Responsibility for overseeing the global economy is passing rapidly from the G8 to the G20, as it should. The latter accounts for 90 percent of global GDP and two-thirds of the world’s population, so this shift is highly desirable — indeed, essential.
But there is a risk that the interests of the remaining one-third of the world’s people (and the majority of the small countries) will not be adequately represented as the international architecture for managing the global economy evolves.
In the current crisis, a substantial fraction of countries outside the G20 are essentially defenseless: small relatively poor economies, no fiscal capacity for stimulus and inadequate reserves to offset the capital outflows that occurred to shore up damaged balance sheets in advanced markets. Within the G20 countries, there are mechanisms that attend to the interests of the most vulnerable citizens. In the global economy, the most vulnerable are whole countries. Inattention to their interests is not just a moral issue, but a potentially explosive social and economic one.
As a result, the world’s international economic institutions will need to be strengthened in terms of governance and resources so that they can act as circuit-breakers in the event of future financial and economic turbulence. Entering the crisis, the IMF was underfunded, and it continues to lack credibility and trust in certain systemically important parts of the world. It is now in the process of being better funded, but we are eight months into a crisis in which international capital flows became volatile and were driven largely by emergency responses rather than underlying economic fundamentals.
Thus, there remains the central question of trust and confidence in the system, both of which have been badly damaged and will take time to rebuild. At the moment, the majority view in most countries is that the financial system failed badly, but that the incentives and dynamics of the broader market-based system in a relatively open global architecture remain the best avenues for wealth creation, poverty reduction and the expansion of opportunity. There are, of course, dissidents, and the balance could shift quickly. It is not inconceivable that the baby will be thrown out with the bath water.
There is no magic bullet for today’s crisis. Pragmatic, steady progress at the national and international levels in improving the regulatory architecture and increasing our collective ability to avoid non-cooperative behavior and suboptimal equilibria, is the best course to follow. It is the course we are on. But for now, it is a journey without a clearly defined, widely accepted endpoint.
Michael Spence is a Nobel laureate in economics (2001) and chairman of the Commission on Growth and Development.
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