G20 leaders remained focused on their global recovery agenda, at their Summit in Seoul, but as the sense of urgency in the crisis fades so too does the laser-like focus. The group’s diversity is showing and domestic issues are beginning to crowd leaders’ priorities. As well, it seems each new host feels compelled to lengthen the agenda, with the Koreans adding development and the French host in 2011 mooting its perennial summit favorite, reforming the international monetary system.

So was Seoul more than a talk shop?

On balance the answer is yes. As summits are supposed to, leaders had previously directed the relevant international agencies to produce financial regulatory reform, which the Basel institutions have done. New higher capital and liquidity requirements will be implemented and a new twist was added at the meeting when the largest cross-border institutions, now known as the G-sifis (global systemically important financial institutions), were not hit with a capital surcharge but with much closer scrutiny by their own and international colleges of regulators.

Finance ministers and central bank governors also reformed IMF governance as they were asked to do, giving China third spot in the pecking order and bringing Brazil and India into the top ten.

In another positive surprise, trade negotiators were tasked with completing the Doha trade talks in 2011 as leaders said: ‘We now need to complete the end game.’ We shall see…

On rebalancing, one can argue there was also progress despite Brazil’s unhelpful red herring about a currency war. The IMF’s mutual assessment process is prodding governments along and the leaders’ summit rhetoric conveyed a deeper appreciation that rebalancing requires both domestic policy reforms as well as currency adjustments. Not one or the other.

There is a lot at stake. Rebalancing cannot be achieved overnight. But it can be achieved through time and new developments in both China and the United States signal potential changes in domestic policies which, if implemented, would be aligned with the collective interest in rebalancing for good domestic reasons.

In mid-October, the outlines of China’s 12^th Five Year Plan were approved by the party leadership foreshadowing a major thrust to rebalance demand towards domestic sources like consumption rather than continue past unsustainable levels of investment in export-oriented industrial capacity. Leaders also recognise that exchange rate appreciation will help things along. So far, however, they are willing to rely mainly on stealth through real appreciation rather than the more visible nominal appreciation that powerful political interests contest.

In the United States the co-chairs of the bipartisan fiscal responsibility commission have published their own findings and recommendations ahead of the full commission’s final report due December 1. They stress the seriousness of the US fiscal position and the hard choices Americans will have to make to solve it, not just by cutting spending as many Americans seem to believe , but with revenue increases as well. The initial reaction on all sides was furious – which suggests the co-chairs have been even-handed in stating the case. If he chooses to use it, the commission has handed President Obama an opportunity to restore America’s economic credibility in the world.

At Seoul, US authority and overall momentum on cooperative rebalancing were undermined by the negative reaction to the unfortunately-timed (and uncoordinated) quantitative easing by the US Federal Reserve aimed at preventing a possible deflationary spiral at a time of fiscal policy paralysis. A depreciating dollar and the prospect of continued zero interest rates triggered a wave of capital flows seeking higher returns in emerging markets. To get things back on track Canada and India (both with flexible exchange rate regimes and sustainable current account deficits) will co-chair a task force to hammer out agreement on the most contentious issues.

But there are two worrisome and offsetting developments. One is the rising domestic political pressures on President Obama to take tougher trade measures against China. The other is the leadership transition underway in China which seems to be associated with hardening nationalistic positions on foreign policy issues. G20 leaders have been warned that if governments fail to make the necessary adjustments markets will force adjustment in a disorderly manner, making everyone worse off. For reasons far beyond the control of the Koreans, Seoul simply postponed that day of reckoning.

Wendy Dobson, a former Associate Deputy Minister of Finance in Canada, is Professor and Co-director of the Rotman School’s Institute of International Business at the University of Toronto.

1. The G20 Seoul Summit: Agenda and implications
2. Using the G20 to avoid currency war
3. Obama leaves Korea without KORUS: Heart but no Seoul

President Barack Obama’s upcoming trip to India, Indonesia, South Korea, and Japan follows similar whirlwind Asia trips by Secretary of the Treasury Timothy Geithner and Secretary of State Hillary Clinton. With the G20 meeting in Seoul providing the keystone of this marathon demonstration of the administration’s commitment to engagement with Asia, the president’s trip will take place against a backdrop of rising concerns in Asia about the frailty of the US and global economic recovery and US policy objectives and limitations to manage any new crisis.

At the finance ministers meeting in Gyeongju, Korea, in late October, Secretary Geithner and other participants sought to quell fears of a ‘currency war’ by pledging support for a strong dollar policy and committing not to succumb to temptations to devalue currencies for competitive purposes. Yet the perceived underlying weakness of the US economy, as highlighted by fears of a new wave of housing foreclosures that will deflate both asset prices and consumer confidence in the United States, creates major economic uncertainties for Asian economies that are reliant on US consumers to drive exports that are still a fundamental piece of the Asian economic recovery puzzle.

