Substantive power in multilateral governance is allocated according to the Golden Rule: ‘He who has the gold rules’. But after a few decades of miraculous economic growth rates, they now have the economic heft. China is now larger economically than Japan or Germany. Brazil is also one of the seven largest economies.

Beyond GDP, we have recently seen an historic role reversal. many developing countries, breaking historic patterns, took advantage of the global boom of 2003-2007 to achieve high national saving rates, particularly in the form of strong government budgets, while the advanced countries did not. As a result, the debt levels of the top 20 rich countries (debt/GDP ratios around 80 per cent) are now twice those of the top 20 emerging markets. A stronger fiscal position is why countries like China could afford large and sustained fiscal stimulus in response to the 2008-09 global recession. By contrast, the United States and the United Kingdom wasted the boom by running budget deficits, and by 2010 had come to feel completely constrained by their debts.

It is understandable if Korea views its hosting of the G20 as another opportunity for marking its arrival on the world stage (as when it hosted the 1988 Summer Olympics) or for consolidating its status as an industrialised economy (as when it joined the oEcd in December 1996). But it must make more of the opportunity than this. Korea should seize the chance to exercise substantive leadership. Otherwise, the risk is that its period as chair could appear like a replay of the chaotic Czech presidency of the EU in the first half of 2009, which confirmed the feelings of some in the larger European countries that it was a mistake to let smaller countries take their turns behind the wheel.

Korea can serve as a bridge between the G7 and the developing countries. But chairing a successful meeting will be a challenge, with respect to both meeting management and substantive issues. With regard to managing the meeting, the challenge comes from the size of the group. There is always a trade-off between legitimacy and workability. The G7 was small enough to be workable but too small to claim legitimacy. The United Nations is the other way around. The latest evidence of this was the conference of Parties of the UN Framework Convention on Climate Change in Copenhagen last December. The UNFCCC proved a totally ineffectual vehicle, in part because small countries repeatedly blocked progress. The G20 is still too big to be workable as a steering group.

A principle of multilateral talk-shops is that conversation is not possible with more than 10 in the room. With 20 delegations, each reads its prepared statement; there is no give and take and the communiqué is a watered- down least-common-denominator press release. Not only does the G20 have more than 10 delegations; it actually has more than 20.

The G20 needs a smaller informal steering group within the steering group, a G6 or G9 within the G20. it could meet in the evening before the main G20 meeting and discuss how to organise the discussion in the larger group. Who would be in the G6 or G9? It would be unwise to be too specific at this point. nevertheless, the US, Japan, and Europe must be there on the rich-country side; China, India, and Brazil must be there on the developing-country side. The pressure to expand is always irresistible. Europe could be represented by both the UK and Euroland. In Seoul, Korea has to be there as the host. Who would be the 9th country in the G9? It should be the country of which the person reading this column is a citizen.

What about the substance of the meetings? The group will discuss whatever the bigger countries consider it most useful to discuss at the time. five possible topics include:

• More reform of multilateral governance, particularly the International Monetary Fund executive board;

• Financial regulatory reform, such as coordination  of any small taxes or penalties that members want to apply to risk-taking banks;

• Global current account imbalances (perhaps there could be a statement agreeing that exchange rates and budget deficits both bear some responsibility, and that the burden of adjustment should be born by neither one alone, but rather by both);

• Macroeconomic exit strategies (the group could articulate the proposition that concrete steps toward long-term fiscal consolidation in each withdrawal of fiscal stimulus. An example would be to reform public pensions by increasing the future retirement  age);

• A new agreement on climate change to take effect after 2012. Korea is in a good position to lead here, as it is essentially the first post-Kyoto-Protocol country to accept emission targets.

By the way, don’t judge the outcome of the meeting by what appears in the media. Press reviews will pronounce the meeting a let-down. They always do. but occasionally such meetings are important, in ways that are usually not clear until later.

Consider the London G20 meeting of April 2009. It was not obvious at the time that it had been a success in terms of substantive policies. Observers even compared it to the infamous failed London Economic Summit of 1933, a way of saying that the world had not learned the lessons of the Great depression. But the 2009 meeting appears far better in hindsight. Fiscal stimulus turned out to be more widespread in 2009 than one might have guessed. Similarly, global monetary policy was easy, avoiding another big mistake of the 1930s. The G20 unexpectedly agreed to triple IMF resources. Even the trade policy outcome, despite fears of protectionism, was not bad by the standards of past recessions, let alone in comparison to the Smoot-Hawley Tariff Act of 1930. overall, policymakers’ immediate response to the global recession in 2009 did not repeat the mistakes of the early 1930s.

Currently, however, the advanced countries are in danger of repeating the mistake that US President Franklin Roosevelt made in 1937, when he cut spending prematurely and sent the US economy back into recession. Perhaps the G20 will be a venue in which the emerging market countries can remind the US and the UK of the lesson they once knew but have now forgotten— what it means to run a countercyclical fiscal policy.

Jeffrey Frankel is the Harpel Professor of Capital Formation and Growth at Harvard University’s Kennedy School of Government and is the Director of Program in International Finance and Macroeconomics at the National Bureau of Economic Research.

 

This is an article from the most recent edition of the East Asia Forum Quarterly: ‘Asia and the G20’.