The world’s rapidly changing geopolitical, economic and social landscape demands that this year’s G20 Summit be different from previous years.

The last 12 months have witnessed the Japanese triple disaster, the Middle Eastern and North African ‘Arab Spring’, nuclear-powered North Korea’s leadership succession to a 27-year-old, Western condemnation of the Iranian nuclear power program, and the shift of US military strategy to the Asia Pacific. Popular movements saw national leaders from Europe (including Italy, Greece, Portugal, Ireland and Spain) to the Middle East and North Africa (Libya, Tunisia and Egypt) toppled from power. Tensions rose between old-power G7 nations and rising-power BRICS countries over currency and trade, the South China Sea, bans on Iranian oil, and most recently, the Syrian regime. Many countries resorted to rising protectionism through tit-for-tat strategies, while the WTO Doha Round has remained stalled. Competition in the food and energy sectors has become increasingly intense. And the US presidential election and the leadership change in China later this year could further add to global uncertainty. All this while prolonged economic turbulence emanating from the euro zone threatens to devastate global economic growth.

With so little space to move and so little time to spare, what can this year’s G20 do differently?

Broadly speaking, the agenda must be continuous, implementable and focused if it is to deliver concrete outcomes. Previous commitments by G20 leaders, while promoting win–win strategies for the international community, have lacked focus and practical implementation plans.

With so much global social unrest and economic turmoil threatening political and social stability, social safety net programs should be prioritised. In particular, the Social Protection Floor, endorsed by G20 leaders last year, must be made central to the coming G20 Summit. The plan must act to attenuate the adverse impacts of the global recession and to maintain social cohesion. Meanwhile, the Multi-Year Action Plan on Development (2010) and recommendations from the G20 Employment Task Force must also be consistently enforced.

Judging by the Finance Ministers’ and Central Bank Governors’ Deputies Meeting in January, there are four key issues that may help shape the G20 Summit’s agenda: IMF quota and voting reforms, financial-sector reforms, commodity and derivatives markets, and disaster-recovery management.

First, the IMF quota and voting reforms will see emerging-market and under-represented countries receive higher shares. With the emerging countries’ share of the global economy rising, IMF quota and voting changes will better represent the new global economic landscape. The IMF’s plan to expand its war chest and increase its firepower is an opportunity for emerging markets to play a contributive role in this new landscape.

Second, although emerging countries have ostensibly committed to financial regulatory reform, including Basel III, scepticism continues to exist. But it is essential that the G20’s developing-economy members overcome this to adopt a strong position on financial regulatory reform, moving beyond the excuse that such measures are for more-developed economies only. There are clearly flaws in the current financial system, and developing economies should not be passive, but active, reformers.

Ways to better connect financial and real sectors must also be discussed. If left unaddressed, such a disconnect may increase scepticism over market capitalism, globalisation, financial greed and inequality — which could ultimately trigger more social unrest.

Third, the co-chairing of a commodity- and derivatives-market working group by Indonesia and the UK is a positive step. Indonesia is an emerging economy with an under-developed derivatives market and volatile commodity prices, partly due to derivatives trading on commodities. By pushing for regulated commodity and derivatives markets, Indonesia would be a counterbalance to the UK. This is the sort of ‘balancing’ agenda needed at the G20 level — one that strikes a compromise between developed and developing economies.

Fourth, disaster-recovery management will benefit many G20 members, including Japan, Indonesia, Australia and the US — all located in disaster-prone areas. Here there is room for alignment with regional initiatives. APEC, which includes nine G20 members, has initiated the APEC High-Level Policy Dialogue on Disaster Resiliency (2011) and the APEC Trade Recovery Programme. The East Asia Summit, encompassing seven G20 members, has also initiated the Practical Approach to Enhance Regional Cooperation on Disaster Rapid Response (2011). This includes efforts to improve efficiency for visa applications, customs, quarantine issues and bureaucratic impediments to disaster-relief efforts, including NGO assistance. The G20 may also contribute to the financial aspects of disaster-recovery management.

With only seven months of preparation time since meeting in Cannes, the G20 Summit in June must ensure the continuity of its agenda, but also recognise the current economic recession. Social protection plans to prevent more political and social instability, and genuine progress toward financial regulatory reform are priorities that should be addressed at the coming summit. Meanwhile, emerging countries should become more active, rather than passive, reformers.

Maria Monica Wihardja is a researcher at the Centre for Strategic and International Studies, Jakarta, and a lecturer at the Department of Economics, University of Indonesia. She is currently on leave to work as a consultant at Bank Indonesia.

1. Will Asia step up to the global challenges of 2012?
2. 2011 East Asia Summit: New members, challenges and opportunities
3. Kim Jong-un’s regime: facing up to domestic challenges, China and the US

The World Bank recently published a valuable research paper (World Bank Policy Research Working Paper 5940 by Justin Yifu Lin and Doerte Doemeland) which presents the evidence needed to justify a globally coordinated initiative in carefully selected infrastructure investment.

A G20 initiative in 2012 could make this happen. G20 leaders have the opportunity to launch a concerted effort to remove the policy and market failures causing serious infrastructure bottlenecks to growth, especially in developing economies. The prospect of a new sustainable source of effective demand could counter the current drift toward a ‘lost decade’ — an extended period of high unemployment, high risks and low returns on investment leading to continued weak growth,high unemployment and debt.

