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Beyond the G20 Toward effective global economic governance Jakob Vestergaard. Epigraphs. Stewart Patrick, US Council on Foreign Relations: G20 is “ the most significant advance in multilateral policy coordination since the end of the Cold War ” (2010).

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Beyond the G20 Toward effective global economic governance Jakob Vestergaard

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Beyond the G20Toward effective global economic governanceJakob Vestergaard

DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES


Epigraphs

  • Stewart Patrick, US Council on Foreign Relations: G20 is “the most significant advance in multilateral policy coordination since the end of the Cold War” (2010).

  • Foreign Minister Norway: creation of G20 was “one of the greatest setbacks since World War II” (Spiegel 2010).

  • Uganda CB Gov: G20 is but extension of “the old architecture” (2011)


Structure of lecture

G20 output legitimacy: effectiveness

G20 input legitimacy: representation

G20 at a crossroads: what to expect from the Cannes summit?

From G20 to GEC

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Output legitimacy: effectiveness

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G20 effectiveness (1)

”The concerted and decisive actions of the G20…has already delivered a number of significant and concrete outcomes:

Financial regulation “broadened” and “strengthened”.

“Great progress” in macroeconomic policy coordination – cf. framework for “strong, sustainable and balanced growth”

Global governance “dramatically improved” – “to better take into consideration the role and the needs of emerging and developing countries, especially through the ambitious reforms of the governance of the IMF and the World Bank”.

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G20 effectiveness (II)

“Failure to reach an (admittedly difficult) agreement on a piloted across-the-board adjustment of balance of payments should not overshadow the rapid agreement achieved with regard to the Basel 3 Accord, which would not have been possible without the political momentum of the G20 leaders”

(Domenico Lombardi, Brookings)

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G20 effectiveness (III)

  • Financial regulation: alleged ”main accomplishment” is the new international standard in banking, ’Basel 3’

  • G20 delegated this task to the Basel committee

  • Basel committee: G20 plus six additional European c’ies (Switzerland, Spain, Sweden etc) and two financial hubs in Asia (Hong Kong and Singapore)

  • Basel 3 negotiated in less than a year, compared to Basel 2 which took more than five years.

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International banking standards

Two fundamental objectives (BCBS, 1988: §3):

“strengthen the soundness and stability of the international banking system”

“be fair and have a high degree of consistency in its application to banks in different countries”

Key governance tool:

capital adequacy requirement: 100 euro loan => at least 8 euro in reserves

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The pre-crisis approach (Basel 2)

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Three pillars:

Pillar 1: Capital > 8 pct of ’risk-weighted assets’

Pillar 2: Supervisory review process – more capital than Pillar 1 minimum can be demanded

Pillar 3: Disclosure requirements, to encourage ’market discipline’ (misbehaviour punished)

From binding to less binding…

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’The end of lightly regulated finance’

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Regulatory capture (1)

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…BUT: reform initial proposals watered down, after intensive banking industry lobbying

Aims of banking industry lobbying – the four Ls:

  • Lower

  • Leave out

  • Least-binding

  • Later

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Regulatory capture (II)

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Basel 2 vs Basel 3

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Basel 3 – overview of outcomes

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Finance professors ’going political’

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“Banks’ high leverage and the resulting fragility and systemic risk contributed to the near collapse of the financial system. Basel 3 is far from sufficient to protect the system from recurring crises.

If a much larger fraction, at least 15 per cent, of banks’ total, non-risk-weighted, assets were funded by equity, the social benefits would be substantial. And the social costs would be minimal, if any”.

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Finance professors ’going political’

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Key points of joint letter by 20 of worlds leading finance professors published in Financial Times in run-up to Seoul summit:

-- Basel 3 fails to ”eliminate structural flaws in the system”

-- please remember that ”healthy banking is the goal, not profitable banks”

Unfortunately, this support from academia came too late, says anonymous CB governor

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Basel 3: ’more heat than light’?

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Basel 3

- intensification of Basel 2

- marginalization of counter-cyclicality

- ’grandfathering’ (to be implemented by 2019…)

Three years after crisis:

- banking not ”sound and stable”, espec Eurozone c’ies

- threat to global economy as least as severe as in ’08

- social upheaval and protest, nationalism, even war?

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In conclusion, on G20 effectiveness

  • Before Seoul summit (Nov 2010): G20 is “divided, ineffective and illegitimate” (Rachman, FT).

  • After Seoul summit: G20 had shown “how not to run the world” (FT editorial)

  • Summer 2011: G20 marginalized (G Brown called for meeting, but nothing happened)

  • Conclusion: G20L not “effective” as global steering committee = low “output legitimacy”


Input legitimacy: representation

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G20 claims input legitimacy

  • G20 says: its “economic weight & broad membership gives it a high degree of legitimacy & influence over the management of the global economy & financial system” (G20 2010a).

  • G20 says it is representative: covers 90% of world GDP, 80% world trade, 66% world population.

  • G20 says it is big improvement over G8.


Input illegitimacy (1)

  • Regarded as illegitimate by many of 174 UN member states permanent excluded

  • Membership endorsed by G7, in 1999, selected in transatlantic calls btw US and Germany.

  • G7 claimed they were all “systemically significant” c’ies. No explicit selection criteria.

  • No process for changing membership in line with changes in global distn of econ power.


Input illegitimacy (II)

  • The 19 member countries not the 19 biggest economies by any indicator (neither in 1999 or 2008)

  • Europe not “over-represented” by GDP criteria: Spain, Poland, Netherlands shd be in; Argentina, Saudi A, S Africa out. Yet widely believed (esp USA) that Europe over-rep.

