International Monetary Fund Photograph/Stephen Jaffe
by Logan Scisco
Two weeks ago, the leaders of nineteen of the world’s influential economies, with the European Union, met in Pittsburgh, Pennsylvania for another round of G-20 summit talks. The G-20 is an organization created in 1999 that is meant to be a broader discussion forum of developed and developing economies. The G-7, an economic forum that featured the United States, Canada, Germany, France, Great Britain, Italy, and Japan, was sometimes called too elitist and too isolated from emerging economies like China, India, and Brazil. (Writer’s Note: The G-8 is the name for the economic organization that includes all of the members of the G-7 plus Russia).
In Pittsburgh, President Barack Obama hosted the second meeting of the G-20 in 2009 (the first was held in London). Throughout their discussions, leaders of the countries that are part of the G-20 debated the equality of voting rights in the International Monetary Fund, banking regulations, economic stimulus packages, free trade, and deciphering what the exact mission of the G-20 was going to be.
G-20 meetings will continue to play a pivotal role in the shaping of the world’s economic output for years to come. As a result, extempers will start to see more questions about the G-20 in the future. This brief will explain the composition of the G-20, what the latest summit accomplished, and the chance that their reforms will greatly affect the world economy.
Composition
A misconception extempers may have is that the G-20 represents the world’s twenty largest economies. This is not true. All of the nation’s that are a part of the G-20 are countries with influence in technology, manufacturing, agriculture, and/or natural resources, but a driving characteristic of the G-20 is representing a large pool of nations geographically and politically. Striking a balance between developed and developing nations with influence is a major feature of G-20 talks.
Here is a listing of members in the G-20. Extempers probably do not need to commit all of them to memory, but it is worth knowing the countries that are part of the organization for future speeches: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States. The European Union represents its membership at large at G-20 summits.
All of the nation’s in the G-20 represent 80% of global trade volume and 85% of global income. At their meetings, the G-20 is managed by what is called the Troika. The Troika is composed of the country that has held the last G-20 summit, the current host of the G-20 summit, and the country that will host the next G-20 summit. The point of this is to make sure that the steps the G-20 takes at a certain summit is continued later and is not killed dead by a new host. As a point of information, South Korea and Canada will jointly host the next G-20 summit next year.
Summit Accomplishments
At this summit, the G-20 addressed several issues that developed and developing nations have been squabbling about since the economic crisis became serious at the end of last summer. The most important change the G-20 enacted was to redistribute voting rights in the International Monetary Fund (IMF). Traditionally, developed nations have held a significant sway over the IMF, collectively holding a 57% voting share in the organization versus a 43% share held by developing nations. Developing nations, who have received much IMF aid in the past, accuse the organization of imposing economic packages on them that are not respective of their local culture and norms. Furthermore, with the rise of India and China onto the global scene, it seems to make little sense to consolidate voting rights in the United States, Japan, and traditional European powers. The G-20 summit saw an agreement to push for a five percent shift in voting rights at the IMF from developed to developing nations. This will make the two sides more level and seemingly make the institution more representative of the new global economic environment.
The G-20 also agreed to render much of the G-7 and G-8 dead. In the past, the G-7 and G-8 were viewed as the most prominent economic forum. However, after this summit and in its announcements following the meeting, the G-20 has proclaimed itself as the new economic forum for discussing major international issues. Therefore, this represents a major shift in global economic policymaking, as the G-20 is now the guardian of global economic matters. As the Daily Telegraph of Great Britain points out, the G-7 has dominated global economic policy discussions since 1975 and its leaders will now meet less often now that the G-20 has taken that role away from it.
Another thing agreed to at the G-20 is to have a peer review of countries economies. Developed and developing countries will be subjected to these peer reviews so that other countries can scrutinize their economic policies. One of the things that is blamed for the recent global economic mess is that countries did not do a very good job working together. As a result, this peer review mechanism will theoretically allow countries to see any economic problems that might exist in member countries before they trigger a global financial mess.
A contentious issue at the summit was bank executive’s compensation. The argument made by leaders such as French president Nicholas Sarkozy is that bank executive’s compensation packages did not discourage risk taking and were not based on how well banks performed. As a result, bank executive’s engaged in risky behavior such as investing in securities and other risky credit devices whose bust prompted the economic crisis. The G-20 agreed to do more to peg executive pay to better performance and to prefer deferred compensation packages that would hinge more on how companies perform in the long-term than the short term. “Claw-back” measures for pay, whereby executive bonuses could be forfeited if their bank goes bust, were also recommended.
Other issues the G-20 addressed were to enforce tougher capital requirements for banks, which would not allow them to lend excessively or engage in risky ventures that might endanger their solvency (and also protect governments from having to bail them out or pay back depositors through deposit insurance schemes). Also, countries pledged to continue their stimulus packages to boost their economic performance and to condemn protectionist behavior by themselves or other countries.
Living Up to the Pledges
A big question for the G-20’s latest summit is how well they will be able to enforce what they agreed to. The Council on Foreign Relations argues that the G-20 will fail to live up the pledges offered because of far too many conflicts. For example, the U.S. opposes stringent requirements on executive compensation packages, with some economists warning that it would stifle innovation. Also, the European Union dislikes the new banking structure agreed to on capital requirements because they fear their banks will not be able to compete with the U.S. Similarly, European countries worry that the dead clout of the G-7 kills their influence over the global economy and that the shift of voting rights in the IMF also degrades their international power.
Another struggle for enacting any G-20 policy is the size of the organization. With there being twenty opinions at the table, the G-20 has the problem of having policies watered down. Countries represent a broad ideological background. For example, you have the capitalist U.S. meeting socialist-inspired China and a more confrontational driven Argentina. Agreeing on the same implementation of policies is difficult in this environment and the more voices at the table equals more confusion. An extemper only has to look at the World Trade Organization and its conflicts over the Doha trade deal to see this play out.
In closing, the Council on Foreign Relations holds that to solve the global economic crisis a new economic forum is not needed. Instead, they argue that unilateral policies on financial issues can solve problems. For example, if Western nations buy less oil and fossil fuels it may help boost spending on other goods and services and shift wealth outside of the Middle East. Also, Western nations willingness to balanced their budgets would reduce the incentive of countries like China to hold large surpluses because no one would need to lend from them. As the Council notes, although the G-20 talks about balancing the world economy, they are talking their time doing it.