There is no prospect of repeating the coordinated 2009 Keynesian stimulus of increased government spending. Some countries have run out of fiscal space, while others have opted for needless short-term austerity. Consequently, the World Bank paper advocates a new form of fiscal stimulus that is not simply a boost to public consumption, but an investment in future productivity.This form of stimulus would catalyse parallel private investment and serve as a globally coordinated investment initiative, rather than an attempt to stimulate individual economies.

Such a global Keynesian initiative would remove constraints to growth in developing economies, and create new demand in developed economies suffering from high unemployment and excess capacity. Investment in infrastructure can thus generate a virtuous cycle of higher demand, productivity and growth that isconsistent with long-term deleveraging.

The proposal, based on extensive research, argues for the need to find a way out of the current situation, when monetary stimulus is proving inadequate, and when structural adjustment can only be expected to gain traction when demand is revived. Governments need to support demand and employment without adding further to debt levels in the medium run. Providing capital for potentially self-financing infrastructure investment to remove logistic and other constraints to growth would be the best way of doing this.

The report also cites evidence that such a stimulus does not risk crowding out private spending, but can be expected to contribute significantly to employment and growth. The authors demonstrate the potential for profitable infrastructure investment in all economies, while noting that the highest needs and potential returns are in developing economies.

By learning from experience, including the disappointing experience of Japan in the 1990s, it is possible to select the right kind of investment in infrastructure. The paper draws attention to initiatives that support good project selection and design, such as the Infrastructure Action Plan — drawn up in 2011 as part of the G20’s contribution to the development of low-income countries — and the Infrastructure Finance Center of Excellence, which aims at leveraging Singapore’s expertise in urban development and financing.

The G20’s ongoing effort to improve infrastructure in low-income economies should be extended to all economies. Recent estimates of annual requirements for investment and available financing for infrastructure identify a financing gap in the range of US$400 billion to US$650 billion per year. Narrowing this gap would have a significant global macroeconomic effect. The paper discusses numerous options for mobilising additional finance, ranging from domestic revenue raising to local and international bond issuance, and public-private partnerships. These are just some of the ways to steer more of the available global savings toward productivity-boosting infrastructure.

The potential contribution of infrastructure investment to promoting global economic recovery has been discussed for a while. And at a time of deficient global demand, the huge savings of emerging economies — most of which are generated in Asia — are intermediated chiefly in the financial markets of New York and London. Rather than financing productive infrastructure, much of the world’s savings are financing the deficits of already heavily indebted developed economies. The time has come to deal with this massive global financial market failure. Asian members of the G20 have put the infrastructure opportunity on the G20’s growth agenda. This well-researched World Bank paper should ensure it rises to the top of that agenda.

It will take time and creative thinking to meet the financing needs for infrastructure.  A High-Level Panel on Infrastructure appointed by G20 leaders delivered a useful report at the 2011 Cannes Summit. That report contains recommendations for improving the institutional and enabling environment for investment in infrastructure, and ideas for financing infrastructure projects with significant but delayed returns to investors and how to manage project risks.  But the Panel focused only on much-needed infrastructure in the world’s most difficult investment environments, especially sub-Saharan Africa.

The issues of institutional capacity, innovative financing and risk management need attention everywhere and need to be addressed if investment in infrastructure is to provide a globally significant boost to effective demand.  G20 leaders should now challenge their officials, financial-sector managers, and international financial institutions to find ways to intermediate savings to finance more investment in infrastructure.  These ideas can be directed to financing both public and private investment in commercially-viable investment in infrastructure wherever it is needed.  A high-level conference of the world’s leading experts on these issues, which might be organised by the World Bank could be a useful first step in that direction.

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

1. How can Asia help fix the global economy?
2. Global imbalances and the paradox of thrift
3. APEC’s new ‘financial inclusion’ initiative

How does a Cold War organisation like the OECD respond to the end of the Cold War? Does it try to hang on to its former identity? Or does it embrace the new ‘age of globalisation’?

The end of the Cold War in 1989 represented a victory of values and ideology — the triumph of pluralistic democracy, respect for human rights and the market economy — for the OECD and its member countries. At the time, Asian economies were also emerging rapidly, based on a complex cocktail of export promotion, strong state intervention and non-democratic politics.

Before the fall of the Berlin Wall, a number of these Asian economies were ‘economically qualified’ for OECD membership in terms of GDP per capita. But politically, there was never any suggestion that they might join.

Politics has always trumped economics at the OECD, even though economics is its core business. In the 1990s, for example, four central European countries were rushed in as members (following Mexico’s 1994 membership), while they were still fledgling market economies and democracies. They were the lost sheep of the North Atlantic community, having been occupied by the Soviets, and Western Europe and the US strongly supported their membership ambitions.

But Korea’s membership was very much a different case in point. It was economically better qualified, with a GDP per capita more than 60 per cent higher than the other five new members. It was perhaps even more qualified politically. Nevertheless, it is widely recognised that the OECD went soft on Mexico and the central European countries during the membership process, and went much tougher on Korea.

By 2007 when it came to inviting other countries to join the OECD, none of the most interesting possible members — Brazil, China, India, Indonesia and South Africa — had expressed interest in joining. They were offered and accepted a program of ‘Enhanced Engagement’, which was designed to prepare them for possible future membership.

