G20 Transformation: Challenges and Solutions

China International Studies (English) - - Contents - Zhen Bingxi

The G20 is transforming from a mechanism for crisis-management to one for long-term governance. However, due to some inherent constraints, the G20’s transformation will be an enduring and incremental undertaking.

The Group of 20 (G20) is closely associated with a succession of world financial crises. The G20 was born amid the Asian financial crisis of the late 20th century. The world financial crisis in 2008 activated the G20’s functions and upgraded its position in the world. After the Pittsburgh Summit in 2009, the G20 began to replace the G8 as a primary platform for international economic cooperation. The G20 accounts for two-thirds of the world’s population and 60 percent of the world’s land area. The G20 members produce 85 percent of the global GDP and 80 percent of the world’s total trade volume. The G8, meanwhile, only accounts for 10 percent of the world’s population, 28 percent of its land area, 43 percent of the global GDP, and 35 percent of the world’s trade volume. Therefore, it is very obvious that the G20 has greater representation and influence than the G8.

As a product of financial crises, the G20 has shown its effectiveness in crisis management. At present, it is the only shared platform for economic governance in the world for countries to engage in discussions and take into account the common interests of both the North and the South. The G20 is also the highest coordination mechanism where the leaders from both the developed and developing countries can sit and talk on equal terms. The 11th G20 Leaders’ Summit was held in Hangzhou, China, in September 2016.

As the severe effects of the global financial crisis of 2008-2009 gradually subside, the G20 is at a critical turning point in transform itself Zhen Bingxi is Senior Research Fellow at the Department of World Economy and Development, China Institute of International Studies (CIIS).

from a crisis response platform to a long-term governance mechanism, with the focus shifting from periodic policies to structural policy reform. Thus, the G20 will have long-term objectives and contribute to long-term growth instead of focusing on solving short-term problems. However, the transforming G20 also faces many challenges: the mechanism is temporary and informal in nature, the agenda is unreasonable, and the United States takes a negative and uncertain attitude toward the G20’s transformation. As a body responsible for promoting global coordination and cooperation, the G20 has to solve these problems step by step in order to successfully realize its transformation.

The G20 Has Shown Signs of Transformation

In the second half of 2009, the US economy started to recover gradually out of its grave recession. Keeping pace with the subsiding crisis and emerging global challenges, the G20 started its transformation process in 2010. Development issues were officially put on the agenda at the 2010 summit in Seoul, the Republic of Korea, thus signaling the important change of the G20 from a crisis management mechanism to a global economic steering body. From 2013 to 2015, the global economy witnessed an uneven recovery with slow growth in emerging economies, the G20 summits thus shifted their attention to the real economy, with trade, investment and development as core issues.

The G20 transformation is manifested in the following four aspects. First of all, the G20 plays an active leading role in global economic and financial institution building. It has made positive progress in rulesetting in the fields of financial regulation, anti-corruption, and taxation. It has also strengthened cooperation with the International Monetary Fund (IMF), the World Bank, the World Trade Organization (WTO), and other international organizations, participated in global economic and trade rulesetting and amendments, and thus improved the fairness and effectiveness of the global trade rules. Meanwhile, the G20 has promoted reforms in these international organizations and made global economic governance

more productive. A new pillar, that is, financial regulation composed of the Bank for International Settlements (BIS), the Financial Stability Board and the Basel Committee on Banking Supervision, has been created in addition to the original three pillars of goods, finance, and development. The G20 also plays an important role in improving domestic financial systems. The countries concerned have strengthened supervision of their domestic financial institutions in accordance with the G20 resolutions and modified their own rules in light of the G20 policies.

Second, the G20 has continuously expanded its areas of cooperation. It has gradually evolved to be a global cooperation platform with both growth targets and governance objectives, and its major task has shifted from coordinating financial bailouts to strengthening financial regulation and economic stimulus as well as sustainable economic development. The G20’s agenda has also turned to addressing long-term and global issues, and it has taken steps to explore monetary system remodeling, global economic rebalancing, growth and employment, development, environmental protection, and other related issues.

