Yes: 28%, NO: 72%

Since the ongoing economic crisis elevated the G20 to the leader’s level there has been much debate about the utility, futility and future of the G8. I review salient points from this debate with the aim of raising questions the next G8 hosts should ask themselves.

Lets start with the easy stuff, some facts and simple math:

The G8′s share of global GDP shrunk, from 55% of GDP in 1975 to about 44% in 2004 . The G20′s share of the global GDP is of course much higher, around 82.9%; higher at PPP (and higher still if all EU are included)

The G8 represents only about 12.9% of global population; G20 roughly 62% (again higher if we include all EU) 

In some circles there is talk of beginning with a tabula rasa. Think tanks in the US, the Financial Times, Goldman Sachs and Forbes magazine recently ran thought experiments aimed at constituting a group of 10 or less using objective criteria. There is a growing consensus regarding the need to deal with European overrepresentation but more importantly, Canada does not make the cut either. Forward thinking Canadians urge the need for the G8 to get with it, and rightly note that the choice for Canada is simple: we either lead or we get elbowed off the table.  

Canada finds itself in a precarious position in a precarious group. No doubt Canadian policymakers are hoping for an uneventful G8 that passes quickly (low expectations, low profile, low disappointment). But let us ask: Where does Canada stand within the present G8? On raw GDP, Canada’s GDP is about 4.2% of total G8 GDP. At PPP Canada’s GDP is about 3.8% of G8 GDP. On both counts Canada is the smallest in the G8. (All my data is from the the World Bank, WDI2009).

At a briefing meeting at which I presented some of our preliminary findings from this (PRUF) project a senior Canadian policymaker pointed out to me that the real difference between the G8 and the G20 is that the former cuts cheques (clearly, an argument eclipsed by the cheques cut by the G20 including emerging economies for the IMF at the London Summit). That said lets look at the relative size of Canada’s cheques within the G8: for data I use the G8′s Accountability Report (so this is taking them at their own word, but see the numerous footnotes in the actual doc for the devil in the details). Here one finds an interesting trend. Canada seems to play the numbers game. Canadian financial contribution to the four identified G8 Hokkaido (2008) priorities, food security, water, health and education; were all remarkably in line with Canada’s GDP as % G8 GDP. Where possible I use disbursement (not commitment) figs and find that Canadian priorities (in order of magnitude) were education (only commitment figs available), health and food security, much less so water. Overall Canada’s share of reported G8 disbursements was roughly 4%, i.e. in line with Canadian GDP as a share of G8 GDP.

What about Canada vs. possible replacements? On raw GDP (2008), Canada is the smallest. In fact if the group were reconstituted on this crude basis at least three countries, whose GDP is larger, could replace Canada:  China, Brazil and Spain, with India not too far behind. On GDP at PPP (a more accurate measure) at least six would have a better case than Canada: China, India, Brazil, Mexico, Spain and Korea. Clearly G8 membership has allowed Canada to “punch above its weight”.

Crises have a way of producing moments of extreme flux for diplomacy and consequently global governance, and leader’s are inevitably caught in a game of musical chairs. Between Sep 2008 when the global crisis reached its zenith and late June 2010 when Canada hosts the G8 at least three G20 Summits and one (very confused) G8 Summit would have taken place. Math is clearly not a strong suite of the organizers. First of all there are only 19 countries in the G20 (20th is the EU). The Dutch and the Spanish gate-crashed the first Summit in Washington, which compelled the British to invite the Thais and Ethiopians to the second in London (so the G20 wasnt really 20). Now some 28 or 29 states claim membership of the G20!

You would think the G8, a more established group with longer history might avoid this confusion. After all the G8 has an established consultation process with the so called O5 (Outreach-5): Brazil, China, India, Mexico and South Africa. To make things interesting the Italians decided to add Egypt to the O5 at the last G8, without consulting the others (to their displeasure). Nevertheless, this produces a somewhat more workable G14. Moreover, there are signs that the Obama administration which first looked favorably at the G20 now look askance at its chaotic management.  This may actually favor the chances of a more intermediate grouping somewhere between the G8 – G14 - but less than the G20, emerging from this flux as the core group. Canada must take these complex permutations into account  in planning the next G8. PM Harper has suggested Canada will not repeat the Italian experience starting with 8, then going to 14, then 17, then inviting African leaders.

Do the numbers really matter? The No answer: its just a farcical popularity contest -who’s in/who’s out. The YES answer is stronger: these groupings really do matter because they divide countries into ‘rule-makers’ and ‘rule-takers’. They are better seen as meta processes, which can guide for instance reforms and coordination among other international institutions (IMF, WB, UN, WTO, BIS, FSB). For a good explanation of meta-processes’ see Matoo and Subramanian and Lombardi here and here.

