From Seoul to Cannes: what has the G20 delivered so far?
As the Sherpa of the Republic of Korea, I found one of the most rewarding outcomes of the Seoul Summit was that it delivered on all of the commitments made at previous Summits. For instance, member nations reached an agreement on quota reform of the International Monetary Fund (FVIF); it was a difficult endeavor because reform was long viewed as a "zero sum game." The G20 nations also adopted new international standards for bank capital adequacy, leverage ratios, and liquidity standards. They agreed up(m general principles for regulation of systemicaily important financial institutions (SIFIs). These IMF quota and core financial regulatory reforms were originally scheduled for early 2011, but the Seoul Summit facilitated a November 2010 agreement on these issues. In short, the Seoul Summit adhered to the fine tradition established at the Washington Summit in 2008--the principle that subsequent G20 Summits should deliver on the commitments made at the previous Summits in a timely fashion.
The Seoul Summit also strengthened our ability to ensure macroeconomic policy coordination, thus alleviating the concern and uncertainty related to the implementation of the Framework for Strong, Sustainable, and Balanced Growth and our Mutual Assessment Process (MAP). "Currency wars" became a "hot button" headline issue in October 2010, and many predicted that the success of the Seoul Summit would depend on its ability to achieve policy coordination to address global imbalances. Pessimists said that while it was possible for the G20 to muster policy coordination in the immediate aftermath of the subprime crisis due to looming fears of a global crisis, effective and amicable resolution of the "currency wars" and global imbalance issues would be far more difficult since members' positions and interests were much more divergent with respect to these matters.
However, at the Seoul Summit, the G20 nations agreed to maintain current account imbalances at sustainable levels and to establish indicative guidelines under the French Presidency. To be sure, the media has delivered different assessments of this achievement. However, as someone who was intimately involved with negotiations, I am certain that it would have been impossible to reach this agreement without the strong belief among the leaders that concerted policy action is essential to solving the problems of the world economy.
The Seoul Summit's third main achievement was that it demonstrated the G20 is not just about crisis management, but also about global economic management beyond crisis. For example, for the first time ever, the Republic of Korea placed development at the center of the G20 agenda. Doing so helped to demonstrate that the G20's leadership actively engages with all the stakeholders in the global economy, not just its members. The Republic of Korea took seriously its historic responsibility to demonstrate that emerging economies can successfully lead global discussions.
Global Imbalances and Indicative Guidelines
The sudden media focus on exchange rates and the "currency wars" caused serious concern in the lead-up to the Seoul Summit. Just as the financial crisis in southern Europe loomed large at the Toronto Summit, the centrality of the currency tensions immediately prior to the Seoul Summit demanded the G20 reach a political consensus on how to address such tensions. That is why the Republic of Korea proposed current account targeting at four percent of GDP as a fundamental alternative solution. I have been asked numerous times how we came up with the number four. This figure was based on economic forecasts that member nations themselves submitted as part of the MAP exercise. Most of the non-oil-producing nations estimated that their current account balance for the next several years would be in the range of four percent. It appeared that if the G20 members could agree to try to abide by the forecasts that they had themselves submitted, then the global imbalance issues could be largely alleviated. Accordingly, it seemed counterproductive to spend too much time solely discussing exchange rate issues at die expense of other important issues. Allowing each member country to choose its own policy option, including exchange rate adjustment to reduce its imbalances, seemed a more politically feasible option.
However, as expected, there was significant resistance to the four percent numerical target. Critics pointed out that the current account imbalance is a result of international competitiveness, as well as a result of inter-temporal optimization of private sectors that reflect age profiles and savings-investment gaps. Accordingly, critics argued that as long as governments do not intervene in the foreign exchange market, current account imbalances should not be viewed as a problem that requires a coordinated policy response. The same critics likened the phenomenon to the trade imbalance between die state of New York and other states in the United States. Why, they argued, should the trade surplus enjoyed by New York be viewed as a problem? However, in the United States, fiscal consolidation is possible and labor is mobile across state lines. This is why persistent trade surpluses enjoyed by certain states (attendant imbalances in job creation) do not result in heightened political tension among the various states. However, since this is not true in international trade, it does not seem appropriate to apply the US states' trade imbalance analogy to international trade.
After all, the G20 did not agree on a specific quantitative target, but leaders did agree in a broader sense to reduce persistently large current account imbalances and to develop indicative guidelines for that purpose with a designated timeline. This provided political momentum to reduce global imbalances, an objective which has long been declared but has lacked follow through. More importantly, from a theoretical standpoint, this is intimately related to one of the main agenda topics of the Cannes Summit, which is how to build a more stable and resilient international monetary system.
One of the shortcomings of the current international monetary system is that when imbalances occur, the adjustment mechanism is not only ambiguous, but also asymmetrical. First, the onus to address the imbalance falls disproportionally on the deficit nations. Second, as Jacques Rueff, former advisor to French President Charles de Gaulle, once famously said, a country with an international reserve currency can have a "deficit without tears"--it could avoid the burden of adjustment by printing more money. However, by agreeing to develop a guideline for adjusting undesirable excessive current account imbalances, the Seoul declaration made it clear that both deficit and surplus nations bear the responsibility of making adjustments.
