Transcript Slide 1
Beyond the G20 Toward effective global economic governance Jakob Vestergaard DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Epigraphs Stewart Patrick, US Council on Foreign Relations: G20 is “the most significant advance in multilateral policy coordination since the end of the Cold War” (2010). Foreign Minister Norway: creation of G20 was “one of the greatest setbacks since World War II” (Spiegel 2010). Uganda CB Gov: G20 is but extension of “the old architecture” (2011) Structure of lecture G20 output legitimacy: effectiveness G20 input legitimacy: representation G20 at a crossroads: what to expect from the Cannes summit? From G20 to GEC DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Output legitimacy: effectiveness DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES G20 effectiveness (1) ”The concerted and decisive actions of the G20…has already delivered a number of significant and concrete outcomes: Financial regulation “broadened” and “strengthened”. “Great progress” in macroeconomic policy coordination – cf. framework for “strong, sustainable and balanced growth” Global governance “dramatically improved” – “to better take into consideration the role and the needs of emerging and developing countries, especially through the ambitious reforms of the governance of the IMF and the World Bank”. DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES G20 effectiveness (II) “Failure to reach an (admittedly difficult) agreement on a piloted across-the-board adjustment of balance of payments should not overshadow the rapid agreement achieved with regard to the Basel 3 Accord, which would not have been possible without the political momentum of the G20 leaders” (Domenico Lombardi, Brookings) DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES G20 effectiveness (III) Financial regulation: alleged ”main accomplishment” is the new international standard in banking, ’Basel 3’ G20 delegated this task to the Basel committee Basel committee: G20 plus six additional European c’ies (Switzerland, Spain, Sweden etc) and two financial hubs in Asia (Hong Kong and Singapore) Basel 3 negotiated in less than a year, compared to Basel 2 which took more than five years. DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES International banking standards Two fundamental objectives (BCBS, 1988: §3): “strengthen the soundness and stability of the international banking system” “be fair and have a high degree of consistency in its application to banks in different countries” Key governance tool: capital adequacy requirement: 100 euro loan => at least 8 euro in reserves DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES The pre-crisis approach (Basel 2) Three pillars: Pillar 1: Capital > 8 pct of ’risk-weighted assets’ Pillar 2: Supervisory review process – more capital than Pillar 1 minimum can be demanded Pillar 3: Disclosure requirements, to encourage ’market discipline’ (misbehaviour punished) From binding to less binding… DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES ’The end of lightly regulated finance’ Before After Microprudential approach (atomistic perspective) Great moderation: we are beyond boom and bust Macroprudential Surcharge on approach (systemic ’systemically perspective) important financial institutions’ Credit growth may Higher capital indeed be reserve excessive, highly requirements and destabilizing leverage ratio Standards should Countercyclical be revised to be capital reserve countercyclical requirements (instead of procyclical) Standards do not impact on the economic cycle Proposals DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Regulatory capture (1) …BUT: reform initial proposals watered down, after intensive banking industry lobbying Aims of banking industry lobbying – the four Ls: - Lower - Leave out - Least-binding - Later DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Regulatory capture (II) Initial proposal International leverage ratio in Pillar 1 (binding) Introduce countercyclical buffers in Pillar 1 Industry recommendati on Move to Pillar 2 (nonbinding) Move buffers to Pillar 2 Outcome Pillar 1, but set at low level, and delayed… Adoption in Pillar 2; set at only 0-2.5 pct; delay DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Basel 2 vs Basel 3 Basel 2 Basel 3 Core Tier 1 capital Other Tier 1 capital Total Tier 1 capital Tier 2 capital 2 4.5 2 1.5 4 6 4 2 Total 8 8 DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Basel 3 – overview of outcomes Minimum capital reserves Capital conservation buffer Countercycli cal capital buffer Leverage ratio Where? How much? When? Pillar 1 2013-2015 Pillar 1 8 pct (but higher quality) 2.5 Pillar 2 0-2.5 2016-2019 Pillar 1 3 pct. 2018 