Is there anything useful the G8 can discuss, minus the emerging economies? Imagine a dialogue on trade (Doha), climate change and energy, recovery from the crisis, stimulus measures and macroeconomic imbalances, or IFI reform, food security, public health and HIV expenditure, or for that matter peacekeeping, nuclear proliferation and terrorism without China, India, Brazil, a single African or Muslim country at the table.

Surely aid and development policy are a core unifying issue for the G8 given it is a collection of the largest donors. However, as ODI researchers write, even on aid and development the G8 seems to have lost its way.

Let me end with existential questions for the next G8 hosts:

Can the G8 and G20 coexist? Does having two groupings serve a purpose? It has been proposed that Canada take the bull by it horns and propose a joint G8-G20 Summit, and frame it as the last G8 as we transition to a more inclusive and open global dialogue forum.  

Which is more in Canada’s interest -cementing its place in a wider G20 or a smaller G8?

How many and in what capacity? Because numbers matter. It is not only about who is in and who is out, but about how many can be accommodated without compromising a frank and productive discussion. It is about the message Canada sends. As former South African President Mbeki put it: “We cant be put in a situation where we are asked to join in the dessert and miss the main meal”.

Aniket

Robert Wade (LSE) made a compelling argument in favor of selective industrial policy here and in an earlier piece here. A few yrs ago in the Financial Times Wade made the case for the Washington Consensus to be replaced by the BeST or Beijing-Seoul-Tokyo Consensus. Charles Gore (UNCTAD) took the idea further and made a good case for why developing low and middle income countries should aim at harnessing untapped productive capacities as a way out of this crisis, and how the international community could support the same.

Recently Degol Hailu of the International Policy Centre in Brasilia showed how the developmental state is making a come-back in the Indonesian policy response to the to the economic crisis. Highlights include: cartelist stance in the supply of commodity exports (rubber, in concert with Thailand and Malaysia), direct industrial subsidies (to spur the footwear and textile sector), import-substitution measures (to boost cotton production) and a Keynesian fiscal stimulus (comprising tax-cuts, infrastructure spending and large direct subsidies).

The challenge policymakers face is how to restore pre-crisis growth without the imbalances that accompanied them? Dani Rodrik offers a novel solution in a recent paper ‘Growth After the Crisis’. He argues, it is possible to render these two requirements compatible, but doing so requires greater use of explicit industrial policies in developing countries, which have the potential to encourage tradable activity without spilling over into surpluses (the trade-off being letting the exchange rate appreciate). What does this mean in english: promote ‘exportables’ without promoting ‘exports’. Come again? Shift labour and investment from traditional activities where productivity is stagnant to new industries that present economies of scale and/or opportunities to assimilate new and better techniques. These new industries would typically make exportable goods – toys, textiles, shoes. Just dont export them, aim at the domestic market. If it sounds easy enough you can be sure there are others who find it too good to be true.

Finally, for any one really interested in this topic Ha-Joon Chang (Cambridge), a major proponent of ind. policy, presented an excellent paper at the World Bank ABCDE conference, titled ‘Industrial Policy: Can We Go Beyond an Unproductive Confrontation?’. The paper is simply a must read for anyone working in this area. Chang convincingly shows the fastest growing economies in each era happen to be those with strong industrial policies: Britain during the mid 18th and 19th century; US, Germany, Sweden during the late 19th and early 20th century; East Asia, France, Finland, Norway and Austria in the late 20th century; and China today.

 Aniket

This crisis is an opportunity for a paradigm shift to a new consensus around raising living standards across low income developing countries, as part of a broader move away from reliance on overextended US households that have dominated global demand. It is an opportunity to diversify sources of global demand and harness productive capacity across the developing world. Whereas there is a lot of talk of ‘green-shoot’s of recovery in advanced economies, much depends also on the ‘quality’ of that recovery, i.e. whether it is driven by surplus or deficit countries, whether it magnifies or adjusts global imbalances. In this regard, it is important to highlight that the crisis is having a lagged effect in LICs and that there is a real possibility of a L-shaped recovery in LICs, beginning only in 2011, even as other economies bounce back sharper and sooner.

LICs could also face new debt crises as the cost of capital for LICs is rising and these countries are getting crowded out of credit markets, capital flows are drying up fast (and not expected to recover soon) and several LICs face the prospect of deteriorating balance of payments, currency and other macroeconomic impacts.

The brief calls for measures at the international level and domestic level in LICs.

