Transcript Slide 1

Beyond the G20
Toward effective global economic governance
Jakob Vestergaard
DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES
Epigraphs
 Stewart Patrick, US Council on Foreign Relations:
G20 is “the most significant advance in
multilateral policy coordination since the
end of the Cold War” (2010).
 Foreign Minister Norway: creation of G20 was
“one of the greatest setbacks since World
War II” (Spiegel 2010).
 Uganda CB Gov: G20 is but extension of “the
old architecture” (2011)
Structure of lecture
 G20 output legitimacy: effectiveness
 G20 input legitimacy: representation
 G20 at a crossroads: what to expect
from the Cannes summit?
 From G20 to GEC
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Output legitimacy: effectiveness
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G20 effectiveness (1)
”The concerted and decisive actions of the G20…has
already delivered a number of significant and
concrete outcomes:
 Financial regulation “broadened” and
“strengthened”.
 “Great progress” in macroeconomic policy
coordination – cf. framework for “strong,
sustainable and balanced growth”
 Global governance “dramatically improved” – “to
better take into consideration the role and the
needs of emerging and developing countries,
especially through the ambitious reforms of the
governance of the IMF and the World Bank”.
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G20 effectiveness (II)
“Failure to reach an (admittedly difficult)
agreement on a piloted across-the-board
adjustment of balance of payments should
not overshadow the rapid agreement
achieved with regard to the Basel 3 Accord,
which would not have been possible without
the political momentum of the G20 leaders”
(Domenico Lombardi, Brookings)
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G20 effectiveness (III)
 Financial regulation: alleged ”main
accomplishment” is the new international
standard in banking, ’Basel 3’
 G20 delegated this task to the Basel
committee
 Basel committee: G20 plus six additional
European c’ies (Switzerland, Spain, Sweden
etc) and two financial hubs in Asia (Hong
Kong and Singapore)
 Basel 3 negotiated in less than a year,
compared to Basel 2 which took more than
five years.
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International banking standards
Two fundamental objectives (BCBS, 1988: §3):
 “strengthen the soundness and stability of the
international banking system”
 “be fair and have a high degree of consistency in
its application to banks in different countries”
Key governance tool:
 capital adequacy requirement: 100 euro loan =>
at least 8 euro in reserves
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The pre-crisis approach (Basel 2)
Three pillars:
 Pillar 1: Capital > 8 pct of ’risk-weighted assets’
 Pillar 2: Supervisory review process – more
capital than Pillar 1 minimum can be demanded
 Pillar 3: Disclosure requirements, to encourage
’market discipline’ (misbehaviour punished)
From binding to less binding…
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’The end of lightly regulated finance’
Before
After
Microprudential
approach
(atomistic
perspective)
Great moderation:
we are beyond
boom and bust
Macroprudential
Surcharge on
approach (systemic ’systemically
perspective)
important financial
institutions’
Credit growth may Higher capital
indeed be
reserve
excessive, highly
requirements and
destabilizing
leverage ratio
Standards should
Countercyclical
be revised to be
capital reserve
countercyclical
requirements
(instead of
procyclical)
Standards do not
impact on the
economic cycle
Proposals
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Regulatory capture (1)
…BUT: reform initial proposals watered down, after
intensive banking industry lobbying
Aims of banking industry lobbying – the four Ls:
-
Lower
-
Leave out
-
Least-binding
-
Later
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Regulatory capture (II)
Initial proposal
International
leverage ratio in
Pillar 1 (binding)
Introduce
countercyclical
buffers in Pillar 1
Industry
recommendati
on
Move to Pillar
2 (nonbinding)
Move buffers
to Pillar 2
Outcome
Pillar 1, but set
at low level, and
delayed…
Adoption in
Pillar 2; set at
only 0-2.5 pct;
delay
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Basel 2 vs Basel 3
Basel 2
Basel 3
Core Tier 1
capital
Other Tier 1
capital
Total Tier 1
capital
Tier 2 capital
2
4.5
2
1.5
4
6
4
2
Total
8
8
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Basel 3 – overview of outcomes
Minimum
capital
reserves
Capital
conservation
buffer
Countercycli
cal capital
buffer
Leverage
ratio
Where?
How much?
When?
Pillar 1
2013-2015
Pillar 1
8 pct (but
higher
quality)
2.5
Pillar 2
0-2.5
2016-2019
Pillar 1
3 pct.
