As the financial meltdown continues, the good news has been President George Bush's call for a Leaders' G-20 meeting on November 15 in Washington. Don't we have enough such meetings already? Yes, but not necessarily of the right kind. "Black September" underscored that we live in a globalised economy. The subprime crisis that started in Wall Street spread like wildfire to the rest of the world, and the glee and schadenfreude with which it was first received by many abroad was quickly dispelled as stock markets and currencies crumbled. Tens of trillions of dollars have been lost. Solutions are nowhere in sight.
The financial sector is about five times the size of the real economy, yet, the enormous financial imbalances that exist in today's world are unregulated and at least one source of the financial havoc we are witnessing. Some have proposed the creation of a global financial regulator, which, necessary though it may be, is unlikely to be effected in the near future. More broadly, this reveals the deficits in global governance, of which the exclusion of China and India is a prime example.
With close to $2 trillion, China has a quarter of the world's hard currency reserves (up from 5 per cent in 1990). Yet it does not have a place at the table of the G-7 Finance Committee (nor at the G-8, for that matter), where issues of financial coordination among the world's most industrialised nations are discussed. Everybody says China is part of the solution; yet, how should that happen if it isn't even a member of the club that decides such matters? Should it just send a cheque in the mail?
Yet, China at least is a member of the P-5, the permanent members of the United Nations Security Council, thus having a voice on key international security matters on their premier forum. India, the other Asian giant, is neither in the G-8 nor the P-5, thus feeling particularly disenfranchised.
The G-7 was established in the late 1970s to search for a measure of macro-economic coordination among the world's leading economies. Formed by the United States, Germany, Japan, France the United Kingdom, Canada and Italy, its yearly summer meetings became one of the key exercises in summitry. Its selectivity made it effective, as leaders from the rich countries exchanged views in an informal setting which eschewed formal speeches for more productive give-and-take. In the 1990s, in the one gesture made by the West to post-Soviet Russia, the latter was invited to join, thus becoming the G-8.
Expanded version
Yet, 20 years after its initial founding, it became apparent that these countries represented a shrinking share of the world's product, and, with the "Asian crisis" of 1997-1998, an expanded version of the G-7 Finance Committee was launched, a G-20, which added many key nations from the developing world, whose Finance Ministers thus joined these deliberations. In fact, one such meeting will take place in Sao Paulo on November 8 and 9.
In the end, though, certain decisions can be made only at the highest levels. The notion that it was the G-8 itself that needed to expand spread. Emerging powers like China and India, and also countries like Brazil, Mexico and South Africa, richly endowed in population, territory and natural resources, became candidates to join. Yet exclusive clubs are difficult to crack. Inviting their leaders for only part of the G-8 sessions was the initial response, but eventually it became untenable (as South African President Thabo Mbeki put it, "we can't be put into a situation where we are asked to join in the dessert and miss the main meal."). In the 2007 G-8 Summit in Heiligendamm, Germany, the communiqué was issued before the O-5 (Brazil, China, India, Mexico and South Africa) met with the G-8, adding a measure of farce to what was seen by many as mere window-dressing.
It is time to get serious. For several years, two Canadian think tanks, CIGI and the Centre for Global Studies, have pushed for a Leaders' G-20 meeting as a way of breaking global deadlocks and making progress not just on international financial regulation but also on issues as varied as climate change, international migration and agricultural subsidies. Many simulations and "shadow meetings" around the world of this "Breaking Global Deadlocks" project have shown the fruitfulness of it. Extant tools to cope with such issues are either obsolete or not working. As U.S. Treasury Secretary Henry Paulson has himself said, "If you look at the global financial architecture, I don't think it reflects the global economy."
Current arrangements are unfair and unrepresentative. Unfair because they are based on a set of rules based on Northern preferences and convenience - not just on the composition of the G-8. The cozy arrangement whereby the two leading international financial institutions (IFIs), the IMF and the World Bank, are always led by a Western European and an American respectively, although they deal largely with the developing world, has become unacceptable. Moreover, the unwillingness of the IFIs to actually hold Northern countries accountable for the same financial mismanagement they relish in accusing the developing countries of has deprived them of credibility. What has the IMF to say about the ballooning, $500-billion dollar fiscal deficit, $10- trillion dollar public debt and current account imbalances of the United States?
Unrepresentative, because they leave out the vast majority of countries (and population) around the world. There is, of course, an inverse correlation between size and efficiency in these summit meetings, and to recreate the United Nations General Assembly for these purposes would not work. And that is precisely the strength of the Leaders' G-20. By incorporating the O-5, it gives voice to the "New South," the developing nations that speak from strength rather than weakness, it draws on key countries from Africa, Asia and Latin America that are already cooperating with one another and may soon create their own outfit, if only by default. The others - Argentina, Australia, Indonesia, Saudi Arabia, South Korea and Turkey - are sizeable countries with considerable stakes in what happens in the world economy.
One can always argue about who else should be on it (Spain is making it clear it would like to be invited, and there is no doubt others would). But this is an informal body that already exists. Much is to be said for building on extant groupings as opposed to starting them from scratch.
Crisis of globalisation
There has been much talk these days about whether this market collapse signals the end of capitalism as we have known it. In response, many have waxed eloquent about the supposed virtues of private enterprise, individual initiative and unfettered supply and demand. This is to miss the central issue. The crisis started in the U.S. partly as a result of deregulation run amok. But its quickly spreading to the rest of the world, affecting many countries that have been a model of fiscal and financial prudence, shows that the real crisis is not so much of capitalism (which, at least in my mind, still has a good run) as of globalisation.
Globalisation (that is, the steady expansion in the flow of goods, services, capital, cultural products and information across the world) has expanded at a fast clip over the past three decades. Yet, the institutions needed to cope with it have not kept pace. This is not dissimilar from what happened in 19th century Europe after the first industrial revolution, when the inexistence of a suitable institutional framework led to such rampant abuses as the seven-day work week, child labour and the absence of the most elementary safety standards in the workplace.
After the third industrial revolution (that is, the one that started circa 1980 with the IT and telecom breakthroughs) that has made the world a global village, proper rules and regimes are needed to cope with not only financial meltdowns but also issues such as climate change, nuclear proliferation and global pandemics. A Leaders' G-20 has the advantage of putting a set of heads of government around a table to address them - either on an ad hoc basis (as need arises) or more systematically.
Capitalism may not be in its last throes, but the Northern hubris, according to which the answers were to be found in Washington, London or Paris and all the rest of the world needed to do was to follow instructions emanating from these capitals, certainly is. The rich countries' club has opened its doors, realising that we are all in this together. President Bush's calling of the Leaders' G-20 meeting may be the single most forward-looking initiative of his eight years in office.
Also appeared in the Jamaica Gleaner, El Universal (Mexico), Business Day (South Africa) and The Financial Express (Bangladesh)