The administration’s message to Asian partners in the run-up to the president’s trip has been focused on its commitment to trade and economic engagement—a welcome sign amidst fears of rising US protectionism as embodied by campaign rhetoric in a wide variety of congressional races. But even that message of economic openness has been couched in language about increasing US exports and curbs on current account imbalances, which can only reasonably be achieved by an increase in US savings at the expense of US import consumption. Nevertheless, to the extent the president and his cabinet can manage fears that the United States is about to embark on predatory monetary policies and avoid the worst instincts to close its markets to foreign competition, Asians will be at least minimally comforted that the rug will not be completely pulled from under them.

The China Factor

Chinese analysts are hard-pressed not to read the president’s circuitous amble through Asia’s biggest democracies through a prism of worry about American encirclement intentions. The administration has taken pains to reassure Beijing that not every US action in Asia is uniquely directed at China, but Beijing’s worries will persist. Those concerns will be exacerbated by China-directed criticisms at the G20 about the slow pace of RMB appreciation and by new concerns over China’s restriction of rare earth element exports.

Despite these fears, the United States and China are actively pursuing policies designed to ratchet down bilateral tensions that increasingly alarm the region. These policies include efforts to shift the focus of attention in disputes over currency valuation to concerns over global current account balances. China’s current account surplus is generally recognised in China as a source of destabilising inflation and a liability in multilateral relationships, so focusing on the domestic and multilateral benefits of reducing its global current account surplus may deflect domestic public pressures to resist raw US pressures on the RMB valuation. With the Congress seemingly prepared to put off further legislative action on Chinese currency, the administration’s new strategy may provide time enough to engineer a face-saving means for China to put in place policies to further correct its currency misalignment in ways that ease global imbalances and promote overall global growth.

Charles W. Freeman III holds the Freeman Chair in China Studies at the Center for Strategic and International Studies in Washington, D.C.

This article was first published here at CogitAsia.

1. Year in review: Obama and Asia – Weekly editorial
2. Obama in Asia: more than a sentimental journey
3. Obama in Asia

The unprecedented level of policy coordination by G20 countries in response to the global financial and economic crisis in 2008 was instrumental in preventing the worst economic downturn since the 1930s. It is still too early to say that the crisis is over, but at least we can safely say that it could have been much worse if the G20 had not acted swiftly. This success was the most important reason why the Summit of Heads of State or Government in Pittsburgh decided that from then on the G20 would be the premier forum for international economic cooperation—an historic decision from the perspective of global governance as well as the role of Asia in the global economy.

Does the G20 offer a new approach to global governance?

G20 members hold 85 per cent of world GdP, 80 per cent of international trade, and represent two-thirds of the world’s population. However, unlike the G7, where all of the members are from developed countries, half of the G20 members are developing countries. This is major shift in global economic governance. There was a strong sense of realism at Pittsburgh. Advanced economies accepted that to prevent the global crisis from deepening, major efforts to rectify the global economic governance were required, and that these efforts would not be effective without the support of emerging economies. This signalled the importance of emerging economies as well as the pressure on them to share the burden and responsibility for solving the world’s most urgent problems.

The G20 is undertaking a landmark overhaul of the Bretton Woods institutions, the International Monetary Fund and the World bank. The most important change will be to balance the voting rights between the over-represented advanced and under-represented developing nations in these organisations. Not only has the G20 itself created an unprecedented new level of global governance, but it is accepting a new level of responsibility in reforming the governance of other international organisations.

G20 members have presumed the right to determine the group’s direction, agenda and priority issues. At the Toronto Summit, development issues were set as a priority in its future agenda. Developing-country members of the G20 have successfully made this a priority as ‘representatives’ of all developing nations, not only from concern about their own problems. The ability to set the agenda creates an opportunity to extend the reform of global governance beyond the international financial and economic agenda.

The G20 has developed significantly since the second half of 2008, when the global economic crisis prompted the Washington summit to be convened. Formerly a forum of finance ministers and central bank governors, the G20 group has been elevated to summit level just one decade after it was established. With 20 members from around the world, including ten emerging economies, the G20 has the right balance when it comes to levels of income and international representativeness. The group’s credibility is underpinned by its political and economic leverage, since it has the power and authority to make effective and practical decisions.

Reforming global economic governance is one thing; commitment to secure global policy coordination recovery is another. This new challenge is well captured by the Seoul Summit theme, ‘Shared Growth Beyond Crisis’, but it remains to be seen how the G20 can deliver on commitments across a range of strategic global issues within the context of the existing platform of global cooperation. The fact that six G20 states—Australia, China, India, Indonesia, Japan and Korea—are members of the East Asia community highlights the region’s strategic importance in global governance. The region is also one of the world’s most dynamic and includes two of the world’s largest economies in terms both of nominal GDP and purchasing power parity. With rapid economic growth over the years and trade surpluses with the rest of the world, Asia’s foreign exchange reserves are estimated at $4 trillion, or more than half the world’s total. Asia had been the most resilient region during the global financial crisis. These factors position the region as the most important engine of the global recovery.

The region’s role as an engine for global recovery and growth, and its long history of regional engagement, encourages the notions of an informal and moving regional integration to the next level. But there are many challenges that have to be dealt with first. Countries in the region have to showcase their abilities in sustaining high economic growth, maintaining political stability and working towards closer regional integration. An approach that relies on a politicised and formal structure will not suit the dynamics in a region which is economic growth-oriented and market-driven.