At the international level:

A more enabling environment that fosters growth with equity and provides space for diverse development strategies is needed, as is the need to balance diversity at the national level with common standards (human rights, decent work and pursuit of low carbon growth)

A more coherent international monetary system and formalized (and inclusive) adjustment mechanism between surplus and deficit countries, as well as across currency regimes is needed

A permanent new provision for substantial countercyclical anti-shock financing is needed to meet LIC needs. A step in this direction would be institutionalization of the SDRs as a crisis response

Clearly LICs need more voice at the international level, for if you are not on the table you are on the menu. A step in this direction would be enhancing engagement with the G20 via formal (eg. structural changes to allow for a permanent LIC seat) and informal (eg. joint LIC-G20 members working groups) channels (we present a no. of options in the brief)

Regional integration and cooperation could facilitate greater LIC voice and representation (eg. via rotational regional membership in IFIs, changes to voting shares)

But in the near term LICs may need a debt moratorium

At the domestic level in LICs:

Rethinking of the role of the state in development is required, especially in light of the fact that when crises hit (no matter what level of development) the state has a major role to play in recovery. In recent yrs state capacity in LICs has eroded substantially, and yet economies have become increasingly open (eg. export-GDP ratio for LDCs is 45% today, compared to 17% in 1995) and exposed to external crises.

Going forward the state in LICs will need to play a major role in, first and foremost, protecting against worst effects of external crises. Here policymakers would need to underscore the difference between protection (of the integrity of e.g. the financial system, as witnessed across a range of countries today) and protectionism (or unfair trade practices). A relatively open but well managed global economy that allows space for protection of vulnerable sections is a common denominator for all countries.

LICs need to work towards  a structural transformation in favor of stimulating domestic demand. This requires pro-active monetary policies that are growth and employment oriented, but also counteract asset price bubbles.

Fiscal measures that ring-fence critical long-term social and physical infrastructure investments and link the same to countercyclical external sources.

Cautious financial sector development; including openness to a greater state role in the financial sector, greater role for state owned and development banking institutions. And openness, where necessary, to use of blunt instruments (like capital controls) to protect from worst effects of external crises, cash and statutory requirements, financial transactions and other taxes that aim to internalize social externalities generated by financial crises and incentivize a longer-term investment outlook in the financial sector.

Aniket

Click here for presentations and papers delivered at the meeting.

Our policy briefs from the worshop will be available shortly.

Global Financial Crisis and Developing Countries : Preliminary findings from Overseas Development Institute’s 10 country project onthe impact of the crisis. An insightful report on how the crisis is affecting different countries in very different ways.

Commonwealth Secretariat Report on a meeting of low income country finance ministers on dealing with the crisis and debt sustainability.

The African Development Bank’s Response to the Crisis: preliminary assessment of the crisis discussed the direct impact of the crisis on financial markets, foreign exchange markets and commodity markets. Main transmission channels identified were trade and capital flows, including FDI and remittances. Sectoral analysis highlighted the impact on mining and tourism.

Summary Report of the African Economic Research Consortium’s (AERC) Senior Policy Seminar focusing on the Implication of the Crisis for African Economies

One could be faulted for thinking ‘great, its done! They solved it. The crisis is over!’ if one only focused on the post-Summit media hype alighted by headlines like “G20 commit to $1trillion global rescue deal”. Sounds like a lot of money, probably enough to buy a way out of anything.

Even more sober reflection (e.g. ODI) accepted that the “words and (impressive sounding) numbers together secure gains for development and for the poor. The text provides a plan of attack, as well as the standard by which leaders will be judged at the next G20″. All the more encouraging given ODI’s recent work on the crisis as well as the Development Charter for the G20 published in the lead up to the meeting.

Lets take a closer look at some of the high points, drawing on a wider set of reactions as the dust settles (and that nagging issue of ‘standards’ by which to judge). First some of the high points that have got a lot of attention:

Scale – $1.1trillion; trebling of IMF resources to $750bn- i.e. $500bn new, new funds for the Fund from US ($100bn), EU ($75-100bn), China ($40bn), India ($10bn), Saudi Arabia (?), (Japan already committed $100bn) - that takes care of half, not sure where the rest comes from – clearly the Fund was the biggest winner with half the promised ‘trillion’ going to it

$250bn new SDR allocation (no time-frame) – only $19bn would go to low income countries, possibly more if quotas are traded with surplus countries – but again, the key point is no commitment on how/if and when this would work through US congress or if IMF voting shares would be reformed to counter de-facto US veto. Most importantly, little or nothing direct on reform of IMF policy conditionality except reference to the new Flexible Credit Line (FCL) for eligible countries (Mexico will be an early test case)

