In response to the Asian financial crisis in 1997-1998, finance ministers from about 20 major industrialized and emerging countries met to discuss ways to promote global financial stability and conditions for sustainable economic growth and development. The G20 finance ministers' and central bank governors' forum was created at that time. Just over a decade later, in December 2008, leaders of the G20 nations held their first summit, in Washington, DC, to deal with the global financial crisis. In follow-up summits in London and Pittsburgh, the so-called “Washington Consensus” was pronounced dead and the International Monetary Fund (IMF) received a new mandate for comparative analysis. After decades when failures of coordination within and between countries — even within the increasingly integrated European Union (EU) were met with benign neglect, governments had to face together a global financial crisis that their nations could not address alone.
Together Alone
Notwithstanding the leaders’ joint appearances at the recent G20 summits, industrialized and emerging-market economies have rarely developed coordinated national policy responses to international economic problems, even though their economies are mutually interdependent. This creates a paradox whereby nations are left to deal with a global crisis on their own through domestic policy actions — “together alone.” This paradox is as global as the crisis itself.
The latest developments in the euro zone prove that this paradox is ever-present in the interaction between globalization and governance. Policy coordination at the European level was supposed to be strongest, even before the 2009 Lisbon Treaty gave a formal role to the finance ministers of euro zone member countries alongside that of the EU and its Commission. Over-borrowing of euros by some member countries resulted in higher interest rates for them compared to those in Germany, a problem that became especially pronounced for Greece as it approached near-default on its debts and that was also threatening several other European countries. There followed a lengthy tug of war between Greek government actions and a financial response by global and regional bodies, a situation that only perpetuated market uncertainties and was not eliminated by the final EU-IMF "rescue package." Ambiguity in response to crisis, especially when not based on proper consultation, is rarely constructive, particularly in a “together alone” pattern, as illustrated by the lack of clear definition of responsibilities between an individual country and the EU.
Paradoxically, economic policy coordination is stifled when it is most needed: countries facing global and regional crises are left to address uncoordinated governance through individual measures. The same problem of coordination failure that we find at the international level occurs on the country level as well, among different government departments and agencies. Governance innovation around coordination of policies is discouraged internally and externally by widespread “groupthink” among stakeholders, which prevents them from finding win-win solutions or implementing them when found. This damaging tribal mentality or groupthink cannot be ignored in a highly interconnected and globalized world.
Will Peer Pressure Work?
In the renewed mandate that the G20 has given to the IMF, the latter will play an important role in assessing the performance of G20 members against their collective commitment to economic cooperation as defined in the G20 “Framework for Strong, Sustained and Balanced Growth.” It would be a major governance innovation if the proposed peer review and new IMF mandate succeed, and if “peer pressure by commitment” becomes the primary G20 coordination mechanism.
Even if the possible G20 peer review goes beyond a comparison of exit strategies from the current stimulus programs, it is not likely to have a significant impact in some other areas. In particular, it will not enhance monitoring of the Millennium Development Goals (MDGs), a major area of failure at the G7/G8 level. The February 2002 Monterrey Consensus on international financing for development promoted mutual accountability as the principle on which the MDGs rest; however, joint actions on development have always suffered from the lack of effective follow-through mechanisms. This is most apparent in Sub-Saharan Africa, not so much because most impoverished states are located there, but rather because this is a traditional area of influence for the EU. The EU has rarely managed to speak with one voice and this has allowed international organizations to minimize their collaboration both on global issues and on the ground, with devastating consequences in failing states where the payoff to cooperation could be greatest.
It is high time to experiment with the principle of joint monitoring and joint assessment among nations and international institutions such as the IMF, the Organisation for Economic Co-operation and Development and the EU. If this happens, it will more likely be possible to hold nations to account on the progress of the MDGs as well as in other areas. Wider discussions of the proposed G20 assessment framework may help broaden the use of “peer pressure by commitment.” This would not surprise those who believe that paradoxes are a threat but also an opportunity for innovation.
Jorge Braga de Macedo is a member of the international advisory board of The Centre for International Governance Innovation and a former finance minister of Portugal. He is professor of economics at Nova University and currently president of the Institute of Tropical Research, both in Lisbon.
(Image credit: Flickr user World Economic Forum)