Third, newly emerging economies play an increasingly important role. From the G7 to the G8, to the “8+5 Dialogue” and then the G20, the emerging economies have found their status in global economic governance improving. Among the 10 previous G20 summits, the emerging economies hosted four, which mainly focused on issues of inclusiveness and sustainable development.

Finally, China’s influence in global economic governance has increased significantly. During the earlier G20 summits, China was basically in a defensive position, especially when global trade imbalances and exchange rates were discussed. Starting from 2013, China’s voice and influence in global economic governance have risen steadily. China has proposed five initiatives to promote the G20 process. First, the summit should reflect

Keeping pace with subsided crisis and arising global challenges, the G20 started its transformation process in 2010.

the G20’s spirit of cooperation and partnership; second, the international financial system should be reformed; third, a free, open, fair, and justified international trade environment should be created; fourth, the issue of world development should be addressed; and finally, the G20 mechanism should be strengthened. China has also put forward new initiatives and cooperation mechanisms such as the Belt and Road Initiative, the Silk Road Fund, the Asian Infrastructure Investment Bank (AIIB), and BRICS New Development Bank (NDB).

Five Major Problems in the G20 Transformation

Currently, the G20 transformation is still in its initial stage, with no substantive progress being made and its influence in the world somewhat declining. This shows that the G20 is subject to inherent institutional constraints in its transformation, and the United States and other developed countries are changing their attitudes toward the G20 cooperation. Now the G20 is confronted with five problems in its transformation.

First, the G20 is an interim mechanism. For the interests of global governance, the G20 should become a long-term mechanism with executive power. However, the current G20 structure is temporary in nature, lacking in particular institutions, binding force or executive power. The need to cope with crisis gave birth to the G20. However, in the post-crisis era, the G20 has lost direction as well as its driving force. The United States and European countries do not believe that concerted efforts are needed any more, and they have turned their attention respectively to their domestic priorities. The G20 is now a platform for global governance and coordination rather than an executive body because it has neither a permanent secretariat nor a governing entity for implementation and regulation.

Second, the G20’s informal nature affects its policymaking power. In 1999, when the G20 was established, it issued its first communiqué, stating that the G20 was a new mechanism for informal dialogue under the Bretton Woods framework. Such an informal nature determines that the G20 has

to take corresponding measures as to its framework, agenda, the forming of a secretariat, as well as its relations with non-members. Therefore, as an informal platform for global economic governance, the G20 has no formal international legal status and its members establish their cooperation by commitments. The G20 does not have any legal documents as its founding basis, and all the international agreements it has reached so far are not legally binding, hence all communiqués, declarations, and action plans adopted only serve as directional guidance instead of international legal obligations which members have to undertake. International commitments made by the G20 members at the summits are political rather than contractual legal commitments. The G20 adopts a troika practice for summits, and the former, current, and designate presidents work out an agenda together. Though the practice ensures, to a certain extent, the continuation of an agenda, the lack of a formal mechanism to ensure follow-up implementation means many action plans are inconclusive. Although such “informality” has the advantage of coordinating both internal and external political priorities and facilitating members to conduct political consultation and reach political consensus, the resulting lack of legal power means there are no constraints on members. Especially in the post-crisis period, when the members are without common threats, united efforts are non-existent.

Third, a lack of efficiency in the G20’s decision-making process also presents challenges. Although the G20 has enlarged the right of participation for emerging economies, the international community still questions the G20’s efficiency in international economic coordination and decisionmaking. The previous G20 summits only repeated the principled consensus reached by members during the crisis to show their determination to ensure the recovery of the global economy, with little breakthrough in action. There is a thus a tendency for the G20 to become a “talk-shop,” and there is even

Currently, the G20 transformation is still in its initial stage, with no substantive progress being made and its influence in the world somewhat declining.

