G-20 to Assume Mantle as World’s Main Economic Body
World leaders announced the Group of 20 nations is replacing the G-8 as the main forum for global economic coordination, reflecting a shift in power from rich countries to emerging markets.
The decision, unveiled in a White House statement late yesterday, comes as President Barack Obama, Chinese President Hu Jintao and other leaders gather in Pittsburgh for their third summit in a year to reshape the governance of the world economy following the worst financial crisis since the Great Depression. The G-8 will still exist and focus on matters such as development and security matters, Prime Minister Stephen Harper told reporters today. Canada hosts the G-8 next year.
The transfer of influence to the broader group, whose membership ranges from the U.S. to China to Saudi Arabia, symbolizes the fact that the richest industrial nations now lack the sway to govern the world economy alone after their excesses sparked the turmoil that tipped the globe into recession.
“The G-20 needs to prove it can make the tough calls and implement agreed outcomes in a timely fashion,” said Tim Adams, who served as the U.S. Treasury’s top international official under former Secretaries John Snow and Henry M. Paulson, and is now managing director of the Lindsey Group. “I think it will succeed, but the G-20 must prove skeptics wrong, and that will take time and effort.”
‘Premier’ Economic Summit
The G-20 accounts for about 85 percent of global gross domestic product and was created after a spate of currency devaluations plagued emerging markets from Russia to Thailand in the 1990s. The G-8 oversees about two-thirds of global GDP.
Canada will host the first summit of leaders from the G-20 in June under the grouping’s new role as the “premier” global economic summit, Harper said, while a second summit will take place in South Korea in November.
Canada will also hold a summit of leaders from the smaller group at about the same time, Harper said.
“They will be distinctive summits,” Harper told reporters today in Pittsburgh in a joint press conference with South Korean President Lee Myung-Bak. “We are not replacing the G- 8.”
The G-8 meeting was already scheduled to take place June 25-27 in Muskoka, Ontario, where Harper said the G-20 summit will also take place.
A government official, on condition he not be identified, told reporters the two summits will be back-to-back. The official said talks on making the G-20 the main economic forum first began at the G-8 summit in L’Aquila, Italy, last July.
‘One Chance’
“What we are trying to do is create a system for economic cooperation across the world,” U.K. Prime Minister Gordon Brown said yesterday. “We have this one chance to make a huge success of international cooperation.”
Originally a forum for finance chiefs, G-20 leaders met for the first time in Washington last November and again in April in London as they sought to rescue the global economy from its deepest slump in seven decades.
The financial crisis has thrust greater responsibility on to the G-20. At the onset of the turmoil, central bankers used talks near Cape Town in November 2007 to hatch a plan to inject more dollars into markets.
The G-20’s newfound power reflects how the recent slump was led by housing and financial market busts in major economies and the recovery is now being driven by countries such as China. That’s a reversal from previous crises when the G-8 was in the driver’s seat of the recovery effort.
China’s Role
China has already overtaken Germany to become the world’s third-largest economy and may soon be named the biggest exporter. It passed Japan a year ago as the main foreign investor in U.S. government debt. China, Russia, Brazil and India together hold about 42 percent of international reserve assets, excluding gold.
“You can’t possibly have a mechanism” for sustaining global economic stability without including China, said Laura D’Andrea Tyson, an outside adviser to President Barack Obama and former chairman of the White House Council of Economic Advisers under President Bill Clinton. “It’s too big a player in trade and investment.”
Economists at JPMorgan Chase & Co. predict developed economies will shrink 3.3 percent this year and grow 2.8 percent in 2010, compared with emerging-market growth of 0.5 percent and 5.8 percent respectively.
G-20 leaders meeting today are discussing an agenda aimed at tackling global imbalances, restraining banker pay, raising capital at financial companies and revamping control of the International Monetary Fund.
Bretton Woods
The need for economic policy makers to convene regularly grew out of the turmoil that followed the abandonment of the Bretton Woods system of fixed currencies and the oil shock of the 1970s. In 1975, French President Valery Giscard d’Estaing gathered the leaders of West Germany, Italy, Japan, the U.K. and the U.S. at a summit in Rambouillet, France.
The group soon expanded to seven and its influence reached its zenith through the Louvre and Plaza currency accords of the 1980s and with its responses to financial crises in Asia, Latin America and Russia in the 1990s. It hasn’t intervened in foreign exchange markets since a rescue of the euro in September 2000.
Russia joined after the end of the Cold War to expand it to the G-8, although its officials are still not invited to finance and economic talks.
More Investor Attention?
The G-20’s new formal role may prompt some investors who had dismissed the G-7 as irrelevant to pay more attention to international gatherings.
“On G-7 meeting weekends now I go fishing, no reporters call and writing up summaries of the G-7 for the most part is pointless as there is no news,” David Gilmore, a partner at Foreign Exchange Analytics, wrote in a report to clients today.
The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.