Global Imbalances: Beyond the “MAP” and G20 Stovepiping

October 18, 2011

With the world economy beset again by financial turmoil, the G20 leaders’ summit will return to its original raison d’etre — global crisis management. While this may be comforting, ironically, to the proponents of global macro-coordination, it should not be overlooked that the ongoing G20 discussions to put the world economy onto sustainable, and balanced growth had already entered a state of semi-paralysis before the current financial plunge. 

At Pittsburgh in September 2009, the leaders launched the Framework for Strong, Sustainable, and Balanced Growth, and pledged to “work together to ensure a lasting recovery and strong and sustainable growth over the medium term.”

They have placed their hopes on a multilateral process of “mutual assessment” of each other’s progress, and finding agreement on new rules for sharing the adjustment burdens — all to be done via the Mutual Assessment Process (MAP).

G20 finance ministry and central bank deputies have the role of advancing the MAP via a G20 Working Group (WG) on Sustainable and Balanced Growth, and India and Canada are the co-chairs. The WG members are tasked with brokering consensus among G20 members on early warning measures and procedures for crisis avoidance, and adjustment measures for surplus and deficit countries respectively. The International Monetary Fund (IMF) has been enrolled — at the “request of the G20” — to supply the technical analysis needed to evaluate how members’ policies fit together, or not.

The fact that G20 members reached agreement earlier this year on indicative guidelines on key imbalances was presented as a major step forward. But one can only imagine the contention that has arisen when discussions have turned to what is to be done about correcting the imbalances, as major surplus and deficit countries line up on each side of the divide. How is this coordination mechanism supposed to work? For example, would Brazil or China agree to share control of their currency or trade policy in return for the United States restraining quantitative easing, and the European and Japanese central banks also agreeing to some common rules?

Just posing this question illustrates that achieving substantial progress through the MAP is very remote.

Some suggest that if the G20 members cannot reach agreement on their own, then perhaps a supranational overseer, possibly the IMF managing director, can intervene to judge which imbalances are harmful and which are healthy, to gain international agreement on this diagnosis, and then persuade “rogue” governments to mend their ways?

However, efforts to bring back the IMF as the arbiter of exchange rates and develop new procedures for managing future imbalances are also slow going. It should not be surprising if the addition of the charismatic Christine Lagarde is not enough to get developing countries to overcome their long-held reservations about the impartiality or neutrality of the IMF, and its decisions.

Most disconcerting is that for developing countries, the main imbalance in the global economy is not the trade and financial misalignments between surplus and deficit countries, but the harsh realities of ongoing developmental imbalances — the very basic development gap between North and South.

Global development concerns are an intimate part of the world economy, yet they do not receive priority in the G20’s core agenda. Rather, “development” discussions are ghettoized in a separate G20 Development Working Group (DWG), and often consigned to the last item at G20 preparatory meetings.

The G20’s stovepiped MAP approach has left the DWG out of the discussions over addressing imbalances.

Why are the G20’s burden-sharing negotiations (over the MAP) divorced from its benefit-sharing DWG discussions?

One answer is that this stovepiping reflects the pre-established traditions of the G7/8 leaders’ summits, where the preparatory working group discussions on finance and economics, controlled by central bankers and finance officials, were separated from discussions about development — involving “development ministers,” who head the foreign aid agencies of the Western donors.

For the developing world, there is no separation of economy and development as policy issue areas. Development is not the work of a separate “development ministry.” Nor do the developing countries in the G20 have “development ministers.” Their central bank governors and finance ministers, and other economic officials, are also responsible for development. This actually makes the Southern representatives in the WG for Sustainable and Balanced Growth well-positioned to link the burden-sharing and benefit-sharing discussions.

Witness Indian Prime Minister Manmohan Singh’s suggestions at the Seoul G20 Summit in November 2010, that ways should be found to channel the large surpluses in some parts of the world to regions where huge investments are required for development and infrastructure. Repeating this message at a G20 finance WG in February in Paris, Finance Minister Pranab Mukherjee noted the Indian government’s hope that the High-Level Panel on Infrastructure Investment will offer recommendations to the leaders at Cannes to facilitate innovative ways to mobilize private, semi-public and public resources for national and regional infrastructure, and for a comprehensive review of multilateral development bank policy.

With economic conditions worsening in the G7 and the MAP making slow progress, can G7 governments afford the continuing divorce of global burden-sharing discussions from the talks on benefit-sharing? Wouldn’t G7 countries gain if benefit-sharing met not only developing world concerns but also some of the developmental (read: “growth”) needs of the global North?

Infrastructure is a sector where common purpose and shared needs between North and South — and innovative measures to alleviate the excess surpluses of some countries — could be worked out. Where the prospects for political agreement are high, and where multilateral and regional development banks could play a useful and targeted “intermediation role” in ensuring that tangible results are achieved. 

Imagine the potential global growth gains, as well as the legitimacy gains for the G20.

Part of Series

Prescriptions for the G20: The Cannes Summit and Beyond

As leaders of the G20 nations prepare for their summit at Cannes, France on November 3-4, CIGI experts offer policy analysis and prescriptions on the most critical issues amid growing uncertainty about the global economy and the G20's effectiveness as an international policy forum.

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