The East Asia region has assumed a more important role in the G20 era. Whether or not particular countries in the region are members of G20, there is a now a need for East Asia as a whole to focus on that bigger role, accepting more responsibility on global issues beyond its ‘regional comfort zone’.

Mahendra Siregar is the Vice Minister of Trade for the Republic of Indonesia and G20 Sherpa for the President of the Republic of Indonesia, Susilo Bambang Yudhoyono.

Tuti W. Irman is Deputy Director, International Economy and Finance, in the Directorate of Economic Development and Environmental Affairs for the Republic of Indonesia, and Sous-Sherpa for Indonesia’s Ministry of Foreign Affairs.

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

1. Reshaping global economic governance and the role of Asia in the G20
2. How far has the global crisis altered India’s role in Asia?
3. East Asia, the G20 and global economic governance

This month the Asia-Pacific region takes center stage in global diplomacy.

A Group of 20 summit meeting is being held in Seoul, followed by the Asia-Pacific Economic Cooperation forum summit meeting in Yokohama.

U.S. President Barack Obama is also scheduled to visit India, Indonesia, South Korea and Japan in November.

A number of pressing issues will need to be tackled at those forums. Delegates must figure out whether a new international order can be created that would move from the framework established after World War II in which the Group of Seven advanced economies managed the world economy, to one that includes newly emerging economies such as China, India, Brazil, Turkey and South Africa.

Another issue will be securing peace and stability of the Asia-Pacific region, which continues to be the economic growth center of the world.

In the newly emerging economies around the world, about 70 million people join the ranks of the middle class each year.

Along with the advance of globalisation, however, there has been a corresponding widening of economic disparities and a lack of opportunity among nations.

Although an emerging middle class can provide stability to a society, it can also serve as a force seeking to overturn the status quo through its demands for justice and distribution of wealth.

Members of the middle class participate in a cyberspace that is boiling over with guerrilla-like democracy and boorish nationalism.

Asia must stimulate regional demand to place it on a course of autonomous growth. One reason is that the limits of growth have been reached through the accumulation of current account surpluses by exporting to the United States.

The region must also overcome the hurdles associated with problems involved in energy, water and the environment.

Asia’s dependence on petroleum imports stood at 36 percent in 2005, but the figure is estimated to expand to 65 percent by 2030.

Against this background, Japan has lost sight of its position in Asia.

It cannot continue to cling to the G7 forever. At the same time, it remains to be seen if the G20 can serve as the new control tower for macroeconomic policy. APEC also continues to function at a decelerating pace.

The time has come for Japan to return to its starting point as a trading nation and establish a trade and investment strategy that will further connect it both to the Asia-Pacific region and the world.

Asians by and large seem to feel that their region will grow, no matter what. One reason for this is the animal spirit that drives many Asians’ success.

More than half a century ago, French President Charles de Gaulle referred to Prime Minister Hayato Ikeda as ‘a transistor salesman.’

Now, the nations of Asia are salesmen to the world of a whole line of products and services, including home electronics, personal computers, automobiles, nuclear power plants and call centers. Yet, many Asians take for granted the liberal international order that sustained their miraculous growth.

However, three major challenges lie ahead for the economic integration of this region.

The first is the course of China’s state capitalism.

Friction with neighboring nations will be inevitable if China further seeks vertical economic integration of Asia using its gigantic domestic market as a lever and by implementing industrial policy that threatens to violate free trade rules, as in the recent unclear export controls on rare earth metals.

What will be important is for all nations, including China, to abide by and to foster a free and liberal international order based on the rule of law. That will be vital for sustained peace and stability of the region and the world.

The second challenge will be the growing economic gap.

There will be a need to promote economic and social development along with market liberalisation.

At its inauguration, APEC placed liberalisation and development cooperation as its two main pillars.

Subsequently, it bent to pressure from the United States and focused almost exclusively on liberalisation.

Fortunately, the Obama administration has stressed development along with diplomacy and defense to prevent threats from failed states as well as terrorism.

In particular, economic and technological cooperation for the development of human resources will be vital for closing the economic gap.

Japan should cooperate with the United States to place development cooperation as a core theme of APEC.

The final challenge concerns the inability of key nations of the Asia-Pacific region to come up with a shared vision of international order so they can cooperate on policy.

In particular, no progress is being made on developing a mature relationship between Japan and China.

The history of European integration that began with a coal and steel community and led eventually to the formation of the European Union has been described by the late historian Tony Judt in his work, ‘Postwar: A History of Europe Since 1945,’ as ‘a political vehicle in economic disguise, a device for overcoming Franco-German hostility.’

There should be further efforts for a regional ‘vehicle’ in Asia that could lead to a more harmonious coexistence between Japan and China.

Japan will host the APEC summit meeting this year for the first time in 15 years. Although Japan was responsible, along with Australia, for bringing about the establishment of APEC, it has fled from the market liberalization that was the major purpose of the endeavor.

