deregulation through their mouthpieces in Washington, and particularly the IMF.

The IMF remains the main multilateral channel through which global finance can be augmented in the short term, though many developing countries have bitter memories of the price they had to pay for IMF "assistance" in the past. Thailand, South Korea and Indonesia experienced great damage wrought by IMF-driven assistance in the aftermath of the 1997-98 Asian crisis, a contrast to the more serene recovery made by China and Malaysia (which had eschewed Washington's assistance). More recently, the Argentinean and Brazilian economies began to recover as soon as they had ended their IMF programmes.

Yet the top-down approach persists: the IMF bailed Ukraine out with $16 billion in 2008, though initially made this conditional on a balanced budget - a zero fiscal deficit that would have made Ukraine unique in Europe.

There is no alternative to more democratic institutions of global governance, starting with the IMF (see Mark Landler, "Rising Powers challenge U.S. on Role in I.M.F.", New York Times, 29 March 2009). The issue was already urgent before the global financial crisis; but this crisis has clearly and definitively shown why the rich countries can no longer be trusted with dominance over the main levers of economic power. There must be change. The London summit is the time and place for it to begin.

Among openDemocracy's articles on the global crises:

Robert Wade, "The financial crisis: burst bubble, frayed model" (1 October 2007)

Simon Maxwell, "Development in a downturn" (5 July 2008)

Ann Pettifor, "The G8 in a global mess: 1920s and 1980s lessons" (7 July 2008)

Willem Buiter, "The end of American capitalism (as we knew it)" (17 September 2008)

Ann Pettifor, "The week that changed everything" (22 September 2008)

Will Hutton, "Wanted: a fairer capitalism" (6 October 2008)

Avinash Persaud, "Europe's financial crisis: the integration lesson" (7 October 2008)

Paul Rogers, "A world in flux: crisis to agency" (16 October 2008)

Andre Wilkens, "The global financial crisis: opportunities for change" (10 November 2008)

Simon Maxwell & Dirk Messner, "A new global order: Bretton Woods II...and San Francisco II" (11 November 2008)

Larry Elliott, "From G8 to G20: the end of exclusion" (16 November 2008)

Krzysztof Rybinski, "A new world order" (4 December 2008)

Krzysztof Bobinski, "Europe between past and future" (6 March 2009)

Kerry Brown, "China local, China global" (11 March 2009)

Katinka Barysch, "The real G20 agenda: from technics to politics" (16 March 2009)

Krzysztof Rybinski, "There is no zombie free lunch" (18 March 2009)

Sue Branford, "The G20's missing voice" (26 March 2009)

Will Hutton, A G20 deal: power bends to protest" (29 March 2009)

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