The advent of the G20 leaders’ summit is a major advance in international economic policy governance. The forum has been successful in broadly orchestrating the return to stability in the international financial system by agreeing on fiscal and monetary measures in developed and many emerging economies, and by assigning new responsibilities to international financial institutions. However, expectations of what can be accomplished in steering the world economy onto a stable growth path, particularly in the short term, have to be both realistic and informed by the past history of international economic coordination.
A History of Economic Coordination
It is useful to remind ourselves that there have been many instances of successful coordination among major economies when the correct conditions have been present. Conversely, there have been situations where the barriers to reaching agreements have been insurmountable. An understanding of these different circumstances can inform a nuanced assessment of what can be expected from the G20 in its expanded economic role.
Historically speaking, international coordination has tended to be successful when the issue at hand has been clear-cut, the solution has been isolated in previous negotiations and the different parties have all stood to benefit from the outcomes. Examples include trade and debt negotiations or the creation of special funding arrangements. For instance, eight successful rounds of multilateral trade negotiations have reduced the average tariff levied on manufactures by developed countries from 40 percent in the early 1940s to under 4 percent currently. Actions benefiting only developing countries, such as the Generalized System of Trade Preferences and funding for soft loans by the International Development Association, an arm of the World Bank, were undertaken because, at the time, economic analysis held that such actions would assist their development.
Ideological differences can prevent economic agreements. For instance, the 1922 Genoa Conference called to discuss the integration of Russia into the European economic system, broke down on the right of governments to nationalize private property. But despite an unfavourable political atmosphere, agreement was reached at the Genoa Conference on technical matters that became important later. These milestones included the establishment of a committee of central banks to apprise each other of their policies, and the adoption of the gold exchange standard in order to economize on the use of gold — a recommendation that found its way into the agreement that established the International Monetary Fund (IMF). Later, agreements were reached mainly among France, the United Kingdom (UK) and the US on German reparations — the Dawes Plan of 1924 and the Young Plan of 1929.
In the 1960s, agreement was reached on a number of important monetary issues because technical analysis and analytical research conducted at international organizations and universities had pinpointed the main problems, identified possible solutions and all countries wanted to prevent a collapse of the international monetary system. The result was the General Agreement to Borrow, which required special funding arrangements under the IMF; the issuance of Special Drawing Rights by the IMF; and the operation of the Gold Pool.
By contrast, conferences held to tackle broader issues where the solutions were not obvious have invariably resulted in a stalemate. This has been the case particularly when the issue has involved the impact of monetary factors on exchange rates. The attempt to rebuild the international monetary system in the 1970s after the collapse of the Bretton Woods fixed exchange rate system failed. The differences were papered over and we had what many analysts called a non-system. Forty years earlier, the London Conference of 1933, which was organized to stabilize exchange rates, failed to reach agreement because the US did not want to limit the extent of dollar devaluation.
Agreements are particularly difficult to reach on exchange rates; national interests differ because exchange rates affect large parts of the economy, not only the export sectors but also those industries that compete against imports. Often, the threat of protection is used to achieve revaluation. Prominent examples include Germany and Japan accepting revaluation at the Smithsonian Conference in 1971, or the Japanese acceptance of the Plaza Accord in 1985.
Management of the world economy can run into additional problems. There are no instruments at the international level comparable to domestic monetary and fiscal policy. Leaders cannot make firm commitments to definite monetary and fiscal policies because central banks are independent in many countries and fiscal policies require the approval of parliaments. Policies to help the world economy can lead to conflicts with domestic interests, particularly parliaments, which are more geared to the concerns of their constituents and, therefore, to domestic issues. This was illustrated by the conflict that the fledgling US Federal Reserve System faced in the 1920s between the need for a low rate of interest to support England’s continuation on the gold standard, and the need for higher interest rates domestically to restrict speculation. There was substantial coordination between Montagu Norman, governor of the Bank of England and Benjamin Strong, governor of the Federal Reserve Bank of New York, in the 1920s to keep interest rates low in the US in order to encourage a flow of funds to the UK, helping to keep the UK on the gold standard. Strong was able to coordinate policies even in the face of stiff opposition, including opposition from Congress. Later, governors of the central banks of France and Germany joined the meetings between Norman and Strong.
In light of these historical examples, what may we expect from the G20?
Expectations for Future Summits
Undoubtedly, discussions among the leaders at summits can lead to substantial convergence in views regarding the likely performance of the world economy, and leaders can use the opportunity to exchange views regarding the policies likely to be adopted in their countries. This is a form of indirect coordination that feeds into policy making in the individual countries. Summits also provide leaders with the opportunity to take back to their domestic constituencies (parliaments, financial sectors, the media and other influential groups) the expectations of other leaders about the policies that should be adopted by each of the countries. Such feedback is necessary to help convince national parliaments to adopt more globalist policies.
Interaction at the G20 summit will, therefore, lead to greater consistency of monetary and fiscal policies than will occur otherwise. In addition, the more credible the technical analysis that is available to the leaders, the convergence of views and consistency in policies is more likely. In conclusion, regular interaction among G20 leaders, supported by sound technical analysis, will help build trust among the leaders and result in greater coordination of macroeconomic policies over the long term.
Manmohan Agarwal is a senior visiting fellow at The Centre for International Governance Innovation at Waterloo, Ontario, Canada.