The ‘lost 20 years’ of Japan in the post-Cold War era is also a 20-year period when it turned its back on liberalization. Through its protection of vested interests, Japan’s politics and economics have stagnated, its investment and employment have shriveled and its agriculture has been exhausted.

Learning from those lessons, Japan must resolve to open up its markets.

The time has come for Japan to clearly state to the world its intention to participate in negotiations towards a Trans-Pacific Partnership agreement.

The negotiations were begun by Singapore, New Zealand, Chile and Brunei, four small nations eager to spread liberalization within the region. The trans-Pacific, multilateral negotiations seek to establish a tariff-free and pure free trade agreement.

In the background to the move is the fear felt by smaller nations about being swallowed up in a vertical economic integration system that China favors.

The TPP seeks a horizontal integration among the economies of the region. It would re-establish free trade rules and the principle of the rule of law.

All nations, big and small, would be equal under such an arrangement, an absolutely vital principle of rule of law, as well as the foundation for a free and open international order.

The TPP would be nothing more than an economic alliance for such an order. Both the United States and Australia have entered into negotiations to join the TPP.

Japan should also join the negotiations and take part in the writing of the rules from the outset. However, the government still appears to be hesitant about taking that jump.

On Oct. 24, all members of the Cabinet of Prime Minister Naoto Kan gathered along with executives of the ruling Democratic Party of Japan for a study session on the TPP.

One participant was Tadahiro Matsushita, a senior vice minister of economy, trade and industry.

Although Matsushita now belongs to the People’s New Party, he once belonged to the Liberal Democratic Party, where he was a dyed-in-the-wool member of the farm lobby. In the winter of 1993, he took part in a day-long sit-in in front of the Diet in opposition to liberalizing the rice market under the Uruguay Round of trade talks.

Matsushita subsequently flew to Geneva, where the GATT (General Agreement on Tariffs and Trade) headquarters were located, and joined with South Korean legislators to shout their opposition to liberalization of their rice markets.

At the October study session, however, Matsushita took a different tone.

‘I now feel deep regret. What was the result of our absolute opposition to agricultural liberalization? Did that strengthen Japanese agriculture? About 6 trillion yen in funds has been funneled to farming villages to deal with the effects from the Uruguay Round, but about 70 percent of it went to public works projects. It did not help agricultural reform at all. During the period of dealing with the Uruguay Round, the agricultural income per farm household declined by 32 percent.

‘On the other hand, South Korea, whose lawmakers joined us in the sit-in, has pushed for reform of its agricultural sector over the past 15 years. It has signed free trade agreements with the European Union and the United States. We must not repeat that mistake again.’

Matsushita’s statement underlined the strategic connection between Japan’s trade and agriculture policy.

There is strong resistance within the DPJ to the TPP. However, if the DPJ should barricade itself behind a protectionist banner like the LDP had done while it held the reins of power over the past 20 years, what would be the significance of last year’s historic change in government.

Wasn’t one campaign pledge of the DPJ to move spending away from concrete, and the public works projects it symbolizes, and toward people, in this case, independent farmers?

At the very least, the LDP created the Japan-U.S. security alliance that has served as the foundation for prosperity in Japan and Asia in the second half of the 20th century.

The DPJ should create an economic alliance that will be the base for a free and open Asia-Pacific region in the 21st century.

Yoichi Funabashi is editor in chief, Asahi Shimbun.

This article first appeared here in Asahi Shimbun.

1. BRICS and the international economic order — an idea whose time has come
2. Rudd: What sort of international order do we need in the 21st century
3. India in a liberal Asia

Reform of the International Monetary Fund has been a constant theme of all G20 summits since November 2008. Although the G20 has yielded some concrete results in coordinating macroeconomic policies and financial regulatory reform, the same thing cannot yet be said about the promised IMF reform.

In view of the role the IMF must play in the post-financial crisis world, the leaders at the first G20 Summit in Washington in November 2008 expressed a commitment to advance reform so as to increase the ‘legitimacy’ and ‘effectiveness’ of the IMF and instructed the finance ministers to review its mandate and governance. At the Pittsburgh Summit in September 2009, the leaders recognised the need to reform the IMF’s governance as ‘a core element of our efforts to improve the IMF’s credibility, legitimacy, and effectiveness’, and agreed to address, among others, ‘the size and composition of the Executive board; ways of enhancing the board’s effectiveness; and the fund Governors’ involvement in the strategic oversight of the IMF’.

Despite the rhetoric, the G20 has not achieved results when it comes to IMF reform. To be sure, important changes have taken place at the IMF. The IMF has been able to augment its resources, including through securing bilateral loan commitments; there has been an expansion of the New Arrangements to Borrow (NAB); and agreement on a new general allocation of Special Drawing Rights (SDR). Parallel to these developments has been what Dominique Strauss-Kahn, the IMF managing director, has called a ‘modernisation’ of conditionality, designed to remove the ‘stigma’ attached to IMF borrowing. Although the global crisis brought some lending business back, the IMF decided to make its facilities more attractive to potential borrowers by establishing a flexible credit Line for pre-qualified ‘strong performing’ economies, and also by doing away with quantitative performance criteria for macroeconomic policy.

