Financial crisis sparks change in global governance
That the financial crisis of 2008 would have wide effects was obvious from the scale of the paralysis that afflicted markets and from the steepness of the global economy’s subsequent collapse into recession. A year later, economies and financial systems continue to depend on life support provided by governments and central banks, although the day-to-day functioning of markets has returned to normal and economies are beginning to emerge from recession. The crisis demanded exceptional levels of international cooperation. Out of that came its first clear long-term effect: the transformation of the Group of 20 (G20) into a broad and powerful decision-making body. At the September 2009 summit in Pittsburgh, leaders agreed that henceforth the G20 would be ‘the premier forum for international economic cooperation’.
It takes a crisis to force such changes. It had been obvious for some time that the old G7/G8 grouping (the top seven industrialised countries, to which post-Soviet Russia was later added) was no longer representative of true economic power. In fact, it had become routine to invite a broader group of leaders to G8 summits. The 2008 crisis made it imperative to gather a truly representative group in order to reach a consensus on common action that could – if only by its declarative effect – instil confidence in markets. It was necessary to stop the world subsiding into a catastrophic depression, and to try to prevent a similar crisis from occurring in the future.
So it was that leaders settled upon the G20, which had been set up in 1999 following the Asian financial crisis as a forum for finance ministers and central bank governors. President Nicolas Sarkozy of France – then holding the rotating European Union presidency – persuaded George W. Bush, then the US president, to hold the first summit of the G20 in Washington in November 2008. It took place as statistics were showing the largest economies (except China’s) tipping into recession and as stimulus packages were being introduced – governments and central banks had already taken massive action to shore up the banking system. The gathering was the first of three to be held in less than a year, with Britain hosting a London summit in April 2009 and leaders meeting again in Pittsburgh in October. Two more summits are planned for 2010, in Canada in June and South Korea in November, to be followed by annual meetings from 2011.
While consensus among such a large and disparate group was expected to be difficult to achieve – and some still consider the G20 to be too unwieldy – leaders have in fact agreed on significant reforms, exhibiting a remarkable spirit of cooperation. It is reasonable to expect that the G20 will over time, like the G7/G8 earlier, extend the range of its discussions beyond the purely economic and financial sphere.
Broader base
By contrast with the G8, the inclusive nature of the G20 is striking. Four major emerging economies are members: Brazil, China, India and Indonesia. So too are four advanced countries previously excluded from the G8: Australia, Mexico, South Korea and Turkey. Also included are three smaller but regionally important countries: Argentina, Saudi Arabia and South Africa. The 27-country EU is also a member, and the political heads of two other regional bodies have been invited to summit meetings: the New Partnership for Africa’s Development (NEPAD) and the Association of Southeast Asian Nations (ASEAN). Also attending have been the prime ministers of Spain and the Netherlands, as well as the heads of all large international organisations, bringing the total of leaders around the summit table to over 30.
Thus, the G20 framework covers many nations. Of the top 35 economies ranked by the World Bank by GDP, only four have no political representation at G20 summits: Switzerland, Norway, Iran and Venezuela. The accompanying illustration shows that among G20 member nations, the balance has swung towards the Asia-Pacific region, with nine members of the Asia Pacific Economic Cooperation grouping by comparison with seven NATO states.
Washington summit
That such a large and untried group was able rapidly to reach agreements was testament to the common threat that the world faced in November 2008. Management of the financial crisis in terms of measures was – and remains – very much in the hands of individual governments. However, the Washington summit carried symbolic importance as showing the world’s leaders uniting to deal with the danger, even though Bush was a lame-duck president.
The summit occurred against a background of feverish comments in continental Europe to the effect that the crisis marked the end of free-market capitalism and of America’s superpower status. Just before the meeting, Bush made a speech supporting the free market and smaller government – even as US authorities pumped hundreds of billions of dollars into the economy and absorbed recent emergency purchases of large equity stakes by banks and financial companies. There was also discord about the degree to which governments should step in with economic stimulus measures. Yet the leaders agreed that in addition to measures already taken ‘a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth’. As well as monetary support, they would ‘use fiscal measures to stimulate domestic demand to rapid effect’. All would refrain from introducing new barriers to export or trade for 12 months.
Much of the leaders’ communiqué was devoted to plans for reform of financial markets so as to ensure there could be no repeat of the crisis. While again there was plenty of room for disagreement about the degree and scope of future regulation, the leaders reached a common position that was remarkably specific, spelling out planned steps on transparency, regulation, accounting standards and risk management. They agreed that ‘colleges’ of bank supervisors should be set up to oversee major cross-border financial institutions. The International Monetary Fund (IMF) was to play multiple roles, should have adequate resources and would be reformed to give a greater voice to emerging and developing economies, while the Financial Stability Forum, a body set up by the G7 to encourage cooperation, would be expanded. Reflecting popular anger against the ‘bonus culture’ in banks, the summit agreed that ‘incentives should be aligned to avoid excessive risk-taking’.
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