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Towards a new world financial architecture

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In Brief

The G20 includes more Asian countries than any other global grouping, and it is expected to be a good forum for Asian countries to press their agenda.

The G20 Summit was created out of the chaos of the global financial crisis. After Lehman Brothers  collapsed in September 2008, global financial markets went into a tailspin. Securities markets were frozen as buyers disappeared.


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European governments, and the United States, had to de facto nationalise large, systemically- important financial institutions.

The G20 is now regarded as the ‘steering committee’ of the world economy, replacing the G8.  It was first created as the finance ministers  and central bank Governors’ meeting in 1999, in the aftermath of the Asian crisis; hence the increased Asian participation.

In the midst of financial panic following the Lehman Brothers’ failure, leaders of major countries called for a framework to discuss important financial issues among concerned countries. Leaders of France and Germany, and Britain, were quite vocal in pushing for the creation of a summit that would involve not only the G8 but also large emerging market economies. Some leaders called for G8 plus BRICs, while others called for an even broader grouping. Due to lack of negotiating time, leaders grabbed the existing G20 grouping, transforming it into a leaders-level Summit.

At first, it was not clear whether this would be a permanent institution. After three meetings, it was decided to make the G20 Summit permanent. It is often advertised as a grouping that comprises 85 per cent of world GDP.

In the G8, Japan was the only Asian country, whereas China, Japan, indonesia, Korea, Australia and India all participate in the G20. On the one hand, having six Asian countries is a good start for pushing the Asian agenda at the conference. on the other hand, the group of 20 countries may be too big to act in a timely way. Voices as well as votes are important. Whether the G20 continues to be an important ‘steering committee’ on international financial issues is still unclear, and the Korean G20 Summit will set an important precedent for perceptions of Asian capabilities.

The G20 Summit has been effective in crisis management  and building new financial architecture. Several agreements on monetary and fiscal policy commitment, and an agreement on anti-protectionism, were made. for example, coordinated fiscal stimulus and monetary stimulus, in the face of decline in aggregate demand, were encouraged at the Washington Summit, although a quantitative target was not adopted. in addition to growth and employment, recommendations also included reform agendas for international financial architecture, including an International Monetary Fund quota adjustment; resources large emerging market economies, like (loans) for the IMF; tripling Special Drawing Rights (SDR) allocations; and transforming the Financial Stability Forum into the Financial Stability Board.

The membership of the original G20—that is, the finance ministers and central bank Governors meeting—was chosen to reflect GDP size rankings, with some consideration for regional representation.  In response to the criticism of Asian countries regarding their low representation when the G20 was originally created in 1999, European countries were given less emphasis and countries from Asia and other regions were chosen. European countries, like Spain, the Netherlands, Poland, Sweden, Switzerland and Belgium, were not chosen, while Korea, Indonesia, Turkey, Saudi Arabia, Argentina, and South Africa were.

The contrast with G8 and G10 membership is clear; the G20 has more Asian countries and emerging market economies. in this sense, the G20 is closer to a balanced representation than the IMF quota or the General Agreements to Borrow. The list of countries participating in the NAB is broadly similar to the G20 list, with the notable exception of emerging market economies, namely the BRICs and Mexico.

Because the G20 acted in crisis mode, its decisions were quick. Also, the composition of membership—less weight on European countries—may have contributed to faster decisions.

China seems to have recognised the importance of voicing concerns and disseminating ideas about how new international financial architecture should be shaped. for example, Governor Zhou Xiaochuan of the People’s bank of China gave three speeches in late march 2009. They were titled: ‘Reform the International Monetary System’, ‘on Savings Ratio’, and ‘changing Pro-cyclicality for Financial and Economic Stability’.

The timing was clearly chosen for the G20 meeting in London that April. The first speech stirred debates in international finance circles, and in the third Governor Zhou argued that SDR should be used more extensively, as a liquidity provision in case of crisis, and that SDR composition should revised. While he was not explicit, it would not be surprising if China requests consideration  for the RMB to be included in the last session for the year.

This has produced the impression that China is effectively using the G20 to press its own agenda. It remains to be seen how Korea will use its chair position to push its own agenda.

Japan has been conspicuously absent from hot debates regarding reforming global financial architecture, and agenda-setting in the G20 Summit process. Perhaps Japan is absorbed by its internal political mess, and does not have the time or capacity to contribute to global leadership.

Asia collectively is not pushing its agenda, if there is one. An Asian G20 caucus does not exist. So far Asia remains fragmented despite the opportunity increased membership presents. After so many years of under-representation in the IMF, Asia has not coordinated to maximise its effectiveness. but, one may wonder, is there a common agenda for Asia?

Asian leaders should examine whether Asia collectively has anything to contribute to the global agenda, or an Asian agenda to press. ASEAN also demands that the ASEAN Secretariat be granted permanent observer status, if not full G20 membership.

Asian countries should think carefully how ASEAN, ASEAN+3, ASEAN+6 and otherAsian meetings should be used to give input that can be advocated by Asian members in the G20.  If Asia fails to conduct preparatory meetings and coordinate its agenda, Asian voices risk falling upon deaf ears.

The G20 Summit will most likely continue as the premier institution of global governance concerning financial markets. Financial markets will repeat boom and bust cycles in the future too. If a crisis in Asia should occur again in the future, Asian voices should prevent a repeat of the mistakes of the Asian financial crisis of 1997-98. Asian economies will continue to grow, and their collective economic weight continues to increase. So why not coordinate a collective voice? This is the challenge that Asian leaders will face.

Takatoshi Ito is a Professor at the Graduate School of Economics, University of Tokyo, and has served as a member of the Prime Minister’s Council of Economic and Fiscal Policy.

This is an article from the most recent edition of the East Asia Forum Quarterly, ‘Asia and the G20′.

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