the possibility that the G20 might fade away. Moreover, between developed and developing countries, and even among developed countries, squabbling has continued on many issues, which makes it difficult to make decisions and take action. That is why some regard the G20’s joint initiatives as mere “rubber stamps.” Such inefficiency has many causes. First, there persists a power imbalance. Coordination by major countries should be based on balanced power. Rather than powersharing or checks and balances, it should be the wielding of relative capabilities to address the problems under a common framework supported by power. So far, the G20 has operated under the leadership of developed countries, while developing countries remain in a secondary position. The United States and European countries want to maintain or expand their leadership in global governance and even hinder the G20’s transformation. Second, there is a lack of cohesion. The G20 is composed of three groups: the G7, the BRICS countries, and MITKA (Mexico, Indonesia, Turkey, ROK and Australia). Such a grouping makes policy coordination more difficult and complex. Third, there is a shortage of concerted efforts. Major economies are divided in economic development and monetary policies, and each country resorts to different policy approaches. As a result, macro-economic policy coordination is difficult, and this has made it harder for the G20 to become a long-term economic governance mechanism.

Fourth, the G20’s agenda is unreasonable. The most prominent problem is that the G20, in its agenda, tends to broaden topics and shift the focus from the economic to security fields, covering not only world economic trends and international financial system reform, but also topics of climate change, the refugee crisis in Europe, anti-terrorism, Syria, and other international hotspot issues. The increasingly complex issues and difficult reform initiatives pose more and more challenges to the G20’s effectiveness,

The previous G20 summits only repeat the principled consensus reached by members during the crisis to show their determination for global economic recovery, with little breakthrough in action.

and make it harder for members to focus on core issues in economic and financial fields. As to whether the G20 should expand its agenda, there are two distinct perspectives: one group, represented by Canadian Senior Research Fellow Barry Carlin, holds that the G20 should focus its agenda on finance-related issues, and avoid expanding to other issues; another group, headed by Professor Patrick Stewart of the US Council on Foreign Relations, believes that issues of development, climate change, and peace and security should be included in the G20 agenda. Both groups have their limitations, since an inflexible agenda tends to mean discussions end in an impasse. On the other hand, generalized topics will ensure no tangible breakthroughs. In addition, the G20’s agenda tends to favor developed countries. Western countries still dominate the G20’s agenda while developing countries find it hard to exert substantial influence.

Finally, the US attitude toward the G20 transformation is becoming increasingly negative. With the financial crisis waning, the United States has gradually lost interest in the G20. In coordination with emerging countries, Washington has taken an increasingly tough stand on the G20’s transformation. Such a pragmatic approach constitutes a major obstacle to reforms. When the United States has achieved its short-term objective of economic recovery by making use of the G20 to mobilize global resources, its long-term objective is making use of the G20 to maintain its leadership in the current global system. Washington even thinks that the G20 mechanism is imperfect, and it is relying on the G7 and retaining the option to use other mechanisms. The United States’ true interest lies in preventing emerging governance mechanisms from speeding up the power shift from developed countries to emerging countries. If possible, the United States wishes to slow down such a power shift, including slowing down the pace of the G20’s institutionalization. In recent years, the United States’ influence

The US’ position is essential for the G20’s transformation and future sustainable development. Its negative attitude will affect the normal operation of the G20.

in the G20 and its capacity to engage in agenda setting are in decline. This is why the United States is resorting to other options by pushing forward the Trans-pacific Partnership (TPP) and the Trans-atlantic Trade and Investment Partnership (TTIP), in order to consolidate its leadership in making global trade rules. In addition, the policies of the forthcoming new government in Washington on the G20’s future development remain uncertain. The Republican presidential candidate Donald Trump is opposed to international trade and international coordination. He has said he would reject any multilateral trade agreements and systems, and would take tough measures against those countries which have protracted trade surpluses with the United States. He has proposed levying 45% punitive tariffs on Chinese goods. The Democratic presidential candidate Hillary Clinton has also kept a certain distance from the Obama administration in terms of international coordination and cooperation, and stopped giving her support to the TPP.

