Operation of the G20 to date: Emerging country perspectives

Changyong RheeChief Economist

Asian Development Bank

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The views expressed in this document are those of the authors and do not necessarily reflect the views and policies of the Asian Development Bank or its Board of Governors or the governments they represent, nor of the Government of India.

Alok SheelSecretary, Prime Minister’s Advisory Council

Government of India

Outline of the paper

1. Introduction

2. Emerging markets in the G20

3. Role of emerging economies in major G20 initiatives

4. Conclusion

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Emerging markets in the G20

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G20 summit as platform to address the global financial crisis

• Why the G20? Why not the G8+5, the G7+BRICS, or some other forum?– To reflect delayed recognition of new geometry of

the global economy – Heiligendamm process– Emerging G20 economies’ shares in output,

population, and trade were growing rapidly– Functional platform already existed for discussions

on economic and financial issues through meetings of G20 Finance Ministers and Central Bank Governors and Deputies

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Emerging economies in the G20

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Emerging economies in the G20

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AD Economies EMDEs AD Economies EMDEs1990 79.9 20.1 69.3 30.72000 79.7 20.3 62.8 37.22008 68.7 31.3 54.5 45.52013 60.7 39.3 49.1 50.9

Source: WEO April 2013 , IMF

Share in Global GDP

YearAt Market Exchange rates At PPP

If Financial market problems are key, why EMs?

• Financial market regulation and reform were solutions to the crisis. But emerging economies’ financial markets remain limited in size and scope, so why include them?– Burgeoning global imbalances, for which emerging

economies were partly responsible, were one of the underlying causes of the crisis

– In retrospect, including emerging economies in the dialogue to address the crisis proved beneficial to the global recovery

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Financial Markets of EMs in the G20

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Role of emerging market economies (EMEs) in major G20

initiatives

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Financial regulatory reform (1)• Most ambitious agenda since the Great Depression,

but still work in progress is most areas other than BASEL III. Shadow finance (source of the recent crisis) remains a major concern.

• Impact of ongoing financial regulatory reforms on EMEs relatively benign– Capital flows to EMEs are back to pre-crisis levels, and

they appear more impacted by advanced economies’ monetary policies than regulatory reform

• But Basel III implementation may have unintended effects on EMEs– Rising cost of capital– Pullback in trade finance

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Financial regulatory reform (2)

• EMEs played a less significant role in financial regulatory reform discussions– Despite the sudden stop, their financial markets

held up quite well during the crisis.– Emerging economies’ financial markets remain

underdeveloped– G 20 discussions focus on financial stability rather

than on deepening of the financial sector and its relationship with growth

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G20 Framework for Strong, Sustainable, and Balanced Growth (1)

• Strong, coordinated fiscal policy response helped avert a second Great Depression

• While external imbalances have declined, only loose agreement reached on acceptable policy thrusts – such as reducing current account imbalances, exchange rates, trade off between continued stimulus and fiscal management, monetary policy spillovers, etc.

• Mutual Assessment Process and Accountability Assessments have underscored that international policy coordination can achieve tangible results, but have limited success so far in achieving strong, sustainable, and balanced growth

• Little coordination on monetary policies

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G 20 FSSBG : Five Stages of macro-economic policy co-operation (2)

• Five stages of macro-economic policy co-operation• I: First two summits – aggressive, undifferentiated policy

response • Pittsburgh: Framework launched – assumption: recovery

underway, but needed to be strong, sustainable and balanced• II: From Toronto – differentiated policy response across

country groups.• III: From Seoul – Country specific policy response and

commitments first considered• IV: From Cannes – With green shoots withering, policy

response differentiated between short-term and long-term.• V: From Los Cabos – Assessing country commitments and

holding them accountable – explain or comply

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Governance reform of international financial institutions (1)

• Governance reform of IFIs may be one of the most important and visible achievements of the G20 so far.

• But the resolve to reform the power structure of IFIs is puzzling, even though it has long been overdue.

- If governance issues are opened up, this can only be at the cost of advanced European economies.

- A recognition that governance was an essential prerequisite for enhancing effectiveness of IFIs to prevent future crises?

- Opening up governance issues inevitable since the resource replenishment issue was also on the table?

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Governance reform of international financial institutions (2)

• It is a good example of G20 effectiveness and the possibility of reaching political consensus on difficult issues despite diverse vested interests in an international forum. – But deadlines have been missed for resolving IMF

quota and governance issues– IMF resources enhanced substantially, but not

those of MDBs.

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Global safety nets• EMEs continue to rely on self-insurance

mechanism - foreign exchange accumulation• Need to strengthen Global Safety Nets – but

emerging economies were initially not supportive amid concerns of the criticism against accumulation of foreign currency reserves

• Bilateral Swaps; Improving IMF’s lending Facilities; Coordination mechanisms between IMF and RFAs; International Financial architecture

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Development

• Adoption of the development agenda made the G20 more inclusive and representative

• But the development agenda has expanded excessively , and needs to be pared down and prioritized

• Need to strengthen the legitimacy of the remaining items in the development agenda through concrete deliverables

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Other issues• G 20 agenda expanding with each Summit.• Succeeded in accelerating implementation of,

and building upon, agreements already reached in other forums, such as existing WTO commitments, anti-corruption, and tax evasion

• But continued polarity of G20 members on issues such as trade and climate change, which are also stuck in parent forums, is undermining the credibility of the G20

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Conclusion

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Takeaways from G20 at Five• More effective during the crisis, but less so in

coordinating policies during recovery• Finance channel delivered more concrete outcomes

because it is involved in more readily actionable issues; Sherpa channel focused on resolving difficult political issues where consensus cannot easily be reached

• Expanding agenda and non-delivery risks a credibility crisis for G20

• Need to reach out more to non-G20 members• Collective G20 action can be more effective than

delivering individual country commitments because of but difficulties of having binding commitments

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Summary• G20 helped prevent repeat of Great Depression, with emerging economies

significantly contributing to the global recovery through the G20 framework for strong, sustainable, and balanced growth

• But emerging markets played a less significant role in financial regulatory reform, due to its underdeveloped financial markets and concerns about the greater focus on financial stability rather than on growth of the financial sector

• G20 also showed that political consensus on difficult issues such as governance reform of international financial institutions is possible, despite diverse interests between emerging and advanced economies

• However, their continued polarity on other issues such as trade and climate change is undermining the credibility of the G20

• Adoption of the development agenda enhanced the legitimacy of the G20, but the seemingly excessive expansion of the G20 agenda now needs to be pared down and prioritized to enable the delivery of more concrete outcomes

• Dynamic alliances have formed in G20 depending on the issues under discussion: For example, strengthening global safety nets was intended to help emerging economies, but their opinions were initially divided over concerns about the treatment of foreign reserve accumulation

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