2018
2016-2019
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Finance professors ’going political’
“Banks’ high leverage and the resulting fragility
and systemic risk contributed to the near
collapse of the financial system. Basel 3 is far
from sufficient to protect the system from
recurring crises.
If a much larger fraction, at least 15 per cent, of
banks’ total, non-risk-weighted, assets were
funded by equity, the social benefits would be
substantial. And the social costs would be
minimal, if any”.
DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES
Finance professors ’going political’
Key points of joint letter by 20 of worlds
leading finance professors published in
Financial Times in run-up to Seoul summit:
-- Basel 3 fails to ”eliminate structural flaws
in the system”
-- please remember that ”healthy banking is
the goal, not profitable banks”
Unfortunately, this support from academia
came too late, says anonymous CB governor
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Basel 3: ’more heat than light’?
 Basel 3
- intensification of Basel 2
- marginalization of counter-cyclicality
- ’grandfathering’ (to be implemented by 2019…)
 Three years after crisis:
- banking not ”sound and stable”, espec Eurozone c’ies
- threat to global economy as least as severe as in ’08
- social upheaval and protest, nationalism, even war?
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In conclusion, on G20 effectiveness
 Before Seoul summit (Nov 2010): G20 is
“divided, ineffective and illegitimate” (Rachman,
FT).
 After Seoul summit: G20 had shown “how not to
run the world” (FT editorial)
 Summer 2011: G20 marginalized (G Brown called
for meeting, but nothing happened)
 Conclusion: G20L not “effective” as global
steering committee = low “output legitimacy”
Input legitimacy: representation
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G20 claims input legitimacy
 G20 says: its “economic weight & broad
membership gives it a high degree of
legitimacy & influence over the management
of the global economy & financial system”
(G20 2010a).
 G20 says it is representative: covers 90% of
world GDP, 80% world trade, 66% world
population.
 G20 says it is big improvement over G8.
Input illegitimacy (1)
 Regarded as illegitimate by many of 174 UN
member states permanent excluded
 Membership endorsed by G7, in 1999, selected in
transatlantic calls btw US and Germany.
 G7 claimed they were all “systemically significant”
c’ies. No explicit selection criteria.
 No process for changing membership in line
with changes in global distn of econ power.
Input illegitimacy (II)
 The 19 member countries not the 19 biggest
economies by any indicator (neither in 1999 or
2008)
 Europe not “over-represented” by GDP criteria:
Spain, Poland, Netherlands shd be in; Argentina,
Saudi A, S Africa out. Yet widely believed (esp
USA) that Europe over-rep.
 No regional representation – except EU
 If EU removed, G20 “represents” 77% world
GDP, 60% world trade, 62% world population
Input illegitimacy (III)
 Big majority simply cannot be used to argue a case
of input legitimacy
 Consider example of national elections (urban
dominance; religious dominance)
 Without explicit – and widely accepted – criteria of
inclusion/exclusion, there can be no such thing as
input legitimacy
 Irony of G20s claim of “dramatic improvement” of
global governance, in interest of developing
countries: the G20 itself further marginalizes those
countries
G20 countries – by region and income classification
High-income countries
Middle-income
countries
Low-income
countries
Africa
0
South Africa
Tot
al
1
America
s
&
Australa
sia
Asia
0
Argentina,
Mexico
Brazil,
Australia, Canada, USA
6
0
0
Total
0
9
Japan, Korea, Saudi
Arabia
France, Germany, Italy,
UK
10
6
Europe
China,
India,
Indonesia
Russia, Turkey
6
19
Ad hoc participant expansion
 G20L has responded to “unrepresentative” criticism by issuing
“invitations” to “outreach participants” and “observers”.
 Spain invited as “permanent guest”.
 ASEAN invited as “outreach participant” to all 5 summits.
 Hosts of last 2 summits (Canada, Korea) invited African Union
to send 2 reps.
 Status of ‘invitees’ unclear…
 So: G20= 19 countries + EU + 5 “invitee states” (of wh 3 rep
regions)
 G19+6, or simply G25
The G20 at a Crossroads: what to
expect from the summit in Cannes
DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES
Two opposing trends in GEG
1. Drift back towards G7/G8:
 Summer 2011: G20Fs did not meet but G7Fs did (despite
formers self-declared status of ’premier forum’..)