Today the OECD finds itself with 34 members, with some 24 from Europe and only two from Asia. In contrast, the WTO’s list of the world’s 34 leading exporters includes 10 Asian economies. Many of these Asian countries are also internationally significant in areas such as investment, finance and carbon emissions — and school students from Shanghai now outperform all OECD countries in the organisation’s Programme for International Student Assessment, which measures literacy, numeracy and scientific ability. But while the Enhanced Engagement countries participate in a wide array of OECD activities, none of them are interested in membership. A very senior OECD official once described this program as a ‘one-way love affair’.

So the OECD, which has sometimes called itself a ‘hub of globalisation’, seems destined to have a membership which accounts for an ever-declining share of the world economy. It stands at a crossroads, bypassed by Asian-led globalisation at a time when the G20 has more member countries from Asia than Europe.

What are the main problems and solutions?

Even though it is essentially an economic organisation, the OECD has retained a strong North Atlantic political identity. This is partly because it is governed by foreign ministries and also because of the US’ dominant role. And as the recent UN vote on Libya showed, there are still vast political gulfs between the Enhanced Engagement and OECD countries.

New members are also forced to accept and align their policies with a now vast array of instruments and conditions they had no role in creating. From an OECD point of view, this means becoming a ‘responsible stakeholder’. From an emerging country point of view, it means being a ‘rule-taker’, that is, swallowing an OECD agenda now increasingly questioned in light of recent financial crises.  The OECD also has too many European members.  Something must be done about this ‘eurocentricity’, such as establishing constituencies, to improve the organisation’s effectiveness.

Overall, the OECD must adapt much more radically to the changed world and offer a more flexible and pragmatic approach to the application of its values and instruments through its membership. It must then launch a major campaign to recruit the Enhanced Engagement countries as members. The OECD Secretariat and its membership have not yet managed to convince emerging Asian economies of the organisation’s manifest benefits. But the OECD is still in many ways the best idea in town, with its excellent analysis and opportunities for policy dialogue. And emerging Asia has much to learn from the OECD experience in many areas, like developing social safety nets, economic upgrading, dealing with ageing populations, and public-sector reform.

As well as revitalising the OECD, this strategy could contribute to improving relations between the two major blocs which divide the world today — the OECD countries and the Enhanced Engagement countries.

John West is Editor-in-Chief at MrGlobalization.  This article is based on his paper ‘The OECD and Asia: Worlds Apart in Today’s Globalization’, published in Revista de Economia Mundial No. 28 (2011), 67–92.

1. OECD policy brief on emerging economic giants
2. Engaging Central Asia: the EU-Shanghai Cooperation Organisation (SCO) axis
3. The South Asia Cold War ‘quadrilateral’ redux?

Russia’s bid to join the WTO was approved on 16 December at long last. This event marked the end of some of the longest negotiations in WTO history, with Russia making its initial decision to join the General Agreement on Tariffs and Trade — the precursor to the WTO — in 1993.

But despite the decision to join, domestic debate about the appropriateness of Russia’s membership continues unabated.

On the one hand, sceptics about Russia’s involvement believe the decline in tariff protection will considerably worsen the plight of many Russian industries and be particularly detrimental to Russia’s light industry and agriculture.

Russia’s forestry and car industries are likely to be especially impacted. As WTO membership requires maximum duties on unprocessed timber to be reduced from the current 25 per cent to 15 per cent, the forestry industry will find it increasingly hard to compete. Products such as paper, for example, will be cheaper to import than to produce until the industry becomes more efficient. And from 2012, Russia’s car industry will no longer be able to depend on state subsidies or the protection it receives from duties imposed on imported cars. Similarly, foreign investors will have less incentive to relocate production facilities to Russia in exchange for customs exemptions.

The WTO’s emphasis on trade liberalisation will have a large impact on Russia’s insurance and banking industries as well. In four years, foreign insurance companies will be allowed to sell compulsory insurance and life insurance products to the Russian public, and in nine years these companies will be allowed to establish branches in Russia. This will help diminish the monopoly that Russia’s banks and insurance companies currently enjoy.

In addition to the sceptics, there are also optimists who believe that joining the WTO will benefit Russian consumers. Prices of industrial consumer goods, such as electronics and furniture, will drop and pharmaceutical drug prices are estimated to decrease by 5-10 per cent. Russian consumers can also look forward to cheaper mobile phone services as foreign telecommunication companies enter the Russian market from 2015. At the same time, joining the WTO will boost key segments of Russia’s economy as foreign markets are opened to Russian products like grain, transport, tourism, construction and engineering

The impact of Russia’s accession to the WTO will be softened by a phased approach to trade liberalisation. In particular, the average import duty in Russia will fall from 10.3 to 7.1 per cent, including for agricultural products — from 15.6 to 11.2 per cent, and industrial — from 9.4 to 6.4 per cent. The Government will continue to regulate domestic prices for gas Russia has three years to reduce tariffs by a quarter, but longer periods are allowed for specific goods. Also, if tariff reductions result in substantial losses for a particular industry, the WTO rules allow the use of special protective measures to limit such imports for a period of between five and seven years.

 It should also be emphasised that Russia’s membership greatly benefits the WTO. Although Russia accounts for just over 2 per cent of world trade, it is the sixth-largest economy in terms of GDP, and foreign trade turnover in Russia increased seven-fold in nominal dollar terms between 1999 and 2011.