To my pleasant surprise, there has been significant progress in establishing indicative guidelines under the French presidency. As promised by leaders in Seoul, the G20 finance ministers and central bank governors agreed in February of this year upon a set of indicators that will allow them to focus on persistently large imbalances. In April, they arrived at a broader consensus on the set of indicative guidelines against which these indicators will be assessed. In particular, countries that are identified as having persistently large imbalances by at least two of the four approaches will be evaluated in the second step of the process to determine the nature and root causes of their imbalances and to identify impediments to adjustment. The first step has already been completed, and seven countries have been flagged for deeper analysis in the second step. The agreements reached in February and April serve as a touchstone that will affect evaluations of die Seoul and Cannes Summits and help reaffirm the legitimacy of the G20 as a premier forum and the usefulness of the MAP.
Financial Safety Nets & Monetary System Reforms
During the 1997 Asian financial crisis and the subprime crisis, even developing countries without structural problems in their financial sector suffered severe liquidity constraints when developed countries withdrew their money from emerging markets. This highlights the importance of a liquidity supply mechanism that developing countries can rely on when such events occur. Last year, the Republic of Korea focused on the LAIF's crisis-prevention toolkit by enhancing the flexible credit line (FCL) and establishing the precautionary credit line (PCL). It was a proud moment for the Republic of Korea when it introduced the crisis prevention mechanism at the Seoul Summit after being forced to accept the LMF's crisis resolution package in a wholesale fashion just a decade ago during the 1997 crisis. In particular, die introduction of the multi-country FCLs, to simultaneously provide precautionary liquidity to many countries exposed to a common shock, marked an important step to resolve the first-mover problem where countries hesitate to ask the LMF for financial support for fear of being stigmatized.
Transcontinental Transactions: Surplus Economies in Comparative Perspective Country Current Account Balance (Billions Group of US Dollars)* 2009 2010 2011 Euro Area 13.424 34.821 16.834 Economies Major -209.090 -321.021 -416.805 Advanced Economies (G7) Other 226.890 270.123 298.783 Advanced Economies (Advanced Economies Excluding Euro Area / G7) Emerging 287.769 422.308 592.292 and Developing Economies * Current Account Balance: The sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends), and net transfer payments (such as foreign aid) International Monetary Fund; 2011.
The Cannes Summit must focus on two additional Global Financial Safety Net (GFSN') issues that leaders introduced in the Seoul Declaration. We must further explore structural approaches to cope with shocks of a systemic nature and ways to improve collaboration between regional financial arrangements (RFAs) and the IMF. Early last year, when we first introduced the GFSN issue, we considered institutionalizing bilateral swap arrangements with the Federal Reserve. This is because it is impossible to avoid discussing the role of the central banks in the provision of global liquidity if we were to deal with global liquidity shocks. However, most major central banks were opposed to this idea, pointing out that providing support to emerging economies by printing money may not be politically feasible and that this approach raised serious moral hazard issues. In order to ensure we achieved tangible results within the year, we focused our discussions on instituting measures to improve the IMF's lending facilities.
However, the decision of the European Central Bank to provide liquidity and extend its bilateral swap arrangements in dealing with the financial crisis in southern Europe in the second half of last year demonstrated that this issue affects not only emerging economies but is also essential for the stability of advanced financial markets. As the Cannes Summit will develop ideas for a new international monetary system, the discussion will turn inevitably to identifying a framework for providing global liquidity. To give one example, at the Seoul Summit, in reaction to the quantitative easing II announced by the Federal Reserve, there was much discussion about the responsibilities of nations with international reserve currencies. It may therefore be necessary to consider whether it would be appropriate to have a similar discussion regarding the European Central Bank's quantitative easing, which was undertaken in connection with stabilization of the European financial market in the immediate aftermath of the financial crisis in Ireland, or quantitative easing by the Bank of Japan, which was undertaken with the purpose of reducing the volatility of the Japanese yen.
In light of the fact that the euro and yen also function as international reserve currencies, in order to build a more stable and resilient international monetary system, it may be necessary to discuss cooperation among major central banks. Two main questions were regrettably not addressed at the Seoul Summit. First, was the cooperation and coordination among central banks in addressing the sub-prime crisis sufficient, or is there room for improvement? Secondly, is there any way to coordinate the function of central banks in providing liquidity with the IMF's crisis prevention tools?
One question facing the Cannes Summit regarding the international monetary system reform is whether discussions can go beyond the "academic" and offer practical and applicable solutions--an outcome that has eluded us for over a century. In this connection, it is very fortunate that the establishment of a European Financial Stabilization Mechanism and European Financial Stability Facility has highlighted the necessity for RFAs, such as the Multilateralized Chiang Mai Initiative Mechanism (CMLM). When Asian countries raised the possibility of establishing the Asian Monetary Fund and the Chiang Mai Initiative in the immediate aftermath of the Asian financial crisis of 1997, the initial reaction of the international community and the IMF was negative. Although long overdue, we are finally paying attention to this important topic.