 Obama has announced that he will host G8 and Nato
summits in May 2012, just one month before G20 summit
in Mexico
=> Is G20 being reduced to a secondary body?
2. Appeals to G20 to step up: ’rescue WE, please’
 EU, OECD, etc
 Much depends on the Cannes summit
DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES
G20 summit in Cannes: the context
 Drama similar to first two G20 summits: recovery in
danger (for instance, gloomy OECD forecast yesterday).
 Global economy more vulnerable now than in 2008: fiscal
stimulus at similar scale not likely
 Growth in EMEs remain strong – BUT: increasing risk of
inflation, prospect of further weakening of export
markets, partial retreat of foreign capital
 Quasi-insolvent European banking sector? Will banks
reduce lending to meet capital reserve requirements by
June next year? New credit crunch in Europe?
 European agreement: ”too little, too late”? (Brookings,
yesterday). Espec German discontent (Bundesbank).
Greek referendum – radical uncertainty..
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Growth, please – but how?
OECD: adopt ”bold growth strategy”, if not: drop
in GDP of up to 5 pct by mid-2013
EU leaders: G20 should approve ambitions plan to
”ensure strong, sustainable and balanced growth
while implementing credible fiscal consolidation”
Many G20 leaders constrained by domestic politics
to undertake big fiscal stimulus – constrained by
fiscal austerity ideology
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Action items for Cannes summit
With fiscal policy constrained and monetary policy reaching
its limits, what can be expected?
 Non-European contributions to the EFSF? (China etc)
 Expansion of IMF’s financial capacity?
 Global food crisis: more resources for investment in
agriculture? Or, at least, meeting prior commitments to
fund the Global Agriculture and Food Security Program?
 Most likely little on main issues: global imbalances etc
Main risk: conflict btw European leaders and non-European
leaders (on terms of support etc.)
DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES
Two scenarios
1. Marginalization of G20
 Continues as talk-shop, but secondary to G7/G8
 How will the BRICs react?
 Wider process of deglobalization of international
economic governance?
 More emphasis on regional level
2. G20 resumes global leadership
 Further institutionalization, incl secretariat
DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES
Four good reasons…
.. to look for a different, more viable format
for effective global economic governance:
 The G20 is not effective (low output
legitimacy)
 The G20 excludes 174 UN member states
and membership criteria arbitrary (low input
legitimacy)
 The G20 undermines the existing
multilateral system of GEC
 And the G20 is losing momentum…
From G20 to GEC
DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES
Global Economic Council
 Start with BWI system, not G20/G25.
Constituency system has long-established
legitimacy.
 Advantages over G20: (1) all states
represented in governing bodies, (2) some
consultation within constituencies, (3)
some rotation at top table
 Disadvantages: (1) no heads-of-govt. level;
(2) system of single country seats
unsustainale (3) voting power system out-ofsync with realities of global economy
Allocation of seats among regions

25 seats, based on reformed BWI constituencies.
Allocation of seats:
(i)
Divide world into 4 regions: Africa; Americas &
Australasia; Asia; Europe. Each region to have 4
seats. Subtotal = 16.
(ii) Distribute 9 more seats between 4 regions
proportional to regional share of world GDP*.
All regions except Africa get 3 more seats.
Result: Africa = 4 seats, other regions = 7
Constituencies and rotation
 No single-country seats; all countries in
constituencies (minimum size: 3, average: 7).
 Mechanism of rotation within each
constituency: Each constituency one director & 2
alternates.
 Constituency decides whether all 3 positions
rotate b/w members, or only alternates. If only at
alternates’ level, large c’ies cld always be at table –
but still obliged to consult with other states.
 BWI constituencies to be reformed in same way
GEC decision-making
Two models:
 Binding agreements, based on a combination of
majority voting and special majority voting (as in
BWIs)
 Informal “talk-shop” council, as the G20 – on the
assumption that big powers otherwise will not go
along
 Possible compromise: start out as informal council,
replacing the G20, testing ground for future
potential formalization
 UNSC as model? Two forums: “consultation
room” (strictly private, no formal decisions);
formal room.
The way forward
 GEC based on formal treaty
 Treaty focusing on one issue: international
macroeconomic imbalances
 Correction of imbalances as joint responsibility of
surplus and deficit countries
 Limits on imbalances – deficits and surpluses – as
share of GDP
 The how of correction/adjustment is left to
discretion of countries in question, but noncorrection to come at high cost
 All other issues: non-formal