She holds an ambiguous attitude toward a rising China, and worries more that a strong China will pose a threat to US interests. She claims that she does not want her grandchildren to live in a China-dominated world. The support of the United States is essential for the G20’s transformation and future sustainable development. Washington’s negative attitude will affect the normal operation of the G20. For instance, the G20 proposed in 2010 a series of governance reforms for the IMF and other institutions. The proposal was delayed for over five years by the US Congress, thus greatly postponing all related follow-up actions on the reform of international financial institutions.

Policy Proposals on the G20 Transformation

From crisis management to long-term governance, the G20 is now at a new turning point. Scholars both in China and overseas have identical views on the necessity for the G20 to transform. However, as for how to realize such a transformation, they have different perspectives.

Main recommendations by Chinese academics

(1) The G20 should keep its informal nature. Summing up historical experience at a particular time, the G20 founders made informality a basic concept for creating a new mechanism. Informality makes it possible for the heads of states or governments to conduct more direct, flexible, and effective exchanges, and to reach a consensus more easily. With a smarter design the G20 will be able to achieve more effective international economic and financial governance in the future.

(2) The G20 should strengthen and improve institutional building. Institutionalization of the G20 includes the establishment of a secretariat to improve constraints and implementation, closer relations between the G7 and emerging countries, the establishment of a permanent think tank and a formal review mechanism within the G20, and increased dialogue and cooperation with parliaments, policy research institutions, non-governmental organizations (NGO), as well as non-g20 countries.

(3) A “global economic coordination system” should be established. This system will be structured as: a top-level long-term vision mechanism responsible for deciding how to implement the G20’s growth strategy; three agency networks, namely for coordinating the G20 and the United Nations agencies, for coordinating among the G20 members, and for coordinating the G20 with other international organizations; 10 cooperation platforms in various sectors, namely platforms of industrial policy coordination and cooperation for the G20 members in fields of finance and investment, labor and employment, commerce and trade, industry and innovation, agriculture, infrastructure, resources and environment, energy, development, and tourism.

(4) The agenda should be relatively fixed. The G20 should be clearly identified as an economic coordination platform and its primary mission should be economic development with the main agenda focused on financial regulation and stability, sustainable development as well as environmental protection, poverty reduction, anti-corruption, and other economic related issues. Particular attention should be paid when security and political issues become involved.

(5) The G20’s “legitimacy” issue has to be solved. Steps ought to be taken gradually to establish the G20’s relationship with the United Nations through legal instruments, and to turn international organizations such as the IMF, the World Bank, and WTO into executive agencies of the G20. Improving the G20’s governance structure within the framework of UN reform, as well as to establishing the G20’s legal status in global governance, would be ideal.

Main recommendations by overseas scholars

(1) The G20 is a forum for equal consultation and it should address long-term issues. Former Canadian Prime Minister Paul Martin, as one of the G20 founders, thinks that the G20 serves as a platform for the participation of both developed and developing countries who will step up coordinated cooperation in tackling global economic challenges. The G20

was not formed on the basis of “high-level nations.” Instead, the G20 takes into account the importance of the regional representation of each economy, which constitutes its core framework for the G20. It should become a governance mechanism with long-term effectiveness.

(2) Another goal should be to change the G20 summits from crisis response to crisis prevention. Professor Fred Bergsten, honorary director of the US Peterson Institute for International Economics, has pointed out that the G20 summits, since their establishment, have done a good job in responding to the global financial crisis and stabilizing the world economy. In the next stage, the G20 should shift from crisis response to crisis prevention. Although countries have made efforts in this direction in the last few years, the G20 is still far from attaining this goal.

(3) The G20 will become horizontal network-based rather than a vertical global governance mechanism. Canadian scholar Andrew Cooper believes that the G20 should become a consultative governmental network center and not be operated like a club of command and control. US scholar Joseph Nye has also pointed out that a network organization like the G20 should be operated for agenda-setting, consensus-building, policy coordination, knowledge exchanges, and rule-setting.