Overall, WTO membership should encourage Russian companies to produce more competitive products, and the growth in international trade will create thousands of new jobs. But how quickly and effectively Russia will implement reforms in accordance with the WTO’s required standards is unknown. This is because the WTO rules are vastly different to the ‘manual’ methods of economic management currently used in Russia. Still, it is clear that WTO membership will foster institutional change, helping Russia contribute more directly to the development of rules in the global markets. In turn, this will spur Russia’s integration with Belarus, Kazakhstan and Kyrgyzstan through the Eurasian Customs Union and Common Economic Space. This should also accelerate Kazakhstan and Belarus’ accession to the WTO.

The benefits of Russia’s WTO membership will only become fully apparent in the long run. In the short to medium term, it is likely that Russia’s entry into the WTO will disappoint some sectors of Russian society, as its effects are slow to take off. But, until recently, Russia was the only country in the G20 that was not a WTO member and such a step is necessary if Russia wants to maintain a strong position in the global economy. And without active participation in international trade, it will be impossible for Russia to achieve the radical modernisation it so desperately needs.

Boris Kheyfets is Professor, Chief Research Fellow at the Institute of Economics, Russian Academy of Sciences.

1. Russia in the Asia Pacific: a bleak outlook
2. Russia’s accession to the WTO
3. Russia-North Korea trade

Asian regional integration initiatives are rich in plans for trade liberalisation and investment cooperation agreements, but they  have rarely been contextualised in terms of development goals like creating employment and reducing poverty.

This is possibly due to a lack of proper understanding of the ways in which regional trade and investment integration could promote development outcomes. It is particularly important to understand these issues in poverty-stricken areas like those of South Asia. If development outcomes are to be achieved, the link between regional integration and employment must be emphasised.

Strengthening trade and investment links will promote higher levels of regional trade. Increased regional trade will, in turn, improve the export industries of countries, promote trade-creating joint ventures, and, subsequently, generate employment. Improvements in market access, promotion of trade joint ventures, decreasing transaction costs through trade facilitation, and improvements in the development and flow of knowledge and technology produce increases in trade and regional integration. In turn, these promote developments in export industry, and increases in investment — domestic investment caused by expanding export industries and FDI from regional and extra-regional sources — also generate employment.  All of these steps improve the ability of export industries to grow, and, importantly, to specialise across a region — increasing the possibilities to take advantage of potential economies of scale.

Increased market access results from reductions in trade barriers (in a static scenario), from the incumbent scale expansion effect (in a dynamic scenario), and from the trade augmentation effect that comes from increased investment based on the perception of reduced trade barriers. Removal of trade barriers will also produce employment generation effects. A reduction in tariffs means greater market access to member countries, which produces two results. First, export growth. Second, enhanced market access will produce economies of scale as the production process becomes specialised across countries. These economies of scale will involve cost reduction and increase the competitiveness of the product overall. The effects of short-term trade diversion, if any, will be outweighed in the long run by this increased competitiveness, and the export growth and employment generation this will produce over time.

Technology and knowledge increases improve supply-side efficiency and product competitiveness. Rules of origin, less obviously, can also increase the developmental effects of trade. Appropriate rules of origin usually involve subjecting a product to serious transformation, a process that involves value-adding and, subsequently, employment generation, at a local level. Improved supply-side efficiency and product competitiveness increase the capacity of an export industry, while rules of origin can have the effect of promoting regional specialisation.

Cross-country investment flows will also strengthen trade-investment linkages. If investment policy in this context focuses on specialisation across the region, and vertical integration in specific member nations, further gains in terms of higher trade and investment flows may promote increased employment generation. This may essentially mean distributing different stages of production in a particular industry regionally.

The linkage between trade openness and employment can be examined through the effects on labour productivity. For labour productivity increases to translate into increased demands for labour depends on the possibilities for expansion of economies of scale. In the absence of scale expansion, labour productivity gains could result in a lower demand for labour per unit of output production, precisely since labour has become more productive. Thus, scale expansion becomes a crucial variable in generating positive employment effects. This means greater regional integration initiatives that ensure greater market access and subsequent opportunities for scale increases are essential. Foreign direct investment distributed according to specialised regional production networks are therefore essential for improving employment, increasing incomes and achieving development outcomes.

Ram Upendra Das is a Senior Fellow at the Research and Information System for Developing Countries, New Delhi. 

This article was first published in the most recent edition of the East Asia Forum Quarterly, ‘Asia’s global impact’.

1. Asian economic integration? Address domestic inequalities
2. Asian economic integration and cooperation- Challenges and way forward
3. India, China and Asian economic integration

The founding institution within the World Bank Group is the International Bank for Reconstruction and Development (IBRD).

The only part of the institution that was established by the 1944 Bretton Woods conference, the IBRD is the World Bank’s bank. Importantly, the IBRD is not an aid agency. It borrows on global capital markets — cheaply because of its triple-A credit rating — and passes on the funds, at these cheap but commercial rates, to its member developing countries. The International Development Agency (IDA) is the World Bank’s aid arm: it was created later, in 1960, and gets its funds from rich country tax-payers rather than the capital market.

The IBRD started small, but expanded rapidly in the seventies under President McNamara. There was another surge in the eighties as the Bank started to provide budget support or adjustment lending. But total commitments reached US$15 billion in the mid-eighties, and then stopped growing. The average for 2006-08 was about $13.5 billion.

