The efforts of the G20 in tackling the 2008–2009 global crisis reinforced the efficacy of this initiative.
The question now is whether the G20 can become an effective coordinating mechanism for maintaining stable conditions in the global economy. If successful, it could promote sustainable and equitable growth for improving living standards while holding inflation under control and generating gainful employment opportunities. The other objectives for the G20 would be reducing global imbalances, keeping markets open for trade and reforming the international financial system. There seems to be a broad consensus on this agenda but anxieties persist over whether the G20 possesses the tools, leadership, culture and authority required to resolve conflict and enforce its decisions. In order to proceed, the G20 will have to confront several challenges.
The first challenge is to demonstrate that the G20 is not an attempt by G7 countries to perpetuate their ascendency by co-opting other countries that have developed economic muscle and thus become critical for the wellbeing of the advanced countries. The G20 must make it clear that it grants equal status to all members and is not simply the G7 plus 13.
Secondly, the G20 will have to address the disjunction that exists between the key international institutions through which it implements its decisions, and those institutions’ structure and mandate. For example, the International Monetary and Financial Committee (IMFC) is the policy-setting body for the International Monetary Fund (IMF) and has a system of representation drawing on all its 180 members. But what happens if a decision taken by the G20 is perceived to be against the interests of some of the 160 members represented at the IMFC but not the G20?
Thirdly, there are serious doubts about the quality of the present leadership of the G20 which will need to be ameliorated. The political divisiveness in the US and the tension between the Northern European countries led by Germany and peripheral countries within the EU have made it difficult for either President Obama or Chancellor Merkel to assert any moral authority in the leadership role. Unfortunately, Japan has gone through too many prime ministers in the last few years and the developing countries are too new to the game to take on leadership. This leaves few alternatives.
Fourthly, the culture of the G7 is derived primarily from the Western values of direct, decisive and result-oriented action while the Asian countries believe in slow, painstaking, patient dialogue and consensus building. This legacy, inherited from the G7, makes it difficult for newcomers like Indonesia and Saudi Arabia to feel comfortable. It remains to be seen whether the G20 will be able to reach agreements on time and with broad-based support.
Finally, the G20 will have to find a way to legitimise its authority for conflict resolution and decision enforcement. The UN, World Trade Organization and Bretton Woods institutions have negotiated and established agreements, protocols, practices and rules for cooperative mutual governance, resulting in a collective acceptance of each other’s decisions. But unlike these institutions, the G20 is merely an informal talk shop where participants can articulate their viewpoints. Suppose China does not think it should appreciate its currency the way the US wants it to, or the US does not think it should discontinue quantitative easing because developing countries are facing undesirable capital inflows. It is hard to see how these differences will be reconciled in the G20 when the IMF is unable to do so, despite the authority it enjoys.
These challenges will hopefully be taken on in future deliberations of the group to try to find solutions. Asia, as an emerging power of the global economy, will have to play a more active role within the G20.
China has already overtaken Japan as the second largest economy in the world and is likely to take over the top spot by 2020. India is moving rapidly up the ladder and will soon become the third largest economy globally. The IMF estimates that emerging Asia will be the main propellant of world economic growth in the coming decades. Europe, the US and Japan face a serious risk of double‑dip recession. By contrast, the public finances of Asian countries are in good shape, debt ratios are low, banking systems are healthier, corporate balance sheets are less stressed, and huge foreign exchange reserves act as an insurance against unexpected shocks. Wages and incomes are rising and unemployment rates are nowhere alarming. Regional trade is at an all-time high and the dependence on the US and EU for exports has declined. China ships only 35 per cent of its exports to the US and EU.
These strengths of the Asian economies clearly show why they should be in the driver’s seat, or at least the co-pilot’s seat, of the G20. The existing arrangements of ASEAN+6 and the South Asian Association for Regional Cooperation (SAARC) should be used to consult other member countries in the region and add their voices to the G20, using the existing six Asian member countries as a conduit.
Ishrat Husain is the dean and director of the Institute of Business Administration, Karachi, and served as a Governor of Pakistan’s central bank from 1999 to 2005.
This article was first published in the most recent edition of the East Asia Forum Quarterly, ‘Asia’s global impact’.