Homi Kharas is a senior fellow in global economy and development at the Brookings Institution's Wolfensohn Center for Development.
Economic Interests
It is easy to see how the G20 operated in Pittsburgh. China and other developing countries benefitted from a greater say in the IMF, but gave in on the issue of enhanced monitoring of their economies. The Europeans got their way on stiffer curbs on remuneration for bankers and progress on cutting fossil fuel subsidies, but lost clout in the IMF. The US deflected criticism of its role as the originator of the crisis and seems to have maintained its veto power in the IMF, but had to yield on bankers’ pay and on multilateral surveillance. In other words, the leaders did exactly what was intended: they traded across issues in order to arrive at compromises in a range of areas.
It is therefore not surprising that for those who were not at the table, the non-G20 developing countries, there was nothing offered! The leaders’ statement is full of promises, including a reiteration of those already made; however, these increasingly lack credibility, like the Gleneagles aid pledge and the reaffirmation of the MDGs, but are short on specifics. Non-G20 low-income countries wanted more resources for development through new concessional funds, a disproportionate share of IMF gold sales, and more liberal interpretation of the Debt Sustainability Framework, which currently acts as a strait-jacket for low-income countries trying to preserve core development spending in the face of falling government revenues. What they got was a promise of support, on a voluntary basis, for new trust funds for food and fuel programs — not additional money, but earmarked money.
That said, all non-G20 countries have a strong stake in a well-functioning global economy. They benefit from the stabilization of the system, the agreed commitment to maintain stimulus programs until the recovery is more robust, and the decision to push towards concluding the Doha free trade agreement. They should be thankful that a global group has emerged that is prepared to take on itself the task of collectively providing global economic public goods that the rest of the world depends upon.
Political Interests
Non-G20 countries see that yet again, when it comes to global politics, money talks. The selection of which countries sit at the G20 table was based on GDP, not on population, although, from a technical point of view, there exists perfectly good formulae which would have combined GDP and population to balance effectiveness and representation of the world’s people in a better way. It is irritating to many of those who are excluded to think that the rich countries feel that the new, developing country members of the G20 represent their views. For Colombians, it matters little that Mexicans and Brazilians are at the table as well as Americans and Europeans. The Pakistanis do not feel better because India is a member of the club. South Africa does not represent other African countries. Developing countries are a very heterogeneous group. Having a few in the club does not make them represent the interests of many who are excluded, even if, on the margin, there is some solidarity.
The G20 has inadvertently weakened the hands of reformers in non-G20 countries. The massive interventions in key banks and industries, and the tactical use of trade tariffs, have been legitimized by the G20 in an atmosphere of coordinated connivance. These policies are damaging to non-G20 country economic and political interests.
Perhaps the best political news is the renewed determination of the G20 to crack down on corruption and tax havens. Maybe now the process of democratization and political legitimacy will be strengthened in non-G20 countries. They will benefit from this if enforcement is strong. But right now, the measures are being taken to protect the G20 country tax bases, not to root out corruption. There’s a coincidence of interests in the short run, but no guarantee this will persist in the medium term.
Geopolitical interests
The G20 leaders make much of being more inclusive in the governance of the international financial institutions. This will make a difference to large G20 developing countries, like China. But the decision to increase the voting share of developing countries by a paltry 3 percentage points in the World Bank is a clear statement that it is unnecessary to hear the voices of poor, developing countries in order to set development strategies. The G20 promised to protect the share of votes of poor countries: but protecting almost nothing still leaves poor countries with little voice in the new system.
Politics matters. Connected developing countries, like those in Eastern Europe, got access to huge funds to run counter-cyclical policies. So did other middle-income countries that got access to MDB and IMF non-concessional resources. But poor countries have been told they have no fiscal space (based on very conservative and questionable methodologies), so they should contract. The World Bank estimated that low-income countries need US$11.6 billion to protect core infrastructure, safety net and social services. Little of this has been forthcoming as yet, although there are promises to look favourably on IDA and AfDF replenishments when these come up.
It seems clear that global institutions will pay less attention to the specific needs of development in each of the non-G20 countries and more attention to global public goods. Regional institutions, and regional powers, now call the shots.
Global leadership
Small countries swim in a big pond. The G20 provides some semblance of global economic leadership on which others can get a free ride. In many instances, the non-G20 country interests coincide with those who sit at the G20 table, for example, on trade talks, climate change and energy security. But no one in the G20 spoke up for the fact that average incomes in the United States are now 44 times the average income in sub-Saharan Africa (compared to only 17 times in 1980). That is also surely a sign of global economic imbalance. Perhaps in time global imbalances will come to mean more than Asia should spend more and the United States should save more. As Donald Kaberuka has noted, “low income countries’ priorities are still an appendix, a footnote.” The new G20 effort to assume the mantle of global economic leadership will not be complete until these issues are also addressed.