The rise of the G20 represents a major innovation in the global governance system. Through G20 summits, the political leaders of 20 economic powers take responsibility for the health and stability of the global economy. Developing nations with big emerging markets are finally given a major role in the international policy-making process.

The G20 is still a young institution among the myriad of intergovernmental organizations and processes designed to advance international economic cooperation. Contrary to the UN, the IMF or the WTO, the G20 does not derive its authority from an international treaty, nor does it have a permanent secretariat to follow up on its decisions. Its long-term success ultimately depends on the political will of its members and its ability to drive new ideas forward and deliver results on its multi-front agenda.

G20 summits tend to generate enormous expectations, and are often followed by their fair share of disappointments. The issues taken up by the G20 are generally very complex and cannot be resolved in the course of one summit. Whether they are addressing matters of trade, financial reform, climate change or agriculture, G20 countries often come to G20 summits with well-established national positions, which largely reflect their level of development, cultural preferences and specific economic contexts.

Assessing the G20’s past and possible future achievements, therefore, calls for a long-term view. Some successes have been immediate and visible. Others will require a longer maturation period. Yet, in today’s world of rapid economic changes and multiple sources of instability, the coming test for the G20 will be its capacity to deal with urgent situations. With the world on alert over the possibility of a new global recession triggered by the sovereign debt crisis in advanced economies, the 2012 G20 summit in Los Cabos, Mexico, looks set to be one of the most crucial to date.

SOME IMMEDIATE SUCCESSES

The G20 has made a number of important breakthroughs since 2008, when the group adopted its current format as a heads of state and/or government forum.

  • In the worst moments of the 2008-2009 financial and economic crisis, the G20 provided a space for the world’s leading economies to coordinate and combine the impact of their national emergency rescue plans. Collectively, G20 governments tripled the IMF’s resources and secured additional funding for multilateral development banks to help developing
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    countries cope with the effects of the crisis. Together, G20 leaders pledged to keep their markets open and stood firm against protectionist pressures. Within a year, the G20 managed to restore liquidity in the financial system and lift the world economy out of recession.
  • The G20 has durably transformed the regulatory environment for the global financial industry. Financial products and institutions which used to fall outside the scope of regulation are now subject to closer oversight by national financial authorities. Under the impulse of the G20, new global rules on banks’ capital and liquidity standards will be progressively implemented in all financial centres and will help reduce excessive leverage in the financial industry. New tools are being designed to prevent and manage the collapse of “too-big-to-fail” financial institutions, with the aim of protecting taxpayers and national economies from the cost of financial risk.
  • The G20 has played an instrumental role in pushing for a long-overdue governance reform of the IMF. Prior agreement among the G20 gave a decisive impetus to the IMF’s 2010 decision to increase the voting power of under-represented, dynamic emerging developing economies by over six per cent. China, Brazil, India and Russia are now among the top 10 shareholders of the IMF.

LESS VISIBLE BUT EQUALLY IMPORTANT CHANGES

Beyond these immediate accomplishments, the G20 has introduced a series of less visible changes which nonetheless represent fundamental developments for the future of global economic governance.

  • The G20 has brought to the table a number of issues which had fallen between the cracks of the major institutions of global governance. In particular, the G20 provided a framework to tackle the issue of global macroeconomic imbalances, which many observers identified as a root cause of the global financial crisis of 2008-2009 but which had never been formally addressed in the context of international financial institutions for lack of a clear mandate.
  • The high profile of G20 summits, and the intensive media coverage that they generate, has largely contributed to bringing international economic issues to the forefront of public debate. The G20 has taken on an important role and responsibility to inform and educate the public on complex economic developments and, in turn, to inject public concerns into the global governance agenda.
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  • By setting overall strategic direction, and in some cases substantially increasing their funding, the G20 has re-energized the work of the main multilateral institutions, including the IMF, the World Bank, the WTO, the ILO, the OECD and specialized UN agencies. While the G20 was never intended to act as a substitute for the governing bodies of these institutions, it fulfils a central role by ensuring the global consistency of their actions and creating synergies among them.
  • The G20 process has injected a high dose of political engagement in global economic governance. Without a doubt, the political nature of the G20 process has been a decisive factor in its rapid progress in areas where traditional multilateral institutions have previously lagged. Every year, the leader of the host country of the annual G20 summit has a clear political motivation to organize a successful event which leads to landmark decisions. His or her political credit, both nationally and internationally, is at stake. Indeed, G20 summits attract much more media and public attention than the annual meetings of the Boards of Governors of the IMF and World Bank.

A FEW PERSISTING WEAKNESSES

In other areas, however, the impact of G20 action has been more limited, casting a shadow on the group’s ability to fully deliver on its far-reaching agenda.

