South Korea has an historic opportunity when it chairs the G20 meeting in Seoul on Thursday and Friday, for this will be the first time that a non-G7 country has hosted the G20 since the larger body supplanted the G7 as the steering committee of the world economy. However, there is a danger that the G20 will now prove too unwieldy.
South Korea justifiably views its role as host as another opportunity to mark its arrival on the world stage, but it should make more of its opportunity than this, and instead exercise substantive leadership. Otherwise, its turn at the G20’s helm risks resembling the chaotic Czech presidency of the EU last year, which confirmed some larger EU members in their belief that it is a mistake to let smaller countries do the driving.
The challenge for South Korea stems from the inevitable tradeoff between legitimacy and -workability. The G7 was small enough to be workable, but too small to claim legitimacy. The UN is big enough to claim legitimacy, but too big to be workable.
The G20 has enough legitimacy for its purpose —– which is more limited than the purposes of formal institutions such as the UN, the IMF and the WTO — by virtue of the fact that it accounts for 85 percent of the world’s GDP, for example, but it is too big to be workable as a steering group. A principle of multilateral talking-shops is that conversation is not possible with more than 10 delegations in the room. With 20 delegations, each reads prepared statements; there is no give-and-take, and the communique is a watered down least-common-denominator press release.
The G20 needs a smaller informal steering group, a G6 or G9, which could meet on the eve of the main G20 meeting and discuss how to organize the discussion in the larger group.
It would be unwise to be too specific at this point about who should be in the smaller group. Nevertheless, the US, Japan, and Europe (represented perhaps by the EU Commission), must be there on the rich-country side; China, India, and Brazil must be there on the developing-country side. Of course the pressure to expand is always irresistible. Europe could be represented by both the UK and the eurozone. In Seoul, South Korea must be there as the host. The ninth country could be any of the rest.
The G20 will discuss whatever the bigger countries consider it most useful to discuss. Five possible topics include:
One, more seats on the IMF executive board for emerging market countries, made possible by consolidation of some European seats;
Two, more financial regulatory reform, such as coordination of any taxes or penalties that members want to apply to risk-taking banks;
Three, an attempt to address global current-account imbalances and “currency wars.” There could be a statement agreeing that -excessive imbalances are a problem, that exchange rates and budget deficits both bear some responsibility, and that neither should bear the burden of adjustment alone;
Four, macroeconomic exit strategies. I would favor articulation of the principle that the necessary concrete steps toward long-term fiscal consolidation in advanced countries — such as raising the retirement age or taking other steps today to reform public pensions — need not require premature withdrawal of current fiscal stimulus;
Five, re-launching discussion of a new agreement on climate change to replace the Kyoto Protocol after 2012. South Korea is in a good position to lead as the first post-Kyoto country to accept emission targets.
Don’t judge the outcome of the Seoul G20 meeting by what appears in the media. Press reviews usually pronounce any summit meeting a let-down. Occasionally, however, such meetings are important, in ways that are often not clear until later.
Consider the London G20 meeting last year. 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, which was a way of saying that the world had not learned the lessons of the Great Depression. However, last year’s meeting appears far better in hindsight. Fiscal stimulus turned out to be more widespread last year than one might have guessed. Similarly, global monetary policy was easy, avoiding another big mistake of the 1930s. In addition, the G20 unexpectedly agreed to triple the IMF’s resources and bring its reserve currency, special drawing rights (SDRs), back from the dead.
Even in the area of trade policy, despite fears of protectionism, the outcome was not bad by the standards of past recessions, let alone compared to the infamous Smoot-Hawley tariffs in the US, enacted in 1930. Overall, the immediate response of policymakers to the global recession last year did not repeat the mistakes of the early 1930s.
Currently, however, the advanced countries are in danger of repeating the mistake that then-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 big emerging-market countries 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 a professor of government at Harvard University’s John F. Kennedy School of Government.
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