The issue of cooperation between RFAs and the IMF involves not only establishing a crisis management system, but also initiating larger discussions on the international monetary system. Strengthening RFAs offers a practical solution to lessen demand for foreign currency reserves, diversify reserve currencies, and enhance the role of the IMF's Special Drawing Rights (SDR) as a reserve asset. Asia can be a good testing ground this year. Ways to better coordinate the CMIM and the IMF are currently being discussed in Asia. In particular, introducing ex ante crisis prevention mechanisms in the CMLM and linking them with the LMF's ex ante mechanisms can be an important topic to study. Further discussion on the establishment of a regional settlement infrastructure, and the expansion of local currency trade payment settlement schemes such as the one between the People's Republic of China and Hong Kong, China into a regional trade settlement system could be a practical solution to international monetary system reform.
Ethopian Prime Minister Meles Zenawi's comment that the Seoul Development Consensus dovetails with the ".African Consensus" was one of the most memorable moments of the Seoul Summit. The Seoul Consensus reflects the view that inclusive growth is overwhelmingly the single biggest contributor to poverty reduction. The Seoul Consensus is an attempt to ensure that international development efforts revolve around economic factors--such as infrastructure, private investment, and skills--in achieving poverty reduction through growth. The presence of countries in the G20 such as the Republic of Korea, the People's Republic of China, India, and Brazil that have recently experienced many different types of development models demonstrated recognition of the fact that there is no universal model for growth and development. In order to ensure that the Seoul Summit's discussions on development do not culminate in a mere announcement of an initiative or a "photo opportunity" and that our efforts can deliver real progress, we must give heed to the voice of developing countries.
Accordingly, the Republic of Koreas President Lee Myung-bak advocated a "consumer-oriented approach" based on extensive inquiry into what developing countries sought. The Seoul Consensus reflects the view that low-income countries are an important part of the solution to global imbalances as new sources of aggregate demand, and should be equal partners for achieving a more resilient and balanced global economy; that economic growth is the most effective means of achieving the millennium development goals (although alone not sufficient) and that the role of public interventions must be re-emphasized in achieving low income countries' growth; and that, in particular, addressing bottlenecks in infrastructure investment are extremely urgent and must be prioritized. These views that are articulated in the Seoul Consensus reflect the message we have consistently received from our developing country partners in Africa and elsewhere.
To ensure effective implementation of the ideas expressed by the Seoul Consensus, the G20 has drawn up a Multi-Year Action Plan with nine key pillars of economic growth including infrastructure, food security, and human resource development, among others. These action plans have concrete timelines and implementation mandates for G20 members and relevant international organizations, most of which will have a delivery or reporting deadline at the Cannes Summit. To accomplish these many tasks within these very strict timelines will not be easy According it will be important to use the 47 item multi-year agenda on financial regulatory reforms announced at the Washington Summit, on which the London and subsequent Summits delivered, as a benchmark.
At the same time, the emphasis of the Seoul Summit is on promoting key economic drivers and tackling bottlenecks to inclusive growth. Therefore, more emphasis should be placed on infrastructure, given the particular importance low-income countries themselves have placed on this pillar--an importance they have clearly communicated to the G20, hi that regard, the G20 High-Level Panel should play an important role in identifying institutional bottlenecks to cross-border infrastructure investment, evaluating bankable projects, and promoting public-private partnerships.
There certainly has been criticism about the effectiveness (especially after the global financial crisis) and legitimacy (because it does not represent all countries) of the G20. Looking at the bright side, however, the G20 has had notable achievements. The global governance structure implemented after World War II had not changed and did not reflect the growing role of emerging economies. The G20 is a belated recognition of the multi-polar state of the world, and emerging economies are now better represented in global international fora. In addition, unlike in other organizations where coalitions are characterized either by income--high, middle, and low--or region--Asia, Africa, Latin America, .Middle East, Europe, and North America--in the G20, coalitions among members change depending on the issues under debate in an ever-changing variable geometry. While emerging economies' voices have strengthened in the G20 discussions, each state's own interest can still be reflected differently for different issues. Each nation in the G20 thus enters into dynamic coalitions with others that share its views, raising the potential of the G20 to reach agreement on key global issues.
In order to secure its footing in the international arena, the G20 must deliver on its commitments with concrete outcomes to present itself as a valuable global forum. Happily, the Seoul Summit delivered on the Toronto Summit commitments. Hopefully, France and Mexico will continue this fine tradition to ensure the G20's firm foothold in the world governance structure.
Changyong Rhee is the Chief Economist at the Asian Development Bank. He was Secretary-General of the Presidential Committee for the 2010 G20 Seoul Summit.