Stagnant lending in nominal terms meant declining lending in real terms. In the context of a globalising world — with massive increases in everything from remittances to international capital flows and from exports to the size of developing country economies — it meant a less relevant and influential World Bank.

This in turn led to the widespread conclusion that the future of the World Bank was not as a bank. The World Bank, it was argued, needed to expand its role as an aid agency, a global problem-solver, or a multilateral think-tank (a knowledge bank), or some combination of all three.

But not as a bank. The World Bank’s banking role was seen as a legacy from the past rather than a priority for the future. In 2007, leading US development commentators Nancy Birdsall and Arvind Subramanian argued that the World Bank should become ‘a more reluctant lender to governments’. Jessica Einhorn, writing in Foreign Policy in 2006, went further, proposing that the IBRD should be shut down.

In the last few years, however, the World Bank has become not more but less reluctant to lend. Total IBRD lending catapulted from US$13.5 billion in 2007-08 to US$33 billion in 2008-09 and US$44 billion in 2009-10, before falling to US$27 billion in 2010-11.

Of course the World Bank always lends more in a crisis, as do all of the international financial institutions. Lending from the IMF and the Asian Development Bank, for example, is also up sharply. But the rapid expansion this time round can hardly be satisfactorily explained solely in terms of the global financial crisis. A comparison with the Asian financial crisis of the late nineties is telling. Then IBRD lending also went up but only from that historic average of US$15 billion to about US$22 billion for a couple of years before falling back to average levels. More tellingly, this comparatively small and temporary increase was all in quick disbursing budget support. Project lending, the IBRD’s traditional fare, in fact continued to decline throughout the Asian financial crisis, falling in 1999 to about US$7 billion — the lowest since the mid-seventies.

This time around is very different. Not only is the total increase much bigger (a tripling rather than a 50 per cent increase), but project lending has also gone up dramatically, from US$9 billion in 2007-08 to US$24 billion in 2009-10 and US$17 billion in 2010-11. This suggests a deeper role for the IBRD than simply the provision of liquidity.

What is going on? One obvious explanation is that the IBRD can lend more. It has recently benefited from a general capital increase, the first in over 20 years. The more capital reserves the IBRD has from its members, the more it can borrow and lend.  The developed countries have also encouraged the IBRD to lend as part of a global stimulus strategy.

And developing countries, this time round, are in a better position to borrow. Finding it more difficult to raise private capital, they have turned to the IBRD both for short-term cash and longer-term projects.

Another explanation are the reforms put in place by the World Bank to make it a more attractive source of funds. In the last few years, it has embarked on an effort to reduce transaction costs, as well as margins to borrowers. The World Bank has also shifted power in its governance structure from developed to developing countries.

Perhaps the ideological pendulum has also swung. In the 1990s, public-sector lending for infrastructure was seen as passé, and something which should be the domain of the private sector. No longer.

Another deep change is the adoption by the G20 of the IMF and World Bank. The G20 does not have its own secretariat, and the IMF and the World Bank end up doing a lot of the background work for it. A significant part of the G20’s deliberations are also addressed to multilateral issues. For example, the G20 has driven the recent governance reforms at the World Bank, and also the capital increase.

It is quite remarkable that these two institutions of the old world order, the World Bank and the IMF, the so-called Bretton Woods twins, should now be adopted by the emblematic institution of the new world order, the G20. This must give them a new energy, and a new legitimacy.

It remains to be seen if the recent increase in lending will be sustained. There are also risks. The big scale-up of lending under McNamara came at the cost of quality. But there is also a strong argument that a diminishing role as a borrowing and lending institution was making the World Bank much less relevant to its clients.  Yes, the World Bank has a number of other important functions, from aid agency to think tank, but so do the UN agencies. It is arguably its ability to combine its intellectual firepower with a lending role that gives the World Bank its unique character. From this perspective, the recent revival of the IBRD, the World Bank’s bank, is to be welcomed.

Stephen Howes is Director at the Development Policy Centre, Crawford School of Economics and Government, the Australian National University.

This article was originally published here at the Development Policy Blog.

1. Zai jian – Goodbye – See you again: A look back on China’s progress upon leaving the World Bank
2. Private Chinese firms don’t get bank loans? Think again
3. The removal of Muhammad Yunus from Grameen Bank

For many reasons, the G20 may be justifiably considered the world’s premier economic forum. These reasons are often associated with problems inherent in the earlier G7 grouping.

The most prominent among those problems was that the G7 consisted only of advanced industrial countries and thus could not legitimately claim the privilege of making important decisions on global economic issues. For the G20 to maintain its authority in future it must continue to incorporate the developing world, and Asia in particular.

Developing economies now account for around 40 per cent of global GDP and their share is expected to continue rising in the coming years. The Asian economy is projected to take up one half of global production by 2050, given its current pace of growth. This has led many economists and futurists to predict that the centre of gravity for the global economy will shift toward Asia. In fact, that shift is already taking place.

Asia has shown a strong presence at all stages of the G20 process during the global economic crisis, from its first meeting in Washington DC in 2008 to the Seoul Summit last year. While the international community as a whole has been active in cooperating on policies to overcome the crisis and in drawing the basic blueprint for global economic governance, the actions of the Asian countries in this effort were vital. The weight and influence that Asian countries brought to bear was felt throughout every major issue on the agenda, including the resolution of global imbalances, the reform of international financial institutions, the creation of a global financial safety net and deliberations on development issues.