$100bn to support additional lending by Multilateral Development Banks

$250bn for trade finance (no breakdown of sources – national export credit agencies vs. for instance development bank channels)

Reaffirmed commitment to MDGs, aid pledges, as well as Aid4Trade

$50bn to be made available to low income countries via Rapid Social Response Fund, investing in food security and supporting the World Bank’s Vulnerability Financing Framework. $9bn from IMF gold sales for concessional lending to low income countries

Impressed yet? Some more sidebars:

Particularly interesting in PM Brown’s press conference was when he pronounced the Washington Consensus “dead”, the way tax havens were going to be “named and shamed” by the (very low standards of the) OECD, the way Brown deflected the global reserve currency issue saying ‘no serious proposal’ was on the table yet (see earlier post below), and the curious reference to the common approach the G20 have agreed to take in dealing with toxic/legacy assets in the banking system, with zero elaboration of what that approach is or might mean

note: Paulson’s original TARP approach was socialization of risk, i.e. Treasury buys toxic assets with taxpayer funds at inflated prices, which changed into TARP redux where Treasury, Fed, FDIC whoever/whatever it takes infuses funds into zombie banks, and now the Geithner-Paulson TALF/PPIP public-private purchase approach — which ”common approach” across the G20 Brown is referring to is a mystery,  when even the US hasnt settled on a singular approach a year and a half into the crisis and 6months into TARP.

Elizabeth Warren heads the TARP Congressional Oversight Panel. Even she is mystified by the US strategy. Watch her trying to explain to John Stewart; as well as the insightful latest video report of the Panel.

Bottomline 1: the cosmetic focus on developing, emerging and poor country needs was used to deflect attention away from divisions among G20 on core issues

Bottomline 2: judged even by the low standard of the last summit (Washington), the G20 process seems to be a failure. E.g. : recall  the rhetoric against protectionism, in the face of which 17 or the G20 embarked on protectionist measures (see earlier post below)

MORE REACTIONS:

Allan Beattie had an interesting reaction piece in the FT titled “G20 aid pledges must be more than just hot air”. I highlight the following, see the article at the link above:

• Groupings that produce grandiloquent promises of international action are only worthwhile when they materially affect the domestic policy debates in their member countries. Breaking the G8 aid pledges has inflicted no significant political damage on anyone
• vague no-protectionism promises made at November’s G20 meeting have been widely broken — Congress made the “Buy American” provisions compatible with the US’s international obligations – but only those with actual legal standing backed up by trade sanctions, namely the WTO and Nafta agreements. China, India and Brazil, G20 members but not signatories to the WTO government procurement agreement, can go whistle. The US Congress has a pretty good (if not perfect) record of complying with real trade treaties but not of being swayed by the gusts of hot air emanating from international talk-shops.
• when it comes to improving global economic management, the fund’s (IMF) ability to affect its member governments’ actions will likely remain limited to those which actually need its money. That does not mean anyone is going to change policy because of what the fund says unless they are forced to borrow from it. In return for its new cash contribution, for example, what Beijing wants – even more than a bigger vote on the fund’s board – is for the IMF to shut up about the Chinese exchange rate.

Jonathan Fenby had a piece in YaleGlobal titled “G20′s Uncertain Roadmap”, which highlights:  

• the fundamental destabilizing divide between surplus exporting countries and deficit countries was not addressed
• nobody has a clear vision of how two parts of the global economy, the West and Japan on the one hand, and the emerging economies on the other, can better fit together in more than a simple trading relationship. This quandary concerns China most of all which till now “grew richer but kept quite” but is now willing to make its voice heard

Chris Giles had a good piece in the FT titled “Large numbers serve to hide big divisions” : 

• Figures at the end of any international summit need to be examined closely, particularly those presented by the UK prime minister. His reputation for numerical inflation, repeat announcements and double counting precedes him.
• When all the sums are added together, rather than $1,100bn, the new commitments appear to be below $100bn and most of those were in train without the G20 summit.

