G20 VERSION 2.0 WILL APPEASE THE SCEPTICS / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( RECOMMENDED READING )

G20 version 2.0 will appease the sceptics

By Daniel Price

Published: March 31 2011 22:38

In Nanjing on Thursday Nicolas Sarkozy, the French president, convened a meeting of officials to prepare for the Group of 20 leading nations summit in France this autumn. They met amid a rising chorus of academic and media criticism about the G20’s role. Fuelled by what they saw as paltry deliverables at November’s Seoul summit, and continuing deadlock on global imbalances and exchange rates, these critics question the role of the self-declared “premier forum” for global economic co-operation.


But G20 sceptics miss the point. The group has evolved over nearly three years and five summits. Initially operating in crisis-response mode, version 1.0 of the G20 displayed impressive unity, in Washington and London, producing plans for stabilising financial markets, co-ordinating regulatory reform, and agreeing a global stimulus. Then, 2009’s Pittsburgh summit saw the release of G20 “version 2.0,” with the focus shifting to longer-term macroeconomic governance, later pushed forward in Toronto and Seoul.
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On these issues this version 2.0 will yield incremental, not seismic results. The G20 should be judged on whether, first, the leaders remain committed to a co-ordinated approach for addressing the critical global economic issues; and, second, whether they remain willing to put on the table issues that were previously regarded as “off limits”, and solely within the sovereign prerogative of individual countries – such as monetary policy, exchange rates and debt levels.
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Using these standards, the G20’s progress is encouraging. We have seen a fundamental shift from a point where, at the 2008 Washington summit, certain countries objected to the very use of the word “imbalances”, to one where finance ministers, central bankers, the International Monetary Fund and others routinely debate, within the G20 process, the components of such imbalances and how to correct them. Similarly, we have moved from a world where international financial regulation was the province of technical experts labouring in obscurity on a leisurely schedule to one where politically accountable actors play a vital role in setting the agenda and monitoring its implementation.
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The G20 now functions as a steering committee that provides political energy and direction to international standard-setters, and also assesses progress on implementation. Whether the subject is capital requirements, current account imbalances or “too-big-to-fail” banks, this is tough work both technically and politically. But here the G20 is moving along nicely.
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That said, the G20 is not the right forum to address all global issues. It is not a committee to save the world. The G7 industrialised nations intervened in currency markets in the aftermath of Japan’s earthquake. And an ad hoc coalition is enforcing the UN-sanctioned “no-fly zone” in Libya. There are other pressing matters requiring global action – such as climate change, HIV/Aids and clean drinking water – being addressed by other groups. Here, the G20 must guard against mission creep, which could undercut its efficacy on the global economic issues squarely within its remit.
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For G20 version 2.0, Mr Sarkozy’s agenda is broadly right. It properly focuses on advancing a consensus on issues of monetary and fiscal policy that would allow market forces to play a greater role in the setting of exchange rates, and would apply some limits on imbalances. But Mr Sarkozy must also guard against over-reach. On capital controls, the G20 should be cautious about endorsing measures that constrain capital flows, especially as this may run counter to the overall goal of restoring global growth. On food security, French proposals for transparency of supply and banning export restraints are beneficial. Yet care must be taken not to wrongly equate the depth or liquidity of commodity markets with harmful speculation, or to limit the use of hedging tools, a restriction that could actually increase rather than dampen price volatility.
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The success of Mr Sarkozy’s summit, and the G20 itself, require efforts both to resist nationally Balkanised financial reform measures and, incrementally, to enlarge the scope for international superintendence of historically domestic economic policy issues. But if the G20 stays focused, and expectations are reasonable, even the sceptics may be impressed.
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The writer was international economics adviser to former US president George W. Bush, and a G20 “sherpa” in 2008. He is a partner at Sidley Austin LLP in Washington


Copyright The Financial Times Limited 2011.