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When the first G20 summit was held in 2008 in the aftermath of the financial crisis, it was welcomed from across the world as it was expected to improve global governance. It was also appreciated because of the fact that key issues hitherto being discussed only among the G8 members, were for the first time involving countries that, though not rich, had voice in terms of their large populations and high overall GDP. Since the global economy was going through a crisis, the subsequent two years saw two summits in a year, but now the G20 has settled for one routine summit a year, and the next one is scheduled to be held in St Petersburg in early September. Has the G20 summit then become another routine affair with very little impetus for creating change in global governance?
To be fair to the G20 initiative, it was able to contain competitive protectionist trade policies which could have spelled disaster for the global economy. It was indeed one of its objectives, but not the only one as communicated by the heads of government during the first G20 summit. Looking at the overall agenda of the upcoming summit, one does find mention of some of the important global challenges facing the world, but a more detailed examination reveals an absence of interesting ideas or initiatives.
The agenda has many issues that have been discussed for the last twenty years and more, such as, for example, financing for investment. The past meetings and summits were dominated by the financial crisis and the Eurozone crisis. The developed world requested developing countries to extend their support to which they readily responded. Developing countries now hope that the next G20 summit will pay more attention to the interests of the South. However, it seems that the G20 is trying to get into a ‘business as usual’ mode.
As expected, strengthening financial regulations is one of the important items on the agenda. However, it gives prime importance to the monitoring of the Basel III implementation among its members. Basel III is only about raising the capital adequacy ratio and hence focuses on administering more of the same medicine that did not work. Hence if Basel II could not prevent the 2008 financial crisis, Basel III is unlikely to prevent a future financial crisis. Moreover, if the required higher capital is maintained in overvalued and toxic assets, as was seen in the 2008 financial crisis, how will this help? In fact it might provide banks with a perverse incentive to take unjustified risks as they might think that they are better secured due to higher capital adequacy. Such a prescription is akin to advising smokers to invest in higher insurance cover rather than asking them to give up smoking. In developing countries, where banks do not get into risky business, higher capital adequacy ratio will unnecessarily lock up precious resources. G20 has been discussing other issues that should be taken more seriously. These include better supervisory regimes and a reduction in the reliance on credit rating agencies.
The recent global financial crisis has also revealed gaps and deficiencies in the International Financial Architecture (IFA). Appreciably, addressing these gaps is one of the main priorities of the G20. However, in this area too, there has not been any innovative idea to deal with the systemic issue of global liquidity. Instead, the thrust has been to engage in some patchy reforms of the IMF which have been long overdue and have little to do with the 2008 financial crisis.
As mentioned earlier, addressing protectionism and strengthening the multilateral trade system has been one of the primary objectives of the G20. The current World Trade Organisation (WTO) framework gives nations some flexibility, and this is desirable. But the G20 seems to have adopted a truncated version of the Doha agenda which is unlikely to benefit the developing world. Only services and trade facilitation are being highlighted where the adjustment costs will largely fall on developing countries, while ignoring issues such as agriculture where developing countries might expect some gains. WTO also needs some systemic reforms in the form of improvements in the dispute settlement mechanism and enabling developing countries to actually utilise the special and differential treatment that they already have. These countries should also be able to use their flexibilities in promoting development as well as dealing with trade imbalances. The IMF advised approach, of focussing on balance of payments rather than the current account balance that the WTO has adopted, hides the long term vulnerability of a country as evident by the difficulties that India is currently facing.
The disappointing aspect of the 2013 G20 summit agenda is the complete absence of climate change, as if it does not pose any challenge to the global community or is not a challenge to ‘strong, sustainable and balanced global growth’ which happens to be the first item on the agenda. Nobody is expecting the summit to provide a framework for an agreement on climate change which could be better negotiated at a global body. However, one would expect to hear about the commitments that members of the G20 are willing to make in this regard. Moreover, two important areas that are very important in dealing with climate change, namely finance and technology, are issues where countries within the group are at loggerheads. There are serious differences between the developed countries on one hand and developing countries led by BASIC (Brazil, South Africa, India and China) countries on the other. The differences on climate finance, for example, were apparent even in the context of G20 when this issue was discussed in earlier summits. Possibly this is the reason why the issue has been dropped from the agenda altogether. In the context of sustainable energy, the agenda does talk about energy efficiency and green growth, but there is no indication that other climate change related issues will be discussed as well.
To remain relevant G20 must deal with cross-border externalities. The financial crisis happened due to improper regulation in the developed world but impacts were felt in the developing world as well. Similarly, climate change has been happening largely due to activities in the developed world but impacts are likely to be felt disproportionately in the developing world. G20 cannot avoid attention to these issues. Even the trade regime is hard on protectionism in the developing world but soft on protectionism in the developed world. This needs to be rebalanced.