Needless to say, maintaining the vitality of the G20 as the world’s premier economic forum hinges on the continuing and dynamic role of Asian economies. This is underscored by the fact that Asia is home not only to the world’s second and third largest economies, but also to 60 per cent of the world’s population. The region also holds more than half of the world’s foreign exchange reserves.

Asia’s status in the world economy is unique in that, although it is a major contributor to the global imbalance, it is also in the best position to provide a solution to the problem. The G20 devoted the greatest amount of energy to the issue of global imbalances because it was the most important and difficult one facing the forum.  American consumerism can be readily pointed out as a major contributing factor, but the division of production now firmly established within the structure of the Asian economy must take an equal share of the blame.

The structure of the Asian economy involves tariff-free or low-tariff export of raw materials or intermediate goods from Korea, Japan and Southeast Asia to China. They are then processed or assembled in China for export to the US or Europe, thereby adding to the global imbalance. An earnest reform of such trade or production structures is no doubt essential for relieving the pervasive global imbalance. This reform could be realised through trade liberalisation among the countries in the Asian region, with complete removal of tariffs and non-tariff barriers — not just for raw materials and intermediate goods but for finished products as well.

Another remedy for the imbalance would be strengthening monetary cooperation among Asian economies to promote greater stability of financial markets in the region. This would alleviate strong tendencies by individual countries to accumulate foreign exchange reserves. In this regard, the multilateralised Chiang Mai Initiative (CMIM) regime established among East Asian economies needs to be strengthened and expanded further.

Asian countries are expected to play a more active role on the issue of development, a matter of great importance for the G20 and the world. It is worth noting that Asia is a region where major aid donors and recipients coexist. In the region there are OECD Development Assistance Committee (DAC) members such as Korea and Japan, emerging economies like China and India that are leaders in south–south cooperation, and recipients of large international aid like some Southeast Asian countries. The creation of an effective regime for cooperation on regional development in Asia will most likely lead to improvements in global regimes for aid and development.

It was through sheer determination and effort as well as economic growth that Asian economies have attained their place in the sun. But as Asian economies are now being asked to assume a more active role in the decision-making processes of the G20 on important global issues, they are coming under increasing pressure to improve their political and economic capacity. In order to achieve this requirement they will need to strengthen their respective market systems and democratic institutions.

Wook Chae is President of the Korea Institute for International Economic Policy (KIEP) and has served as a member of the National Economic Advisory Council, Seoul.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘Asia’s global impact‘.

1. G20 and the global agenda: A bigger role for Asia
2. Reshaping global economic governance and the role of Asia in the G20
3. Consolidating East Asian cooperation: A new role for Northeast Asia

There is still uncertainty surrounding China’s future economic, political and strategic intentions in the Asia Pacific.

Recognising a fundamental paradigm shift in the region, then-Australian Prime Minister Kevin Rudd announced on 4 June 2008 his intention ‘to begin the conversation about where we need to go’ to strengthen regional cooperation in the Asia Pacific via the idea of an Asia Pacific Community (APC).

Rudd argued that an APC should include a trinity of structural components: first, it must be ‘[a] regional institution which spans the entire Asia Pacific including the United States, Japan, China, Russia, India … [and] Indonesia’; second, the APC should be able to engage in and act upon a range of economic, political and security matters; and third, APC meetings must be held at the heads of government level.

But there are two distinct characterisations of an APC that warrant examination: a de facto and a substantive version. A de facto APC would be realised when the trinity of explicit, but not implicit, components of an APC is adopted or adapted into the region’s multilateral architecture — either adopted through a new institution or adapted into an existing one, such as an enlarged East Asia Summit (EAS). A de facto APC in this mould would remain a talk-shop in keeping with the ASEAN Way: regional cooperation guided by a preoccupation with process as opposed to outcomes, consensus-based decision making and non-interference in other member states’ affairs.

A substantive APC could be accomplished when, in addition to the trinity of explicit structural components, Rudd’s implied fourth limb of an APC materialised. That is, an institution that became the region’s premier one-stop-shop for fostering the habits of cooperation and not resorting to conflict. An APC Way of regional cooperation would not seek to undermine ASEAN’s role as the principal driver of Asia Pacific regionalism (as Rudd pointed out). Rather, an APC Way would catalyse the process of spurring ASEAN norms of unstructured, ritualistic meetings with a more muscular — or crisis-ready — modus operandi of regional cooperation. This would be manifested in more robust ex ante and ex post crisis mitigation and management practices than is evidenced by the status quo.

The announcement of the APC in 2008 was marred by failures of preparation and presentation. Only after a series of speeches throughout 2008 and 2009 did Rudd better articulate what the APC was and was not, as well as its rationales. From the outset, the APC concept was not restricted to being an institution per se. It simply represented these four components, which if adopted or adapted — at either the de facto or substantive level — would to varying degrees address design flaws present within the region’s current multilateral architecture. Rudd’s approach sought not to preclude any other existing regional institution from taking the lead in adopting the principles that characterise an APC.

In 2010 the EAS announced that the next summit, to be held in Indonesia in November this year, would expand to 18 members so as to include the United States and Russia. At a de facto level, it can be argued that an APC has taken shape. But whether an APC will be realised at a substantive level does not just depend upon fulfilment of the structural and membership requirements. It also depends on whether both the structure and the substantive spirit of an APC can be achieved. That is, an enlarged EAS must be recognised by its stakeholders as the region’s premier one-stop-shop multilateral institution.

