The G20 presents opportunities and poses challenges for China and other developing countries. As new partners at the global table, they can both raise and pursue issues in the medium to longer term, which are central to their continued growth and development.
China, for instance, needs continued unhindered access to export markets in the Organisation for Economic Co-operation and Development countries, and needs the system to deal with growing numbers of anti-dumping actions and safeguard measures against their exports. The G20 has endorsed a standstill on protectionism. Applying this more strongly than the weak World Trade Organization discipline on trade restrictions is a challenge. China may not wish to maintain the present structure of global financial arrangements in the longer term, and refocusing or even replacing the International Monetary Fund (IMF) by some new global trade and payments entity may be a preferred route. Other developing countries may have similar inclinations. Equally, new rules or arrangements stemming from the Financial Stability Board or the Sustainability Initiative applied uniformly across both developed and developing countries will encounter the issue of sharp differences in financial structures between these economies. Equally, approaches to deal with Africa and other developing countries that are excluded from the G20, may well differ between developed and developing countries.
China’s Power in the G20
China has been growing rapidly and it is aware of the increasing power provided by its rapid growth. China is developing strong links with other emerging economies in the G20 and is likely to continue its policy of trying to change the rules at the major economic governance institutions in concert with these other developing countries. The relationships between China and India, China and Brazil, and China and Russia are all very complex and often complicated by prior conflicts, but are deepening rapidly. Trade between China and India has grown by 33 times between 1985 and 2007.
China is especially conscious of the potential for the G20 to rewrite the rules governing the operation of the world economy in the medium to longer term, particularly the role of the major economic governance institutions. China, together with other important developing country members of the G20 such as Brazil and India, has the opportunity to shape the rules of international economic governance in ways that reflect its own interests. A major interest of the G7 was to avoid policies that resulted in large misalignments of exchange rates and interest rates. Developing countries would like the institutions of international economic governance to be more responsive to their needs for development, so one may expect a shift in the focus of discussions at the G20 as compared to the G7.
Developing Countries and International Economic Organizations
Policy makers in developing countries have, in the past, expressed their disquiet about the limited voice of developing countries currently in the international economic organizations, a view articulated strongly by both India and Brazil. The Chinese have been in the forefront of voicing concerns about the stability of the value of the US dollar in the face of the large deficits in the US budget and the need for an international currency in which countries could hold reserves rather than having to hold dollars. Lack of any other international currency apart from the dollar implies that countries can only fulfill their desire to build up their foreign exchange reserves of US dollars if the US runs a balance of payments deficit. Therefore, the developing view is that if the desire of countries to build up their reserves contributes to the global imbalances, then an end to the global imbalances would seemingly require an alternative international currency.
Chinese policy makers, though expressing their conviction that an alternative international currency is needed, have not acted to disrupt the foreign exchange markets and there has, for now, been only a small reduction in their holdings of US government treasury bills. The Chinese policy makers have behaved responsibly in sustaining the current system and have done nothing to jeopardize its working. Many developing countries, including China, have been diversifying their reserve holdings and holding fewer dollars, but very gradually. Other developing countries are likely to adopt a similar approach as they favour multilateralism.
Developing countries will likely support reforms of the global regulatory and supervisory system. Until recently, the US and China had not participated in the Financial Sector Assessment Program (FSAP) managed jointly by the IMF and the World Bank, that sought to improve supervision of the financial and banking systems and of capital markets and insurance companies. The FSAP also seeks to assess the resilience of the system to shocks. Developing countries have argued that the assessment should extend to all countries, and now the US and China have agreed to be covered by the FSAP.
In the years ahead, the G20 policy makers in developing countries are likely to consult extensively with both developed and developing countries as they seek feasible reforms in the system of international economic governance. China can be expected to be at the centre of negotiations on reshaping the international governance system. With strong economic links to both developed and developing countries, and a strong interest in a well-functioning international economic system, it can play a pivotal role in determining the outcome.
Manmohan Agarwal is a visiting senior fellow and John Whalley is a distinguished fellow at The Centre for International Governance Innovation, Waterloo, Ontario, Canada.