(4) The agenda set by the G20 should be more practical. Matthew Goodman, senior advisor from the Centre for Strategic and International Studies (CSIS) and former White House APEC Coordinator, pointed out that the G20, as a major forum for global economic and financial issues, is confronted with increasing challenges when making more significant progress since the urgency to tackle the global financial crisis has dissipated. To this end, the G20 is expected to shift its focus from large-scale action plans to specific topics, and move gradually to the objective of achieving strong, sustainable, and balanced growth. In the process of putting agenda into practice, pragmatic approaches will be taken with tangible results achieved in infrastructure, trade liberalization, financial regulation, etc.

(5) A new “G7+” group should be established within the G20. Professor Jim O’neill, senior research fellow from the Bruegel Institute of Belgium,

proposed the establishment of a “G7+” group within the G20 framework, composed mainly of the United States, the eurozone, China, Brazil, India, Russia, Japan, and the United Kingdom, with a function similar to the UN Security Council. The new “G7+” group will lead and make effective policy decisions at the top level, supported by a forum like the G20 which has widespread legitimacy to engage in discussions. O’neill went further to point out that, except in times of crisis, the G20, with so many members and a changeable agenda, is unable to make timely decisions and is unlikely to succeed in achieving set objectives. The world needs global governance which is not confined to immediate crises. Rather, the world needs a global governance mechanism with more representation and effectiveness. The “G7+” group proposal will improve the functions of the current global governance framework while maintaining its representation and legitimacy. The “G7+” group would have the same legitimacy as the G20 and, what is more, the group could take quick action in global economic affairs.

Perspectives to Tackle Problems in the G20 Transformation

The G20’s transformation will be a long process, during which the G20 will take on the responsibility of leading global governance and coordination while paying attention to transformation planning and operability. The G20 has to promote its own orderly reform and build up an authoritative, efficient, balanced, and sustainable global governance mechanism.

Strengthening institutional building

The G20’s institutional building serves as a critical step to transform the mechanism from an interim forum to a permanent international organization, so that it can avoid being marginalized in the post-crisis period and realize its sustainability. The institutional building will help the G20 switch its role from concerted stimulation to coordinated growth, from short-term emergency response to long-term governance, and from passive reaction to proactive planning. In order to coordinate members’

domestic policies, the G20 should establish the following four executive mechanisms. First, a permanent secretariat should be established as soon as possible to strengthen members’ coordination and enhance the G20’s capabilities in research and policy implementation. The secretariat could be set up in emerging countries with offices of representatives established in several countries. If no permanent secretariat is established, at least a smallsized secretariat should be founded with the staff from the “troika” countries to ensure convergence between the G20 mechanism and the presidency. Second, a “basket of common tools” should be established to provide policy option templates for the G20 members in their development. Third, a review mechanism for mutual evaluation of policy effectiveness should be established, for example the policy review mechanism for the mutual evaluation of growth effectiveness. Last, efforts should be made to explore the establishment of a reward and penalty system.

Improving the G20’s effectiveness

Equal participation and joint decision-making of both developed and developing countries has become the general trend in global governance. It is also a driving force in improving the G20’s efficiency. The G20 members should strengthen their coordination and cooperation in accordance with the principle of shared rights and duties and corresponding power and responsibility. In light of the situation that developed countries play a leading role in the G20, emerging countries and developing countries should be given continuously more representation. To break the deadlock in decisionmaking and improve efficiency, the G20 leaders’ summits should focus on commonalities rather than divergences among members. In order to avoid being merely a “talk-shop,” the major G20 members should come up with workable solutions through consultation and compromise. The G20 should strengthen the effectiveness of governance so as to improve its capability in global economic governance. The G20 could start with a review of its macroeconomic policy under the framework of economic growth, followed by gradual expansion to other areas.