For an APC to wield influence, credibility and ultimately utility, it would need China’s support. The nature of China’s future regional projection is difficult to forecast with any certainty — a dilemma compounded by a schism of views within China about its appropriate role in the region. This is exacerbated by China’s perceived double-bind dilemma, or shuangchong zhiyue 双重制约: China is damned if it does and damned if it doesn’t take an active regional role. When China is active in the region, influential Chinese figures argue that China-threat theorists attack an increasingly assertive China as undermining regional stability. But when China is passive, it is perceived to be shirking the responsibilities that its status as a major power now requires. China’s double-bind will intensify as its foreign policy increasingly moves from ‘biding one’s time and hiding one’s capacities’, taoguang yanghui 韬光养晦 to the latter half of Deng’s guiding foreign policy maxim, ‘to really become something’, or yousuo zuowei 有所作为. As China naturally seeks to preserve or enhance its growing interests abroad, China’s foreign policy behaviour will accordingly resemble that of a proactive regional player. Mitigating these anxieties and maximising the chances of China’s positive-sum integration within the region is now an urgent task.

Dialogue and policy cooperation can help reassure the region that China will not become a revisionist state while easing China’s double-bind more effectively than through the existing hodge-podge of regional institutions.

Despite premature speculation that Rudd’s APC was dead in the water, the region could instead be about to witness the green shoots of his APC. Only time and the will of the region’s great powers — especially China — will tell to what extent this de facto APC, through an enlarged EAS, will prove a pyrrhic victory or a meaningful success in activist Australian middle-power diplomacy. What is certain is that Rudd deserves to be congratulated for beginning the conversation about where we need to go.

Henry Makeham is a Founder of the Australia-China Youth Dialogue. He will be joining international law firm Davis Polk & Wardwell LLP in Hong Kong in 2012 as a trainee solicitor.

1. Squaring the Japanese and Australia proposals for an East Asian and Asia Pacific Community: is America in or out?
2. Rudd in Singapore on the Asia Pacific Community idea
3. Realizing the Asia Pacific Community: geographic, institutional and leadership challenges

Prior to joining the World Trade Organization (WTO), the common perception in China was that the WTO belonged to ‘the Club of the Rich’, where wealthy countries imposed rules on poor and weak developing ones.

Now, the WTO is one of the most widely recognised and respected international organisations within China.

Since China’s accession in 2001, the belief that the WTO is a ‘public good’ has taken hold in China, and membership in the WTO is a driving force for market reforms. WTO entry transformed how the global multilateral trading system is viewed, not only by skeptics in the government but, more importantly, in the public mindset. China undertook a major public engagement program to increase the society’s understanding of the multilateral trading regime. And several thousand books were published in the past decade to raise awareness of the norms and rules of the WTO, in addition to modifying laws and administrative practices to align them with WTO commitments.

But the most important factor in reshaping public sentiment toward the WTO in China is the actual gains the country has achieved since joining. Throughout the past decade, China’s GDP grew at an average of 9 per cent per year and is now the second-largest trading nation in both exports and imports. China emerged as a source of outbound investment, as well as one of the hottest destinations for FDI. And beyond trade and investment, China has become a major creditor nation. These achievements show that WTO accession and integration into the global economy have been pivotal to the country’s progress. For China, the gains from WTO membership have exceeded the risks — so far.

China’s support of the WTO will continue to be steady and strong because of China’s rapidly growing interests in an open global trading system; and China’s association with developing countries and emerging economies will strongly shape its role in the global regime. China encourages more consideration of development concerns in multilateral trade talks (including effective implementation of the Doha Development Agenda) and believes that a new consensus should be reached between developed and developing countries — especially on issues such as barriers to agricultural trade.

But some are now concerned about China moving toward protectionist measures and insist it should restructure its growth model. China is facing growing external pressure to increase its domestic consumption as a way of contributing to rebalancing the global economy.

The global financial crisis also changed the perception within China that the external demand-driven development model can continue indefinitely. To deal with declining external demand, the Chinese government implemented a three-year national stimulus package amounting to RMB4 trillion (US$626 billion). But the present situation continues to be fragile and uncertain, due in part to world economic conditions — especially the extended downturn in the US economy and parts of the EU.

What lessons did China learn from the global financial crisis? First, China learnt to manage the risks of integration into the global economy, while also remembering the benefits of global integration. Second, China needs to move away from the existing economic growth model — which is too reliant on exports — to one that is more internally demand-driven. And finally, China learnt to rectify the asymmetrical influence of some countries in the system of international economic governance.

Adjusting the Chinese development model is a painful process. But China is looking toward strengthening internal demand, improving the domestic social security system, moving toward more value-added production by encouraging innovation, and promoting environmental sustainability.

And while China is increasingly committed to multilateralism, it is also seeking regional cooperation in East Asia. Chinese academics view regionalism as providing China with a self-insurance option to absorb the risks of economic globalisation and economic uncertainties; a tool to enhance security relations with neighbouring countries; and a means to increase China’s voice and influence in the international community by cultivating mutual trust and shared interests. In contrast, Chinese authorities emphasise that regional cooperation is not necessarily or inevitably in conflict with global multilateralism, as long as regional trade arrangements facilitate gains in trade and investment liberalisation.

