The gathering of leaders of the G20 group of countries initiated by President Bush on November 15 may well represent a historical shift in international governance. That the meeting was convened at all is a sign of the current relative weakness of the United States. The US wishes to restore confidence in its global economic leadership, and since the G7 no longer includes a preponderance of the major stakeholders in the US economy, the larger grouping has almost naturally come to make sense as a potentially more effective group.
Because there is typically a degree of continuity from one US administration to the next on foreign policy, and because President-elect Obama has emphatically stated his intention to seriously engage with foreign partners, the Bush outreach to the G20 is a fair harbinger of what the Obama administration is likely to build on. But for this to happen, the group’s interventions in stemming the current global economic crisis need to be seen as helpful.
The group’s real function at this time is mainly political, indeed perhaps even psychological. The liquidity crisis stemming from the debacle of derivatives packaged around sub-prime mortgages is being addressed by central bankers, finance ministers and national and international regulators. But what leaders are confronted with now is the well-known adage that one cannot push on a string. For the “real economy” to be kick-started, those who have access to renewed liquidity will need to be convinced that being liquid is not necessarily the best investment, that they will not get sideswiped by erratic markets or erratic policy shifts, and that there are many good, solid “real economy” investments out there.
This means, among other things that leaders will have to convince their peoples and markets that they can help prevent things from getting worse, before they get better. One way in which they can do this collectively is by reassuring markets that, while they each take proper and decisive action within their jurisdiction of the type that many governments have taken since the crisis erupted they also have the willpower to avoid ill-advised actions that could endanger the recovery globally.
More regulation on financial markets, such as stronger capital requirements on a wider range of institutions, could have pro-cyclical effects at this point, meaning they could make the downturn worse. Measures that, while ensuring minimum and transparent standards of risk-management and risk-assessment, provide a degree of comfort to global players aimed at reducing systemic risks that affect all countries, should also retain plenty of room and perhaps expand room for competing regulatory frameworks (Canada’s own framework being a case in point against uniform global regulation that could have been worse). So, leaders should seek to avoid rash calls for re-regulation.
On macro-economics, the objectives are to avoid US and global deflation, and defeating excessive speculation against smaller countries’ currencies that otherwise hold sound growth prospects. Beyond that, some will seek to adjust exchange rates in order to “correct” current account and capital imbalances, in a spate of “beggar-thy-neighbour” approaches. But history has shown that currency intervention and exchange rate “accords” based on, for example, political pressures to reduce current account imbalances, can in fact make matters much, much worse. The trick here, clearly, is to concentrate on giving the proper amount of fiscal and monetary stimulus, while allowing foreign exchange markets to do their thing adjusting to expected inflation rates, growth rates and to monetary conditions in an orderly fashion. But here again, “do no harm” should be the dominant discourse.
On trade and investment, a commitment to resist the inevitably rising protectionist pressures and to ensure that developing countries are engaged in trade and investment liberalization on terms they find acceptable remains key. Protectionism is a real problem, especially perhaps with the newly elected Congress, and US exports will face protectionism in some markets abroad as a result of the recent boost in US exports. However, it is largely non-tariff barriers that pose the challenge, not tariffs that are in the main limited by GATT/WTO commitments. So leaders could pledge vigilance on that front even as they appropriately seek to enact policies to protect consumers and businesses from the effects of lax standards in other countries.
If it becomes necessary, leaders will need to explicitly repudiate the destructive parts of the populist and xenophobic impulses that dominated after the Great Crash of 1929, and that may resurface again.
The leaders’ G20 may at this stage lack the cohesion and proven discipline to execute anything but a very limited range of positive strategies for recovery, including strategies that will boost the confidence of smaller economies that they can cope with transnational economic challenges. But it could become a useful forum for communication and coordination, allowing other major economies to anticipate movements and to adjust their macroeconomic policies to accommodate it. By engaging many large emerging economies, it is also probably at this point the right assemblage of countries to help restore confidence, though there will be limits to what the United States and other large players are likely to accept from other countries in such a context.
Canada’s best chance to have an impact in the G20 is to win over the Obama administration on the merits of its ideas and not to appeal to the gallery of G20 participants that may advocate rash action that would undermine the nascent credibility of the group. If the exercise fails to reassure investors and the US economy continues to slide, Canada will be dragged down along with the other G20 countries.