  • No regional representation – except EU

  • If EU removed, G20 “represents” 77% world GDP, 60% world trade, 62% world population


Input illegitimacy (III)

  • Big majority simply cannot be used to argue a case of input legitimacy

  • Consider example of national elections (urban dominance; religious dominance)

  • Without explicit – and widely accepted – criteria of inclusion/exclusion, there can be no such thing as input legitimacy

  • Irony of G20s claim of “dramatic improvement” of global governance, in interest of developing countries: the G20 itself further marginalizes those countries


G20 countries – by region and income classification


Ad hoc participant expansion

  • G20L has responded to “unrepresentative” criticism by issuing “invitations” to “outreach participants” and “observers”.

  • Spain invited as “permanent guest”.

  • ASEAN invited as “outreach participant” to all 5 summits.

  • Hosts of last 2 summits (Canada, Korea) invited African Union to send 2 reps.

  • Status of ‘invitees’ unclear…

  • So: G20= 19 countries + EU + 5 “invitee states” (of wh 3 rep regions)

  • G19+6, or simply G25


The G20 at a Crossroads: what to expect from the summit in Cannes

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Two opposing trends in GEG

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1. Drift back towards G7/G8:

Summer 2011: G20Fs did not meet but G7Fs did (despite formers self-declared status of ’premier forum’..)

Obama has announced that he will host G8 and Nato summits in May 2012, just one month before G20 summit in Mexico

=> Is G20 being reduced to a secondary body?

2. Appeals to G20 to step up: ’rescue WE, please’

EU, OECD, etc

Much depends on the Cannes summit

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G20 summit in Cannes: the context

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Drama similar to first two G20 summits: recovery in danger (for instance, gloomy OECD forecast yesterday).

Global economy more vulnerable now than in 2008: fiscal stimulus at similar scale not likely

Growth in EMEs remain strong – BUT: increasing risk of inflation, prospect of further weakening of export markets, partial retreat of foreign capital

Quasi-insolvent European banking sector? Will banks reduce lending to meet capital reserve requirements by June next year? New credit crunch in Europe?

European agreement: ”too little, too late”? (Brookings, yesterday). Espec German discontent (Bundesbank). Greek referendum – radical uncertainty..

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Growth, please – but how?

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OECD: adopt ”bold growth strategy”, if not: drop in GDP of up to 5 pct by mid-2013

EU leaders: G20 should approve ambitions plan to ”ensure strong, sustainable and balanced growth while implementing credible fiscal consolidation”

Many G20 leaders constrained by domestic politics to undertake big fiscal stimulus – constrained by fiscal austerity ideology

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Action items for Cannes summit

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With fiscal policy constrained and monetary policy reaching its limits, what can be expected?

Non-European contributions to the EFSF? (China etc)

Expansion of IMF’s financial capacity?

Global food crisis: more resources for investment in agriculture? Or, at least, meeting prior commitments to fund the Global Agriculture and Food Security Program?

Most likely little on main issues: global imbalances etc

Main risk: conflict btw European leaders and non-European leaders (on terms of support etc.)

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Two scenarios

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1. Marginalization of G20

Continues as talk-shop, but secondary to G7/G8

How will the BRICs react?

Wider process of deglobalization of international economic governance?

More emphasis on regional level

2. G20 resumes global leadership

Further institutionalization, incl secretariat

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Four good reasons…

.. to look for a different, more viable format for effective global economic governance:

  • The G20 is not effective (low output legitimacy)

  • The G20 excludes 174 UN member states and membership criteria arbitrary (low input legitimacy)

  • The G20 undermines the existing multilateral system of GEC

  • And the G20 is losing momentum…


From G20 to GEC

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Global Economic Council

  • Start with BWI system, not G20/G25. Constituency system has long-established legitimacy.

  • Advantages over G20: (1) all states represented in governing bodies, (2) some consultation within constituencies, (3) some rotation at top table

  • Disadvantages: (1) no heads-of-govt. level; (2) system of single country seats unsustainale (3) voting power system out-of-sync with realities of global economy


Allocation of seats among regions

  • 25 seats, based on reformed BWI constituencies.

    Allocation of seats:

  • Divide world into 4 regions: Africa; Americas & Australasia; Asia; Europe. Each region to have 4 seats. Subtotal = 16.

    (ii) Distribute 9 more seats between 4 regions proportional to regional share of world GDP*. All regions except Africa get 3 more seats.

    Result: Africa = 4 seats, other regions = 7


Constituencies and rotation

  • No single-country seats; all countries in constituencies (minimum size: 3, average: 7).

  • Mechanism of rotation within each constituency: Each constituency one director & 2 alternates.

  • Constituency decides whether all 3 positions rotate b/w members, or only alternates. If only at alternates’ level, large c’ies cld always be at table – but still obliged to consult with other states.

  • BWI constituencies to be reformed in same way


GEC decision-making

Two models:

  • Binding agreements, based on a combination of majority voting and special majority voting (as in BWIs)

  • Informal “talk-shop” council, as the G20 – on the assumption that big powers otherwise will not go along

  • Possible compromise: start out as informal council, replacing the G20, testing ground for future potential formalization

  • UNSC as model? Two forums: “consultation room” (strictly private, no formal decisions); formal room.


The way forward

  • GEC based on formal treaty

  • Treaty focusing on one issue: international macroeconomic imbalances

  • Correction of imbalances as joint responsibility of surplus and deficit countries

  • Limits on imbalances – deficits and surpluses – as share of GDP

  • The how of correction/adjustment is left to discretion of countries in question, but non-correction to come at high cost

  • All other issues: non-formal


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