The G20 may well have helped build the consensus for such reforms more quickly, but these changes were dictated by the extraordinary nature of the global financial crisis, and the G20 cannot claim much credit. Rightly, the London Summit of April 2009 simply noted ‘the progress made by the IMF with its new flexible credit Line and its reformed lending and conditionality framework’.

The G20 Summits have stressed the need to increase the voice and representation of new economic powers in the governance of the IMF, but the latest agreement on quota reform had already been made before the first G20 Summit. What the G20 has called for is to accelerate the schedule of the next quota reform, stipulating that the process must be completed by January 2011, with an adjustment of at least 5 per cent toward the under-represented dynamic emerging market economies. Yet quota reform is a zero-sum game. To achieve the adjustment of an even 5 per cent is probably a political feat that would only be possible with the full might of the G20. But in substance it amounts to virtually nothing even if it is achieved as promised.

IMF governance reform will be particularly important, going forward, because the stigma attached to IMF borrowing, at least for many Asian countries, is related not to conditionality, but fundamentally to the perception of how the institution is run. Streamlining conditionality is not the way to win back Asia’s trust. To win this trust, the IMF must be perceived to be politically neutral; Asia must feel that it has sufficient ownership in the strategic oversight of the institution. The lack of Asian influence reflects the lack of Asian intellectual input. Asia must specify what must be done to allow the IMF to become a global financial safety net for the region once again. For example, Asia could reasonably demand a quota share of 35 per cent for the region (compared with just over 20 per cent now); IMF management should be made more independent of the political process by removing the executive board from day-to-day operations, consistent with modern corporate principles.

The G20 is about to propose a transparent and merit-based process of selecting the senior leadership of the IMF. But is this all that the leaders of nations that claim over 80 per cent of world GDP can agree on after two full years of discussion? If so, the utility of the G20 process as the premier forum for international economic cooperation might rightly be questioned, once the immediate task of responding to the global crisis has been completed.

Strengthening global financial safety nets is high on the agenda of the Seoul Summit, but if strengthening global financial safety nets involves an enhanced role for IMF financing in the post-crisis world, the required reform of IMF governance must be far-reaching. Otherwise it can hardly be expected that any of the major dynamic Asian economies will utilise what the IMF may offer, even when called for by another extraordinary crisis.

Professor Shinji Takagi is Professor of Economics, Graduate School of Economics, Osaka University.

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

1. The G-20 and IMF governance reform
2. Renminbi internationalisation and the international monetary system: a match made in heaven
3. An Asian response to international financial reforms

Observing the G20 scene from a North American country with pretensions to an Asia-Pacific vocation, we are reminded that over 10 years ago, Kishore Mahbubani, Singaporean Ambassador, wrote the book ‘Can Asians Think?’ Mahbubani provocatively questioned Asian acceptance of Western leadership and paradigms, and Asian tolerance of the West’s condescending attitudes.

Prompted by Mahbubani’s insights, we wonder why Asians continue to acquiesce to outdated, ineffective global institutions designed by Westerners more than 50 years ago in very different circumstances.

Why does Asia assent to the US Federal Reserve as the de facto ‘world financial authority’ and the US Treasury Secretary as the de facto head of the International Monetary Fund? Why does Asia seem resigned to bear disproportionate costs in bailing out OECD countries’ financial institutions? Why does Asia tolerate OECD agricultural subsidies of hundreds of billions of dollars and resign itself to accepting the World Trade Organisation’s intellectual property regime? And why does Asia accept the implicit insult of the continued existence of the G8?

More generally, why does Asian reticence prevail, given the recent financial regulatory disaster, the ongoing lack of economic growth, the futility of climate change and trade negotiation deadlocks, the perils of nuclear proliferation, and the clear evidence of stalled development demonstrated by the failure of the Millennium Development Goals? Western models and existing institutions have obviously failed across the board. A martian would conclude that on Earth, the borrowers run the international financial institutions, the polluters manage the environment and the inmates run the asylums.

A key opportunity has arisen for Asia to redress the balance in global decision-making processes. In November South Korea will be the first Asian host of a G20 Summit. After a disappointing Toronto meeting, which neither moved the substantive G20 agenda forward nor contributed to the evolution of the G20 institutionally, the Seoul Summit is positioned to do both.

Asia’s weight within the G20 is significant, consisting of six major countries—China, Japan, India, Indonesia, South Korea and Australia combined with natural allies such as Brazil, Argentina, Mexico, South Africa and Turkey, Asian G20 countries should be in a position to drive the G20 process. We remain puzzled that the leading states in the region have not stepped forward to lead the effort to make the expanded G20 a more effective body which finally moves the international centre of gravity away from the traditional ‘western’ powers. If ever there was a time for the emerging economies to shed the legacies of colonialism and the Cold War, this is it. Can Asia and its allies devise a credible and practical set of goals and strategies to re-imagine the structure of international relations?

Realistically, the US will remain a major actor for the foreseeable future. A key element in this strategic thrust is the China-United States axis which sits at the centre of the reoriented global configuration. Asia must build off the power of this dyad to achieve its objectives. Impetus from China is particularly important at a time when the US political system seems likely to remain in deadlock at least until the 2012 presidential elections. A Chinese role as energiser and conceptual pioneer would be extremely useful.

