The G-20 is a recent expansion of the G-7 and the G-8. The expansion became necessary after the 2008 financial crisis impacted the globe. Moreover, there are vast and fast-growing economies that have become major players on the world economic and political scenes and their involvement and cooperation in world affairs has become justified and desired. Emerging and developing countries are the front runners in the current recovery, expanding by1.5 percent this year before rebounding 5 percent next year led by China and India, compared to 1.1% and 3.1% respectively for the global recovery. China is now the third largest economy, and is expected to grow at 8.3% in 2009 to become the second largest economy even evaluated at market prices, to replace Japan. Brazil and India are also growing very fast and their participation is warranted. The oil-exporting countries with their vast capital and oil wealth had to be represented, and Saudi Arabia was rightly chosen as the representative. But we should also be mindful that there are 172 UN-member nations that are not directly represented in the G-7 club and their interests should be taken into account when global decisions are made.
The decisions of the G-20 are usually a hodgepodge of weak compromises among its currently more diversified members. The G-20 decisions should be more diluted than those of the G-8 because of more conflicting interests, not only between the G-8 countries but also between the developed and developing nations. However, they are currently more representatives of the interests of the 192 nations that exist on this earth than before. This may be supported by the recent success that developing nations achieved in the G-20 by having the developed countries to agree to an equal voting power between developed and developing countries.
Unilateral global actions by the superpower members of the G-20 to achieve domestic political goals in their own countries should not be in conflict with the hodgepodge of decision compromises of the G-20 because they bring with them global crises. The Obama Administration’s decision to impose punitive tariffs on tire imports from China is a good example. Such a decision is shortsighted and came from a narrow-minded mentality that wants to pacify a certain political group in the United States. It can bring retaliations that could hinder international trade and plunge the world economy into a global recession as it happened in the past.
Still, as I mentioned above, the G-20 decisions are diluted and the desired goals lack good implementations, not only because of objections of developing countries but also because of conflicts among developed countries. The European countries support a cap on bankers’ compensations, while the United States does not. The resulted compromise is: the pay should be linked to performance! This is definitely a diluted compromise. The U.S. supports tough capital standards to avoid the repeat of inadequate provisions for bad loans that exacerbated the current global crises. The resulted compromise: it's up to the individual nation to set its own capital standards. Large banks in the U.S. and Europe object to those strict standards and plan not to implement this goal.
Developing countries should continue to demand equal power sharing in managing the international financial institutions such as the IMF, World Bank and the G-20 club. For example, the voting representation of the developed countries in the World Bank is 53%versus 47% for the devloping countries. Developing countries should also push for more restrains on aggressive risk-taking behavior which is a characteristic of capitalist economies.
Since major economic crises are global, developed countries should willingly take into account the interests of developing countries. The latter invests their gigantic national savings in the developed economies at low returns, to the determinant of their own people where many live close to the poverty line.
Developing countries have also more work to do to fulfill their global obligations. They should be mindful of the external imbalances that prevail in their economies and the world. Continuing dependence on domestic investment as the locomotive for their export-oriented growth will lower the return on their capital and create excess capacity which should keep the imbalances growing, a major source of the “savings glut”. Continuous interventions in the foreign exchange markets and depending on dollar peg schemes should also encourage more exports and the accumulation of foreign currency assets through the current account balance in these countries. There should be new domestic policies that aim at increasing private consumption and freeing up the exchange rate in those countries. China, for example, has high absorption of domestic spending on social programs such as education, health care and social security. It has also plenty of room to increase the earning power of its workers. These policies should help reduce the external economic imbalances, which is a major issue between developed and developing countries. Reciprocity from the world’s largest consumer and importer is a must for these policies to succeed. The United States should reduce this budget deficit, learn how to save more and regulate its banking liquidity and credit processes to repair its current account imbalance.
In conclusion, developing countries should not foster export -led growth and the developed countries should retreat from leverage-led growth. The new principle of international economics that has emerged from the current global crises is: “It is right to increase G-8 to G-20, but G-20 should ideally act as G-1. This is not good math but good economics”.
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