Daniel Kauffman had an interesting piece in a Brookings publication titled “G20 and the End of Ideology” :

• On economic matters, the world at large, proxied by the G-20, does not currently have a real counter-ideology to the Washington Consensus. Rather, the process leading to the two recent G-20 Summits, and a close reading of the agreements just reached in London, suggests the end of ideology in the global economy arena, and the advent of pragmatism instead
• the most contentious issue at the G-20 Summit last Thursday in London had nothing to do with any overarching ideological mantra (or with one of the top priorities, for that matter): the closing down of tax havens and publishing a list of offending jurisdictions. This issue almost derailed the overall G-20 accord. At the last instance, it was “solved” by somehow ensuring that no jurisdiction linked to any G-20 member stayed on the list of offenders (Jersey and the Isle of Man have not been in the latest list, while Hong Kong and Macao were dropped on Thursday evening…)
• Given the track record of some aid donors, the pledges to help the poorest and most afflicted countries will need monitoring, and actual progress on trade policy will also require close scrutiny and, where needed, recourse

Martin Khor at the South Centre in a piece titled “Reality Behind the Hype”:

• an analysis by the Third World Network of the nine most recent IMF loans to countries affected by the crisis (including Pakistan and several East European countries) clearly demonstrates that the IMF is still prescribing “pro-cyclical policies” (policies that accentuate the downturn in a recession) of fiscal and monetary policy tightening
• The Commission of Experts set up by the President of the General Assembly presented their forthcoming report’s draft recommendations, which included proposals for actions that were more relevant to the basic changes required to the international financial system, including changes that would meet some of the critical needsof developing countries.

   

   

 

For a response by the Center of Concern and a critique of the G20 response to the trade linkages of the crisis, see “No Bretton Woods II here either”

 

See: WTO prospects for 2009

Furthermore, 17 of the G20 countries have imposed measures that restrict trade at the expense of other countries. Since the start of the crisis countries have proposed and/or implemented 78 trade measures, 66 involved trade restrictions and 47 of these eventually took effect. While the trade effects of these measures are difficult to evaluate, the trend is clearly worrisome.

See: Trade Notes, International Trade Dept., PREM, World Bank

Addressing the Global Governance Deficit

Keeping the Social Context Front and Center

IMF Reform: Capitalization, Representation, Mandate, Conditionality

Strengthening the UN’s Coordinating Function

Countercyclical Sources of Development Finance

Prudential Capital Controls

Fresh thinking on a Stable Global Reserve Currency System

Comprehensive Regulatory Coverage

Control Leverage

See: Keeping ODA Afloat

The UN appointed Commission of Experts on the Reform of the Monetary and Financial System (Stiglitz commission) released a draft text outlining recommendations.

See: Recommendations by the Commission of Experts

Zhou Xiaochuan (People’s Bank of China), echoing one of the recommendations made by the UN Commission of Experts, calls for a new global reserve currency system.

See: Reform the International Monetary System

According to Mr. Summers the right macroeconomic focus for the G20 is stimulating global demand. Indeed everyone agrees coordinated fiscal measures would provide the biggest bang for the stimulus buck.  Japan strongly supports  Tim Geithner’s call for spending 2percent of GDP. The best summary of the case for stimulus (over regulation) I have heard is as follows: when a house is on fire you put all your initial effort into putting it out. Only after the fire is squelched do you redesign the sprinkler system. (Except I dont get how financial regulation is a sprinkler system, perhaps therein lies a large part of the problem).

Here is the rub. More stimulus is just another way of saying accumulate more public debt. That debt has to be financed somewhere. One doesnt know the exact figure but China probably holds about half its $2trillion reserves in US Treasuries and notes issued by US govt-affiliates. And China is seriously worried about its exposure to Treasuries (the next great bubble?). Forever rising deficits may devalue Treasuries by pushing interest rates higher, and there is no guarantee the US will find limitless buyers for its ‘riskless’ issuance.

Rob Zoellick (World Bank) put it best: stimulus without reform is ”just a sugar high”.  

However in order for their call for much needed global regulatory reforms to be taken seriously the Europeans need to demonstrate with action. A good place to start would be reducing their disproportionate voting share in the IMF and opening up the fund not only to ‘systemically significant’ emerging economies, but also to the wider developing and least developed world (which unlike over-represented advanced economies is at the receiving end of IMF influence). For all the lofty talk of clamping down on bank secrecy and tax havens, the proof will lie in the pudding (which at the moment is quite tasteless).

To Mr. Obama and his merry band of stimulators: when you talk of a ‘globally coordinated’ effort please do remember the billions living in countries with no fiscal capacity to stimulate their own economies, who will be further squeezed out of global credit markets as you finance your next binge (it is heartening Beijing wants the London Summit to focus on the plight of poor countries). Remember you have at least one ready policy instrument at your disposal, a special one-time large issue of SDRs, to address the crisis ‘cooperatively, concretely and credibly’. You only need the political will and mojo to use it, and we hear you have plenty of that.

Here is hoping at one of your countless cocktails in London you will find the opportunity to raise a toast in praise of multitasking!

Aniket Bhushan