Despite diversity, one issue where we may reasonably expect a coherent Asian strategy is with respect to Europe. The fulfilment of the G20’s promise requires both Europe to give ground and Asia to lead. An obvious target of opportunity is the over-representation of European countries in the G20 (and by extension throughout the international system). Europe is essentially a disunited paper tiger in terms of meaningful global power, incapable of effectively mobilising its economic and military potential. Europe is the weak sister in terms of the G20 commitments to multilateral co-operation. The EU maintains significant effective trade protection in the form of subsidies, bailouts, ‘buy national’ injunctions and restrictions on foreign direct investment. The EU has done nothing in practical terms to promote achievement of the Doha Round or free up investment flows.

Europe has used the G20 as an expedient means of tapping into emergency funds pertinent to the EU’s own interests, rather than as a step towards broader and more balanced multilateral cooperation. The largest share of the bailout funds agreed by the G20 has been directed to states in Europe.

The profligate US is another villain—incapable of regulating its own financial sector, running two wars without taxation, and over-consuming and dissaving on the backs of Asia. How long will Asia continue to send thousands of containers of goods to the West in exchange for depreciating paper? Why not insist on turning the Special Drawing Right into an alternative reserve currency, allowing a gradual withdrawal from the addiction to the US dollar?

Influencing G20 outcomes requires aggressive pursuit of the moral high ground when it comes to shaping the work programs and operating procedures of key international bodies such as the IMF. With political gridlock in the US (a country manifestly incapable of even ratifying treaties) and feebleness in Europe, Asia and its allies need to move into the policy vacuum and use the G20 to institutionalise broader and more inclusive approaches to global decision-making.

Growth can no longer be generated from the West on the back of emerging economy surpluses, but will need to come from within the emerging world itself. Asian countries must devise the means to move away from a reliance on export-oriented economic policies. The IMF has done little to soften the impact of the crisis in developing countries and still lacks legitimacy, yet is being mandated with powerful new surveillance functions by the G20. Under these new rules, will the EU and the US subject themselves to the same degree of oversight that the IMF has long visited upon developing countries? Based on historical experience, this seems very unlikely.

Asia, which now holds the strong cards, must caucus to promote initiatives such as: the final burial of the G8, with its questionable practice of inviting developing countries as second-class citizens; establishing a formal G20 secretariat located in Beijing; establishing a formal Asian Global fund, open to South Americans and Africans as well; and, setting up an Asian regional trade organisation—to press the OECD countries to reduce the billions in agricultural subsidies.

With the Seoul Summit, if this is to turn out to be the Asian century after all, the legitimate concerns and aspirations of the Asian region must be brought to bear on the proceedings of the G20. It is time for Asian countries to step forward and promote their national and regional interests. The world as a whole would be better off for it.

Barry Carin is Senior Fellow, Centre for International Governance Innovation and Peter Heap is a Senior Research Associate at Centre for Global Studies at the University of Victoria, British Columbia.

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

1. Asian leadership and the global economic crisis
2. Asia’s global leadership at a difficult time
3. Connecting Asian and global cooperation

As the G20 assembles in Seoul, it has a full plate. There is the need for continued progress on strengthening financial regulation – on getting countries to harmonise their still divergent approaches to regulatory reform and to push the Basel III reforms of capital adequacy through to their logical conclusion. There is the continuing inadequacy of international arrangements to wind up insolvent cross-border financial institutions. There is the need to coordinate monetary and budgetary policies so as to reconcile fiscal consolidation in some countries with the need for continuing policy support from others for what remains a less-than-certain recovery. There is the need for agreement on the global financial safety net, the pet project of the Korean hosts. There is the need to push ahead with quota reform at the IMF and to agree on reducing the number of European seats on the fund’s executive board.

No doubt the G20’s communiqué will touch on all these areas. But there is also the elephant in the room, namely China’s exchange rate.

The G20 does not exactly have a record of issuing strong statements or achieving breakthroughs in this area. China has been reluctant to let its currency adjust significantly, the announcement last year of a change in its exchange rate regime notwithstanding. And other G20 countries have been reluctant to push the issue. This G20 failing jeopardises the prospects for recovery.

The absence of progress on this front means that global imbalances will be back. Asia is still running current account surpluses and accumulating reserves. The European periphery, previously accustomed to running current account deficits, is no longer in a position to do so. This leaves only the United States on the other side of the equation. US households are saving more than before the crisis, but the country as a whole is not. The IMF projects the US external deficit as soon rising back to 4 per cent of GDP, and it may be overoptimistic.

The return of global imbalances would be worrisome for two reasons. First, imbalances, while not the entire explanation for the financial crisis, were certainly a factor in those events. Foreign capital inflows allowed the US to keep interest rates lower for longer than otherwise and encouraged investors to stretch for yield. Allowing those imbalances to return would not encourage the deleveraging that is needed to reduce financial fragilities.