Chinese authorities have overcome their previous skepticism and sovereignty concerns related to regional multilateralism after the 1997 Asian financial crisis. They are now taking a more proactive approach to regionalism. This approach highlights China’s growing support for regional cooperation as a response to competitive liberalisation in other regions of the world.

Striking the appropriate relationship between regional and global cooperation is now one of the crucial challenges in global governance — trying to balance what is desirable with what is realistic in the emerging global order. China’s leaders realise that the country’s economic rise over the past 30 years is not an isolated development or an accident of history.

China will continue to be a positive and driving force in the global multilateral trading system and its track record since joining the WTO sets a good example for other countries, including those currently plagued by an extended economic downturn. China will help demonstrate how the objectives of development and maintaining an open trading system can work together.

Wang Yong is Professor in the School of International Studies, and director of the Center for International Political Economy at Peking University in Beijing, China.

A version of this article was first published here by the Centre for International Governance Innovation (CIGI).

1. Russia’s accession to the WTO
2. China lifts Africa’s development prospects
3. The values dimension of Southeast Asian development and the rise of China

Europe’s woes and another week of volatility in world financial markets saw confidence in global recovery tumble.

The IMF meetings in Washington and the political follow up that is now playing out across Europe have done something to staunch the financial bleeding, but the global economy is still in emergency triage.

The G20 summit next month in Cannes has a great deal riding on it as the world lurches backwards into the recession.

Europe is still in a mess. The European experiment is at risk. Deep down the worry is that the writing is on the wall for the Euro itself. There’s no doubt at all that, despite all the emergency measures to prop up Greece and keep it in the fold, the Euro zone’s collapse is a serious risk. Greece is not the only Euro zone member trapped in the Euro straightjacket. The core problem for southern Europe is its chronic inability to match German productivity growth.

When two countries — Germany and Greece, for example — engage in free trade, the country with the slower rate of productivity growth normally experiences depreciation of its currency. But currency depreciation need not occur. There are other possibilities: its workers’ wage rates could grow at a commensurately slower rate; it could experience ever-increasing unemployment; its workers could emigrate; or it could find some means of ‘validating’ its increasingly over-valued real exchange rate. Greece chose the last of these options. And the means it chose was to increase government spending, financed by borrowing. Over the last decade, unit labour costs in Greece grew by about 30 per cent more than in Germany. This implies a 30 per cent effective appreciation of Greece’s real exchange rate. The validation of a real appreciation of that magnitude required a lot of government spending. Ultimately, that fiscal stance was going to prove unsustainable. Greece is not the only European country in this pickle. Whether the Greek and European body politic can now wear the fiscal burdens of an adjustment without breaking the Euro currency system remains to be seen.

As Elek says in this week’s lead, ’the self-imposed crises in the US and the EU have destroyed the capacity of industrial countries to contribute to global growth in the short term’. The danger now is that G20 leaders, consumed by the anxieties in Europe and North America, will miss the global main chance when they meet in Paris next month.

With Europe and the United States in the mire, the global main chance for medium term growth is investment and growth in developing economies. That’s not just another big fiscal stimulus in China — there are risks with that which the Chinese authorities are justifiably cautious about assuming. As Elek points out, the potential for productive investment in economic infrastructure is enormous. The OECD estimates global infrastructure requirements to 2030 to be in the order of US$50 trillion. Much of this demand is in Asia, also the primary source of the savings that are currently sloshing around the global economy. There are almost a trillion dollars of infrastructural investments there that have been given the once-over by the Asian Development Bank. China may be facing a temporary problem of over-heating, but its stock of capital relative to population and income is low. India and Indonesia offer vast scope for investment infrastructure. The US also needs to make large investments to rehabilitate or extend its economic infrastructure. More generally, global investment is a historically-low share of global output.

Meanwhile the G20 is wrongly focusing on a development agenda that largely misses this main point. As Elek explains, G20 leaders have appointed a High-Level Panel on Infrastructure to advise them on improving the institutional and enabling environment for investment in infrastructure, and ideas for financing infrastructure projects with significant but delayed returns to investors. But the Panel’s brief currently focuses only on much needed infrastructure in the world’s most difficult investment environments, especially sub-Saharan Africa. This is a diversion. The issues of institutional capacity, innovative financing and risk management need attention everywhere. G20 leaders at their next summit need to grab the Panel’s terms of reference and widen them, challenging their officials, financial sector managers, and international financial institutions to use their expertise to find ways to intermediate more savings into commercially-viable investment in infrastructure where it is needed, as Elek argues.

The Asian six in the G20 can take a lead here. Last week, Japanese METI minister Yukio Edano announced on a visit to Jakarta that Japan would support theconstruction of Jakarta’s ramshackle port capacity, including its airport and help to build a long overdue urban subway system. This is the kind of infrastructure investment that will both boost Indonesian productivity and lift Japan’s and other industrial countries’ growth prospects.

Europe has too long dominated the global agenda and it is clinging on to it. It’s time for G20 leaders to look beyond the European funk and focus on the opportunity for sustaining global growth through a development agenda beyond Europe’s messy backyard.

Peter Drysdale

1. How should Asia read the Greek tragedy? – Weekly editorial
2. The Greek tragedy: Global debt crisis and balance sheets
3. Indonesia and global development