2016-2019 DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Finance professors ’going political’ “Banks’ high leverage and the resulting fragility and systemic risk contributed to the near collapse of the financial system. Basel 3 is far from sufficient to protect the system from recurring crises. If a much larger fraction, at least 15 per cent, of banks’ total, non-risk-weighted, assets were funded by equity, the social benefits would be substantial. And the social costs would be minimal, if any”. DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Finance professors ’going political’ Key points of joint letter by 20 of worlds leading finance professors published in Financial Times in run-up to Seoul summit: -- Basel 3 fails to ”eliminate structural flaws in the system” -- please remember that ”healthy banking is the goal, not profitable banks” Unfortunately, this support from academia came too late, says anonymous CB governor DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Basel 3: ’more heat than light’? Basel 3 - intensification of Basel 2 - marginalization of counter-cyclicality - ’grandfathering’ (to be implemented by 2019…) Three years after crisis: - banking not ”sound and stable”, espec Eurozone c’ies - threat to global economy as least as severe as in ’08 - social upheaval and protest, nationalism, even war? DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES In conclusion, on G20 effectiveness Before Seoul summit (Nov 2010): G20 is “divided, ineffective and illegitimate” (Rachman, FT). After Seoul summit: G20 had shown “how not to run the world” (FT editorial) Summer 2011: G20 marginalized (G Brown called for meeting, but nothing happened) Conclusion: G20L not “effective” as global steering committee = low “output legitimacy” Input legitimacy: representation DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES G20 claims input legitimacy G20 says: its “economic weight & broad membership gives it a high degree of legitimacy & influence over the management of the global economy & financial system” (G20 2010a). G20 says it is representative: covers 90% of world GDP, 80% world trade, 66% world population. G20 says it is big improvement over G8. Input illegitimacy (1) Regarded as illegitimate by many of 174 UN member states permanent excluded Membership endorsed by G7, in 1999, selected in transatlantic calls btw US and Germany. G7 claimed they were all “systemically significant” c’ies. No explicit selection criteria. No process for changing membership in line with changes in global distn of econ power. Input illegitimacy (II) The 19 member countries not the 19 biggest economies by any indicator (neither in 1999 or 2008) Europe not “over-represented” by GDP criteria: Spain, Poland, Netherlands shd be in; Argentina, Saudi A, S Africa out. Yet widely believed (esp USA) that Europe over-rep. No regional representation – except EU If EU removed, G20 “represents” 77% world GDP, 60% world trade, 62% world population Input illegitimacy (III) Big majority simply cannot be used to argue a case of input legitimacy Consider example of national elections (urban dominance; religious dominance) Without explicit – and widely accepted – criteria of inclusion/exclusion, there can be no such thing as input legitimacy Irony of G20s claim of “dramatic improvement” of global governance, in interest of developing countries: the G20 itself further marginalizes those countries G20 countries – by region and income classification High-income countries Middle-income countries Low-income countries Africa 0 South Africa Tot al 1 America s & Australa sia Asia 0 Argentina, Mexico Brazil, Australia, Canada, USA 6 0 0 Total 0 9 Japan, Korea, Saudi Arabia France, Germany, Italy, UK 10 6 Europe China, India, Indonesia Russia, Turkey 6 19 Ad hoc participant expansion G20L has responded to “unrepresentative” criticism by issuing “invitations” to “outreach participants” and “observers”. Spain invited as “permanent guest”. ASEAN invited as “outreach participant” to all 5 summits. Hosts of last 2 summits (Canada, Korea) invited African Union to send 2 reps. Status of ‘invitees’ unclear… So: G20= 19 countries + EU + 5 “invitee states” (of wh 3 rep regions) G19+6, or simply G25 The G20 at a Crossroads: what to expect from the summit in Cannes DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Two opposing trends in GEG 1. Drift back towards G7/G8: Summer 2011: G20Fs did not meet but G7Fs did (despite formers self-declared status of ’premier forum’..) Obama has announced that he will host G8 and Nato summits in May 2012, just one month before G20 summit in Mexico => Is G20 being reduced to a secondary body? 2. Appeals to G20 to step up: ’rescue WE, please’ EU, OECD, etc Much