Second, the growth of the US external deficit, against the backdrop of continuing high unemployment, raises the danger of protectionism. The Fed having spent its bullets and fiscal policy having been sidelined for political reasons, the pressure for US politicians to do something – anything – to encourage employment is intense. At this point, protectionism is the only lever available. Almost everyone would like to see the danger created by this sort of response averted. The question is how.

The answer is for China to allow its currency to rise more rapidly against the dollar. For a long time i’ve actually been on the side of cautioning against pressuring China to act. Letting the Renminbi rise would slow the rate of growth of Chinese exports and shift domestic demand away from locally-produced goods. If nothing else changed, this would mean a growth slowdown for China, or worse. My view has been that China should let the Renminbi rise very slowly as it gradually boosts domestic consumption through the development of financial markets and an effective social safety net, institutional reforms that can only take place slowly over time.

Now, however, the Chinese authorities are actively taking steps to cool off the economy, mainly by instructing the banks to tighten their lending standards. Growth rates accelerating to more than 11 per cent late last year and early this one raised the risk of overheating. They led to worries about a housing bubble. They created visible strains in the labour market.

Why not cool off the economy by shifting some Chinese spending towards imported goods, instead of the current strategy of reducing overall spending? And why not shift the composition of output away from manufactures produced for export and toward services produced for the home market?

The Chinese authorities still hesitate to go down this road. The source of their hesitancy is presumably a reluctance to mess with success – to tamper with a tried and true growth model. Evidently the United States is not the only country where politics stand in the way of the adoption of a sensible economy policy.

Why, then, does the rest of the G20 hesitate to push? There is an understandable caution about putting pressure on the world’s second largest economy, which has considerable capacity to push back. There is the tradition of consensual decision making within the G20. but if the G20 is incapable of taking hard decisions, then what is it good for? The rest of the communiqué will be easy. Whether it says something significant about China’s currency will be the acid test.

Barry Eichengreen is a Professor of Economics and Political Science at the University of California, Berkeley.

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

1. China’s exchange rate policy dilemma
2. China’s exchange rate: The plight of an immature international creditor
3. China’s exchange rate policy, its current account surplus, and the global imbalances

The elevation of the G20 to a leaders’ summit represents a change to the international system of an order that can be compared with the establishment of the great postwar international institutions. The G20 is now the premier forum for global economic governance following its elevation to leaders’ level meetings after the global financial crisis. The United States has led a smooth transition in the locus of power from the G7/8 to the G20.

The membership of the G20 is recognition of the importance of Asia in the global system. Now Asia has this global platform can it deliver on its global responsibilities?

Finding a way through — forging a consensus — on a strategy for global recovery after the financial crisis is the challenge that faces leaders in Seoul next week. Asia, and in particular, China with its current account surpluses and its huge international reserves is in the spotlight on this issue.

This week’s lead, from Yiping Huang in the next issue the East Asia Forum Quarterly (EAFQ) argues that the G20 should focus on structural reform in key countries in which imbalance is a problem. Currency adjustment should be an important part of the, but not the entire, policy solution.

‘The large Chinese current account surplus derives mainly from distortions in factor markets, which repress costs of production and artificially improve the competitiveness of China’s manufacturing exports. Exchange rate misalignment is only a part of the picture of distortions. Elimination of the current account surplus requires liberalisation of the factor markets. Relying exclusively on currency adjustment to correct external imbalances would require an out-sized appreciation, and that would be difficult for China to accommodate at this stage, both politically and economically.

‘Likewise, the exceedingly low savings rate in the US before the subprime crisis was caused by a number of factors. Simply depreciating the US dollar by a significant margin is unlikely to lift the savings rate materially. Such currency moves threaten to destabilise the economy and financial markets.’

EAFQ brings together contributions from across the Asia Pacific region to address some of the big questions that face Asia in the G20.

There are clearly Asian interests in the G20 although the region brings diverse perspectives and agendas to the global table, as it should. And how well the Asian members of the G20 can project broader regional interests and engage non-member support for those interests and agendas is another question. The legitimacy of the process will ultimately depend on getting the answer to that question right. But there is resolve in Asia to make the G20 work, since there is collective Asian interest that this global initiative succeed and continue and that encourages the G20′s Asian members to define a constructive agenda through which to contribute to the international public good.

The spotlight is on Korea as the first Asian and newly emerged country to host the G20.

The remarkable achievement of the G20 in helping to steer the global economy out of the worst of the financial crisis thus far has solidified its global role. But a lot of risks remain.

The global economy remains unbalanced, because there is imbalance within major economies. The way out is difficult and requires important structural adjustments at home for most countries. Asia can help to lead by example.

Asia can help the world by helping itself in advancing vigorous structural and financial reform, strengthening domestic safety nets, rebalancing growth and showing leadership and flexibility on policies that affect others, including on the exchange rates as well as by promoting global institutional reform, for example, within the IMF and WTO.