  • Despite the G20’s stated ambition to “put jobs at the heart of the recovery”, advanced G20 economies have made little progress in curbing unemployment and recovering the jobs which were lost during the global financial crisis of 2008-2009. In the US, the unemployment rate hit 9.1% in August 2011, compared with 5% in January 2008. In the European Union, where the impact of the crisis on jobs was less pronounced, the average unemployment rate reached 9.4% in June 2011, up from 6.7% in March 2008.
  • While the G20 managed to stem the financial crisis of 2008-2009, it has been unable to anticipate and prevent the emergence of new systemic risks in the world economy. In the near future, G20 action under the Framework for Strong, Sustainable and Balanced Growth may prove insufficient to avoid a double-dip recession triggered by the combination of a faltering recovery in the US and market concerns about the deepening sovereign debt crisis in the eurozone.
  • With hindsight, the initial hopes that the G20 process could provide a quick fix for the crisis of multilateralism appear to have been overly optimistic. The two major multilateral processes taking place today, the
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    WTO Doha Round and the UN climate change negotiations, continue to move at a desperately slow pace despite the G20’s repeated commitment to reach ambitious and comprehensive agreements as rapidly as possible.
  • Finally, many observers have pointed out the limited reach and effectiveness of G20-led reforms in the economic and financial spheres. Upstream, governments continue to resist measures that potentially impinge on their state sovereignty and short-term national interests, sometimes at the expense of globally framed solutions that would benefit all parties. Downstream, in the absence of a strong implementation and monitoring mechanism, the G20 process continues to rely on the goodwill of its members and the diligence of national regulatory bodies.
    The risk is that persistent differences in implementation efforts across countries will seriously undermine G20 efforts to apply global responses to today’s global problems.

CHALLENGES AHEAD

For all its strengths and weaknesses, the G20 process is now well established and set to last. Yet, a number of pending questions will require increased attention from G20 leaders in the short to medium term. The first one is whether the group needs to set up a permanent secretariat. Those in favour believe that establishing a G20 secretariat would facilitate the organization of G20 summits, allow for better follow-up on G20 decisions from one summit to another, help to preserve institutional memory, and foster a greater sense of common identity. Those against consider that the G20’s lightweight structure is precisely what enables the group to function efficiently and at limited cost to taxpayers. A recurring proposal has been to establish a small rotating secretariat, possibly staffed by officials seconded from G20 countries and chaired by the country holding the G20 chairmanship.

Another challenge facing the G20 is to find a way to reach out to the wider global community. Many voices have advocated the establishment of more structured and systematic consultations with non-G20 countries prior to summits. The G20 also faces growing calls to strengthen its institutional links with the UN and other multilateral institutions in order to take into account more fully the views of smaller countries, particularly the least developed ones. A more inclusive process would go a long way towards strengthening the G20’s global legitimacy. Doing so appears to be not only a matter of democratic fairness but a key condition for the group’s efficiency, since many G20 decisions and orientations will require the “buy-in” of non-G20 countries, especially in the context of wider multilateral processes which the G20 seeks to influence.

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Some observers, however, have taken an opposite view and make the point that the G20’s size is already too large to effectively address complex policy issues. In their view, the tough issues of today should first be mapped out by a handful of countries, each representing key positions, before being introduced at G20 level for wider debate and agreement. For example, a G20 deal for correcting global macroeconomic imbalances might be attained more easily if a preliminary agreement were reached among a core group of countries whose external imbalances pose the greatest threat to the global economy, such as the US, China and Germany.

Last but not least, a key issue for the future of the G20 remains the scope of its agenda. In the first two years, the G20’s work programme was predominantly driven by the policy imperatives and debates within the G8 countries. Such a focus was justified by the fact that the financial crisis had originated in advanced economies. As the G20 process progresses, and as summit locations move to non-G8 countries, the group will be increasingly called upon to address issues of central concern to emerging countries, such as their resilience to external shocks and how to prevent their economies from overheating. The challenge, however, goes beyond the formulation of an “emerging market agenda”. To be relevant and effective, the G20 will need to focus on where it adds the most value, namely, its capacity to foster collective action between advanced and emerging economies in the pursuit of globally shared objectives.

Another underlying issue for the future of the G20’s agenda is finding the right balance between dealing with the most technical aspects of the global policy agenda, such as capital flows, exchange rates and banking regulations, and providing a response to the big public concerns raised by globalization. Given its political nature, the G20 has a responsibility to address some of the fundamental questions raised by the global economy, such as the growing problem of widening inequalities within nations and the increasingly widespread perception of public opinion that global financial markets are pushing governments to the sidelines and restraining public policy choices.

THE BUSINESS AGENDA

Through direct engagement with G20 governments, the global business community has a key role to play to promote G20 outcomes that are aligned with core business goals for open trade and investment, economic growth, job creation, and sustainable development. To date, however, the G20 process has progressed with little input from the companies which provide innovation and dynamism for the world economy. Looking ahead, the global policy agenda could benefit considerably from stronger business participation in three vital areas.
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First, business can help governments make informed decisions on complex issues that are part of the G20 agenda. From anti-corruption to banking, from climate change to international trade, and from employment to currency issues, the collective experience of companies is a precious asset for G20 leaders as they seek to craft policy responses that have a positive impact on the ground. In all these areas, the G20 process offers a formidable opportunity for companies to bring their top priorities and concerns to the attention of the world leaders from key advanced and emerging economies.

Second, business leaders can help identify issues that are not yet part of the G20 agenda but which have a strong bearing on the health and competitiveness of the global economy. These may include cross-border investment rules, innovation policies, intellectual property rights, small business development, and corporate social responsibility. Thanks to its flexible structure and its high-level nature, the G20 indeed has an unmatched capacity to pick up fresh and innovative ideas and accelerate policy developments on a global scale.

Third, business has a clear interest – and a broader responsibility – to support the G20 as a driving force for increased global governance. As the balance of economic power shifts to the emerging world, the map of global economic competition is also being redesigned. New business players are emerging from all parts of the world and the bulk of today’s and tomorrow’s business opportunities lies in fast-growing emerging markets. Increased dialogue and cooperation between governments, through the G20 process and in the context of multilateral institutions, will be critical to ensure that the global economy is based on open and fair competition and that business competes under a common set of global rules.