A new G20 strategy for development cooperation

Author: Andrew Elek, ANU

In late 2008 the policy failures of Western economies created a global problem which they could not fix by themselves.

Heads of the G20 leading economies posing for a family photo at the convention center in Los Cabos, Mexico on 18 June 2012. (Photo. AAP)

The G7 was forced to bring other emerging economies to the table to help deal with the global financial crisis. The new grouping — the G20 — was able to agree quickly on policies that limited the potential damage of the crisis.

Encouraged by initial success, in 2009 the G20 declared itself the new steering group for the global economy. That may have been premature. The recovery from the global financial crisis has been weak, and the unresolved crisis of the euro zone and fiscal gridlock in the United States could yet lead to a new crisis.

The G20’s credibility and legitimacy will not be established until there is a confident, robust recovery. The G20 needs to give much more attention to injecting more effective demand into a global economy still performing well below its potential. The recent decision to work alongside APEC to steer more of the world’s savings towards investment in productive economic infrastructure is a step in the right direction.

This needs to be followed up by catalysing investment in some significant infrastructure projects to demonstrate how a coordinated multilateral initiative can provide a productive and sustainable source of new global demand. The G20 also needs to demonstrate how it intends to make a meaningful contribution to the development prospects of those not at the table, especially low-income countries.

When G20 leaders turned their attention to development cooperation in 2010, they adopted guiding principles for cooperation to deal with systemic issues. The current development agenda, designed by the G20 Development Working Group (DWG), is not consistent with these principles. They have accepted, without questioning, that development cooperation is simply more ‘foreign aid’.

That is a strategic mistake. By far the most important contribution the G20 can make to the prospects of low income countries is to deal with the large systemic problems facing the world economy. The scarce time of leaders needs to be concentrated on three goals: restoring the confidence needed for recovery from the global financial crisis, scaling up currently inadequate commitments to contain global warming, and restoring respect for the WTO.

The most effective way for G20 governments to deal with these problems starts with acknowledging that some of their own policies are creating these systemic global problems. Only then can they encourage each other to act.

Modest, marginal improvements in the quantity or quality of aid to low-income countries will not buy legitimacy for the 20 governments who selected themselves to be the steering committee for the world economy. Managing a new, small aid program is no substitute for dealing with serious systemic problems.

That said, G20 leaders can help to steer the work of many existing development assistance agencies.  The DWG has brought together all international organisations working on issues such as social protection and food security.  That has helped avoid needless duplication among agencies and attracted attention to some important areas. For examples, until now, no agency had the incentive to provide adequate funding for crucial international agricultural research.  Consultations in the DWG have also generated some good new ideas and initiatives.  The G20’s good work on infrastructure, for example, will lead to new investments and a valuable new Agricultural Market Information System will help anticipate future supply and price shocks.

But many other approved activities are not of such a high quality. Very few of them can be expected to meet the hopes expressed in the G20’s guiding principles for development cooperation, and most do not address systemic issues relevant to low-income countries such as restrictions on exports and imports of food products. Very few are designed to lead to measurable outcomes that will make a significant positive impact on the lives of ordinary people.

It is not clear why the DWG should be managing aid programs, even high-quality ones. The G20 should not become a fundraising or implementing agency. Responsibility for all except a few of the many small projects currently on the G20 development agenda can be handed back to existing development agencies. The DWG can then be given a new mandate more consistent with the agreed principles for development cooperation.

A new, tighter G20 development agenda should not try to deal with all sectors. Instead, the DWG should consult with low-income countries and development assistance agencies to identify a much smaller set of activities that will really improve people’s lives. These activities, to be managed by existing agencies, should be substantial and innovative projects which help low income countries strengthen the skills and institutions in just a few strategic areas, closely linked to the G20’s core priorities.

Andrew Elek is Research Associate at the Crawford School of Public Policy, Australian National University. He was the inaugural Chair of APEC Senior Officials in 1989.

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  • Andrew made, quite correctly, the following sttement: “The G20’s credibility and legitimacy will not be established until there is a confident, robust recovery. The G20 needs to give much more attention to injecting more effective demand into a global economy still performing well below its potential.”
    While it is not the case that major economies within the G20 have not been injecting demand into the economies as in the case of QE in the US, similar monetary measures in the EU and the depreciation in Japan and the large fiscal expansions in the wake of the GFC show, some of the measures have not been effective as expected.
    Why haven’t those very strong and even unconventional monetary measures been effective?
    While there may be a number of reasons for that ineffectiveness, the essential effects of those monetary measures are to depreciate own currency and in an environment where every major economy is doing the same, the effects of depreciation offset each other and led to virtually no or little effects, that is the attempts to increase relative competitiveness yield little effect.
    Further, in an environment of liquidity trap monetary expansion does not have effects on expanding domestic demand either.
    Those two points are likely to summarise what the major international monetary policies in the past few years.
    The lesson from that would be not to rely on depreciation and wish/hope that other economies increase demand to solve their own economic weaknesses; instead, every major economy needs to find way to increase its own demand as well as to cooperate/coordinate in such processes.
    If that provides some useful insight, it may suggest that a really fixed exchange rate may provide a better mechanism to force countries to work hard on its own rather than to rely on others by depreciating their own currencies through monetary policies.