1. How should G20 help global rebalancing?
2. Asia’s global responsibilities: Delivering through global and regional arrangements
3. Happy days ahead? Policy implications of the global recovery for India

Korea has an opportunity to exercise historic leadership when it chairs the G20 meeting in Seoul. This will be the first time that a non-G7 country has hosted the G20 since the larger, more inclusive, group supplanted the smaller rich-country group in April 2009 as the premier steering committee for the world economy. With large emerging market and developing countries playing such expanded roles in the world economy, the G7 had lost legitimacy. It was high time to make the membership more representative. But there is also a danger that the G20 will now prove too unwieldy, in which case effective decision-making might then revert to the smaller group.

When countries like China and India used to demand a larger voice in world governance based on their large populations, they did not get very far. 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’.

1. Korean leadership in the G20 and the U.S.-ROK alliance
2. Asians can think: A time for Asian leadership at the G20
3. Korea and the G20 summit next November

The formation of the G20 grouping of finance ministers and central bank governors and their heads of state is indeed a significant improvement compared to the previous G8 arrangements. The dynamic changes in global economic output and international trade are adequately reflected in this expanded group. The inclusion of 10 emerging economies such as South Africa, Mexico, Argentina, Brazil, China, South Korea, India, Indonesia, South Arabia and Turkey in the consultative process has broadened the scope of the dialogue. but it still excludes 170 nations from direct participation in this forum.  Norway, one of the major donors to development programs, has protested that it has no voice within the group.

The questions of the legitimacy, representative character, governance structure, voice and accountability of the G20 remain and pose certain dilemmas for countries such as Pakistan which do not have a seat on the table. While it is true that the number of seats in this organisation should remain limited to ensure the effectiveness and continuity of its activity, the lack of transparency in the process and the choice of the countries invited to become members of the group causes some serious concerns.

The forces of globalisation are spreading so widely and rapidly and the importance of international public goods is becoming so palpable that a new international governance structure is needed. it is not obvious that the G20 can fill this gap. for example, the issues remitted to the finance ministers of the G20 by their leaders at Pittsburgh involve areas such as a framework for strong, sustainable and balanced growth, reforming the mandate, mission and governance of the International Monetary Fund (IMF), development banks, an open global economy, modernising our global institutions to reflect today’s global economy, and others. Each one of the 170 excluded countries or economies has direct interest in these issues which are going to affect its future directly or indirectly. The interests of the majority of countries are neither taken into account nor given due weight in the decision-making process.

Let us illustrate this problem with the example of Pakistan—the fifth most populous country in the world, enjoying the same per capita income as its next door neighbour, India. The size of the Indian economy is eight times that of Pakistan and naturally India, on the basis of its economic strength and dynamism, was invited to become a member of the G20.

If the political relations between the two countries were cordial and there was a convergence of national economic interests then it is quite conceivable that Pakistan could use India as a proxy for its representation at G20 forums. But the fact that the two countries suffer from a serious ‘trust deficit’ precludes this particular possibility.

Where does this leave Pakistan? Any reform of the IMF, or multilateral development banks or setting up of new global institutions would affect Pakistan. How does it ensure that no damage is inflicted upon it under any future arrangement and in fact it is a beneficiary of the decisions taken to reform global institutions?

Assume that the composition of the IMF and the World Bank’s executive boards is altered, replacing nine of the 24 seats belonging to the European Union. Will this result in automatic takeover by the 10 members of the G20? Wouldn’t these countries argue that their economic prowess has already been established by their inclusion in the G20 and that therefore they are entitled to occupy the vacant seats? Won’t this platform be seen as a means of self-aggrandisement by some?

In the WTO Doha Development Round there are multiple groups among the developing and emerging countries each trying to project and safeguard their own parochial interests. These groupings do not stay intact when the global climate change discussions take place. A new set of alliances, networks, groupings are constantly formed and dismantled depending on the nature of the problem. Similarly, the simple dichotomous relationship between the developed and  eveloping countries has also lost its meaning.

In some instances, some developed countries do align themselves with some developing countries and in other cases they stay together as a bloc with other developed countries in a multi-dimensional, multi-player environment, it is hard to predict which of the groupings or alliances would remain stable and for what period of time. The large eco-system has therefore become inherently unstable and therefore the governance structures such as the G20, with their selected, fixed sub-set of countries, are inadequate to address the requirements  of the system.

What are the options available to the excluded countries such as Pakistan to have a voice at the G20? One option is the formation of constituencies consisting of various countries, as is the case with the IMF and the World Bank boards.

Representation on G20 forums from each constituency would be on a rotational basis for a fixed term. Each country can select a constituency of its own choice from among the developed and developing countries. The other option is that 20 countries already included in the G20 should have formal consultative mechanisms with clusters of excluded countries (associate countries) whereby they solicit their input and advice, represent and articulate the interests of their associate countries and keep them informed about the decision-making process.

The above options, though not perfect, would overcome some of the apparent weaknesses of the existing arrangements. it will at least introduce transparency to the process of inclusion of countries, protect the interests of excluded countries, give a voice to the latter group and hold the membership accountable.

Ishrat Husain is the Dean and Director of the Institute of Business Management, Karachi, and served as a Governor of Pakistan’s central bank from 1999 to 2005.

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

1. How can Asia strengthen its voice at the G20?
2. Exit, voice, and loyalty in Japan’s LDP
3. Local versus central governance in China: Providing basic public services