depends on the Cannes summit DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES G20 summit in Cannes: the context Drama similar to first two G20 summits: recovery in danger (for instance, gloomy OECD forecast yesterday). Global economy more vulnerable now than in 2008: fiscal stimulus at similar scale not likely Growth in EMEs remain strong – BUT: increasing risk of inflation, prospect of further weakening of export markets, partial retreat of foreign capital Quasi-insolvent European banking sector? Will banks reduce lending to meet capital reserve requirements by June next year? New credit crunch in Europe? European agreement: ”too little, too late”? (Brookings, yesterday). Espec German discontent (Bundesbank). Greek referendum – radical uncertainty.. DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Growth, please – but how? OECD: adopt ”bold growth strategy”, if not: drop in GDP of up to 5 pct by mid-2013 EU leaders: G20 should approve ambitions plan to ”ensure strong, sustainable and balanced growth while implementing credible fiscal consolidation” Many G20 leaders constrained by domestic politics to undertake big fiscal stimulus – constrained by fiscal austerity ideology DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Action items for Cannes summit With fiscal policy constrained and monetary policy reaching its limits, what can be expected? Non-European contributions to the EFSF? (China etc) Expansion of IMF’s financial capacity? Global food crisis: more resources for investment in agriculture? Or, at least, meeting prior commitments to fund the Global Agriculture and Food Security Program? Most likely little on main issues: global imbalances etc Main risk: conflict btw European leaders and non-European leaders (on terms of support etc.) DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Two scenarios 1. Marginalization of G20 Continues as talk-shop, but secondary to G7/G8 How will the BRICs react? Wider process of deglobalization of international economic governance? More emphasis on regional level 2. G20 resumes global leadership Further institutionalization, incl secretariat DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Four good reasons… .. to look for a different, more viable format for effective global economic governance: The G20 is not effective (low output legitimacy) The G20 excludes 174 UN member states and membership criteria arbitrary (low input legitimacy) The G20 undermines the existing multilateral system of GEC And the G20 is losing momentum… From G20 to GEC DIIS ∙ DANISH INSTITUTE FOR INTERNATIONAL STUDIES Global Economic Council Start with BWI system, not G20/G25. Constituency system has long-established legitimacy. Advantages over G20: (1) all states represented in governing bodies, (2) some consultation within constituencies, (3) some rotation at top table Disadvantages: (1) no heads-of-govt. level; (2) system of single country seats unsustainale (3) voting power system out-ofsync with realities of global economy Allocation of seats among regions 25 seats, based on reformed BWI constituencies. Allocation of seats: (i) Divide world into 4 regions: Africa; Americas & Australasia; Asia; Europe. Each region to have 4 seats. Subtotal = 16. (ii) Distribute 9 more seats between 4 regions proportional to regional share of world GDP*. All regions except Africa get 3 more seats. Result: Africa = 4 seats, other regions = 7 Constituencies and rotation No single-country seats; all countries in constituencies (minimum size: 3, average: 7). Mechanism of rotation within each constituency: Each constituency one director & 2 alternates. Constituency decides whether all 3 positions rotate b/w members, or only alternates. If only at alternates’ level, large c’ies cld always be at table – but still obliged to consult with other states. BWI constituencies to be reformed in same way GEC decision-making Two models: Binding agreements, based on a combination of majority voting and special majority voting (as in BWIs) Informal “talk-shop” council, as the G20 – on the assumption that big powers otherwise will not go along Possible compromise: start out as informal council, replacing the G20, testing ground for future potential formalization UNSC as model? Two forums: “consultation room” (strictly private, no formal decisions); formal room. The way forward GEC based on formal treaty Treaty focusing on one issue: international macroeconomic imbalances Correction of imbalances as joint responsibility of surplus and deficit countries Limits on imbalances – deficits and surpluses – as share of GDP The how of correction/adjustment is left to discretion of countries in question, but noncorrection to come at high cost All other issues: non-formal