By Michael Prowse, Senior Visiting Fellow
Toronto was just a holding operation for the G20. Amid signs of flagging growth in many countries, the assembled leaders agreed to disagree on the need for further fiscal stimulus. All the other important decisions – for instance on bank capital requirements, on IMF reform, on the broader financial regulation agenda, on the European sovereign debt crisis, and on what to do if the world economy does sink back into recession – were postponed until the Seoul meeting.
This puts a heavy responsibility on South Korea, the host for the November summit – as Il SaKong, who is leading Seoul’s preparations, admitted at a briefing this week at the Peterson Institute for International Economics in Washington. Mr SaKong said he lost count in Toronto of the number of times decisions were postponed until November.
Korea is determined not just to broker agreements on the key issues unresolved in Canada but also to introduce a “new agenda” that is of special relevance to emerging and developing nations. The main items here are how to promote economic development in poorer countries and how to protect emerging nations from capital volatility.
Whether by luck or judgment, the G20 has picked the right nation to chair its next summit. If this steering committee for the global economy was to retain any credibility, it was essential that an Asian, and non G 7, nation take up the baton. Korea is ideally placed to serve as a bridge between industrialised and developing nations, and between east and west.
The IMF classifies it as an advanced economy, but its per capita income is only about $20,000 a year which places it midway between the rich and poor nations. It has deep knowledge of both the US, its principal military ally, and of China, its principal trading partner.
Politicians, pundits and the public have welcomed the G20’s emergence as the premier forum for debating global economic cooperation. Yet although the G20 is a much more representative body than the G7 or G8, it has so far focused almost entirely on the problems confronting advanced nations as a result of the meltdown of their financial systems.
The old industrialised nations have invited others to their table but rather rudely are still monopolising the conversation. To some degree this is inevitable since most of the world’s leading banks are located in the US or Europe. If fire-fighters are to be effective they must initially focus their attention on the places where the fire is burning most fiercely.
In order to inaugurate a new era of more enlightened global governance, the G 20 now needs to evolve in two complementary ways. It must adopt a longer time horizon and become more than a financial fire-fighter – in Fred Bergsten’s words it must become a “systemic manager” of the world economy. Equally important it must begin to address the diverse needs of a much broader range of nations. Its obligations extend not just to the developing and emerging nations that are members of the forum but also to the 172 nations that are not invited to its semi-annual meetings.
Korea’s historic task at the G20’s summit in Seoul this November is to ensure that it does evolve in these desirable directions. Its new development agenda is a step in the right direction. Mr SaKong is not willing to divulge much detail, but Korea will certainly not be advocating the techniques that helped it grow so fast in the 1980s (high tariff barriers to protect infant industries and bureaucratic direction of economic resources). Instead, Korea intends to promote a development model centred on “private sector capital investment and human resource development”.
Korea’s strategy has a logical corollary. If capital-intensive development is to be feasible in emerging nations, the rich industrialised nations must save more, and become capital exporters rather than importers. In the case of the US this requires a significant adjustment of national priorities.
Mr SaKong also wants the G20 to address what he rightly regards as a major obstacle to growth in the developing world: the fear of capital instability that has prompted many nations to accumulate huge dollar reserves. This year emerging and developing nations will hold an astounding $6.1 trillion dollars worth of reserves, mostly in dollar assets. That includes $3.4 trillion in developing Asia, $1.0 trillion in the Middle East and North Africa, $600 billion in Latin America and $450 billion in Russia.
When capital can flow out of small open economies as fast as it flows into them, and when every financial centre is potentially subject to speculative attack, one can understand the motive for building up such war-chests. But rather than filling bank vaults with dollars, it would make more sense to spend them on educational, health, transport and communications infrastructure – the prerequisites of equitable and sustainable development.
Korea’s solution is the establishment of “global financial safety nets”. Again Mr SaKong is not willing to provide any details. But Korea appears to want the G20 to replace informal and bilateral currency swaps between central banks with a permanent international framework of swaps.
If individuals have access to bank overdraft facilities, they do not need to hold such large precautionary deposits. Something similar could be true of developing nations: if they were confident of financial support to tide them over temporary market-induced difficulties, they would not be tempted to build up such enormous foreign currency reserves.
Korea expects to spend 30-40 per cent of the Seoul meeting on these new agenda items. But it recognises the bulk of its effort will be on the issues unresolved after Toronto. And here Korea is fortunate that the timing of events favours progress this November. The first Asian Summit may thus be rated an historic success, further enhancing the authority of the G20 as the premier forum for economic coordination.
For instance, on macroeconomic cooperation, the process the IMF initiated of “mutual assessment” of policies by G20 members will be entering its second stage. At Seoul there should be detailed discussion of what policies individual countries should adopt so as to ensure balanced global growth.
On reform of international institutions, the G20 appears resolved that the vexed question of reforming member countries’ “quotas” at the IMF will be finally settled at Seoul. At Pittsburgh the G20 agreed in principle on a 5 per cent shift towards developing and emerging economies, but deciding who gains and who concedes ground has proved contentious.
Given the speed at which Asia is growing, this is unlikely to be the last adjustment giving emerging nations greater clout. Korea will also push for a transparent selection process for the heads of institutions such as the IMF, with merit rather than nationality being the primary criterion for appointment.
On the crucial issue of bank capital reserves, the Basel committee of regulators in Switzerland should have finalised their proposals – “Basel III” - in time for an agreement at Seoul. The most contentious issue is likely to be the transition period permitted rather than the standards themselves. Banks are arguing that raising standards too quickly will only increase the cost of loans to customers and further impair the fragile recovery.
Mr SaKong argues that the G20 has distinguished itself from other forums by adopting a strictly pragmatic approach to problems. The London summit, for instance, successfully averted global depression by agreeing on practical measures to boost growth.
Korea aims to be similarly pragmatic this November and has little interest in discussing a grandiose new global architecture. Where Seoul may differ from previous summits will be in showing greater sensitivity to questions relating to the G20’s legitimacy as a steering mechanism for the world economy, and in seeking to widen the range of issues under discussion.
But in promoting its development agenda, Korea will be focusing only on “win-win” strategies –those from which all G20 members stand to benefit. It will not be in the business of promoting the interests of some regions or classes of economy at the expense of others.