Supporting official international organizations

The G20’s informal nature has never changed since its inception. It plays some role in the international system because it implements decisions through the Bretton Woods system. Compared with the G7, the G20 has not yet formally defined its relations and its interactions with international organizations such as the IMF. To enhance the implementation of decisions made at the G20 summits, reform of the G20’s informality should take the “G20+international organization” model; that is, the leaders’ summits play a key leadership role, while the World Bank, IMF, WTO, and other official international organizations work as implementation platforms. As a result, the G20’s flexibility and the international organizations’ feasibility could be integrated and agreements reached by the G20 leaders could be effectively implemented. Since the premise of this arrangement is that emerging economies have greater rights in the IMF and the World Bank, reforms to global financial institutions should be pushed forward continuously to improve the international monetary system and further promote the structural balance, institutional reliability and operational effectiveness of global economic governance.

In order to avoid being merely a “talk-shop,” the major G20 members should come up with workable solutions through consultation and compromise.

The G20’s agenda should evolve with the long-term governance situation

The G20 should have a clear focus and keep economic priorities while taking into account other concerns. While focusing on major financial and economic governance issues, prioritized issues should be specified rationally and short-term issues like crisis response and economic stimulation should be shifted to long-term topics like sustainable development, infrastructure building, and reforms to the global financial architecture. In the G20’s transformation, its agenda can be expanded in three steps. First, the

economic issues should be specialized, with priorities on employment, international trade, cross-border investment and other real economy sectors. Second, focus should be placed on improving the global financial regulatory system, reforming the Bretton Woods system, and realizing global currency diversification gradually. Third, issues to be discussed in the agenda should be diversified, and appropriate consideration should be given to the evolving global landscape and emerging problems. Climate change, food security, and other economy-related issues can be included in the G20 framework. However, topics should be simplified and workable instead of being too generalized. The agenda set up for each summit should ensure continuity, relevance, and sustainability, and this will make the G20 a true platform for policy coordination. In light of the trend of expanding topics, mutual evaluation at the ministerial level should be strengthened so as to reduce negative impacts caused by expanded topics on the effectiveness of the mechanism. At the same time, the G20 should set up its agenda in a balanced and rational way. Efforts should be made to correct the tendency that the agenda-setting is in favor of developed countries. The concerns, appeals, and interests of developing countries and emerging markets should be well accommodated. More developing countries should be encouraged to host the G20 summits so that they can have a bigger voice in the setting of the G20’s agenda.

China and the US should enhance coordination in the G20

The G20’s future development depends largely on whether China and the United States can increase political mutual trust in their joint efforts to build a long-term governance mechanism. China-us consultations on major issues serve as the driving force for the G20’s development. Although Washington has turned negative toward the G20’s transformation, the G20 has become a platform for global economic governance which is so recognized by all major economies meaning that the United States will not abandon it. The future US administration will continue to take advantage of the G20 to maintain its immediate interests as well as its long-term

strategic objectives. This will provide opportunities for the two countries to engage in coordination concerning the G20’s institution building. Promoting the G20’s transformation is conducive to enhancing the financial and economic stability of the United States and consolidating its dominance in the global multilateral system. It also helps create a favorable international environment for China’s own development. The US Congress in 2015 finally passed the IMF quota and governance reform program proposed by the G20. The IMF announced in October 2015 that the renminbi will be officially added to its Special Drawing Rights currency basket. It is an indication that both China and the United States can narrow their differences through consultation. It is also a reflection that China’s increased strength exerts an impact on the United States. Professor Jeffrey Frank from Harvard University believes that the US block on the IMF reform and its negation of China’s important role in international governance will push China to set up its own institutions. This is equivalent to the United States submissively handing over global economic leadership to China. Therefore, China should continue its efforts to approach and talk to the United States. China should elaborate that the G20’s transformation is in favor of the immediate and long-term interests of the United States from the perspective of economic and trade growth, prevention of financial risks, interdependence between the North and the South, in-depth integration of China-us interests, and concerted efforts to cope with global issues. China should also take into consideration the major concerns of the United States concerning the G20’s development, and strive to form and expand common ground with the United States on the G20’s institutional building.

The G20’s future development depends largely on whether China and the US can increase political mutual trust in building a long-term governance mechanism.

On Sept. 30, 2016, IMF'S Managing Director Christine Lagarde announced that RMB is added to the currency basket of the Special Drawing Right (SDR) effective Oct. 1.

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