G-20 Doesn't Offer Much Reform

"The old system of international economic cooperation is over," announced UK Prime Minister Gordon Brown at the G-20 summit in Pittsburgh. "The new system, as of today, has begun."

The first part of that statement is partly true (see below). The second is a fantasy.

The G-20 is not a system of international economic co-operation, or a board of directors, or a governing council for the global economy, to pick some of the terms that have appeared in the media. It is a forum where the heads of state of 20 economies discuss some of the important economic issues. It has very little ability to directly implement decisions.

The institutions that do have economic enforcement capability are the International Monetary Fund (IMF), the World Bank, and World Trade Organization (WTO). These first two are directly controlled by the rich countries, mostly by the United States Treasury Department.

The third organization that actually makes decisions that affect hundreds of millions (or billions) of people, the WTO, is not so completely controlled by the U.S. and a few rich countries as the others are, since it was formed half a century later. Developing countries have a formal veto power in decision-making. However, it is still dominated by the rich countries, and most importantly, its rules are heavily stacked against developing countries and in favor of the rich countries - and especially rich country corporations. For example, the WTO's TRIPS (Trade Relate Aspects of Intellectual Property Rights) is unequivocally designed to extract more money from throughout the world for corporate patent holders such as the big pharmaceutical companies.

These facts help put the G-20 in context. First, the expansion from the G-8 to the G-20 is mostly a symbolic move. Since the rich countries control the institutions with actual power -- in addition to their own enormous international economic, military, and diplomatic influence -- the G-20 is still mainly the G-7 with the other 13 countries sitting in. (I am counting the G-8 member Russia with the other middle-income countries. The rich countries have still not even allowed Russia join the World Trade Organization.)

Furthermore, the new, augmented G-7 is not even as much of a decision-making body as it was a quarter century ago. For example, in 1985 five of the G-7 countries (the U.S., France, U.K., Germany, and Japan) agreed on the Plaza Accord to bring down the value of the dollar. This was accomplished through coordinated intervention by central banks. The dollar lost more than a third of its value during the next two years.

Today the dollar is even more overvalued and as a result we have large global imbalances that the G-20, in their final statement yesterday, pledged to rectify. However, do not expect them to do anything about it.

For now, the United States government does not even have a logically coherent position on this issue. Treasury Secretary Tim Geithner says we want a "strong dollar." At the same time, our government complains that China is keeping its currency undervalued. These two statements are logically contradictory, since an undervalued Chinese currency is the same thing as a "strong dollar." And without a fall in the value of the dollar - not only against the Chinese currency but others as well - we cannot expect the global trade imbalances to be corrected. (The U.S. trade deficit has fallen by more than half since this recession started, but this will be reversed when the economy recovers.)

A solution to this problem would also require the G-7 to accept China as an equal partner, something they do not appear willing to do. China's economy is now the third largest in the world (or second largest, depending on how its currency is converted).

The IMF is the most powerful of the institutions controlled by the U.S. and its rich allies, and currently has about 50 agreements with low-and-middle income countries. In the vast majority of these agreements it has prescribed "pro-cyclical" policies such as budget cuts and monetary tightening that worsen the impact of the world recession. For many years developing countries have demanded a greater voting share in the organization, but the tiny (1.8 percent) reallocation in 2006 was insignificant. At this week's summit, the leaders pledged to reallocate 5 percent of voting shares from over-represented to under-represented countries. It is not clear that this will actually happen. The European governments were reportedly upset at giving up some of their influence, even though they have almost never gone against the U.S. at the Fund in the last 65 years. But even if 5 percent is shifted, this will not change the balance of power. The United States, with its 17 percent share, will be able to veto important decisions that require 85 percent; and together with allies, will have a majority for almost anything it wants.

Most of the other issues that the G-20 includes in its final communiqué are either inadequate or would have to be implemented at the level of the individual countries. This includes badly needed financial reform - the rich countries just can't seem to say the words "too big to fail is too big" - and economic stimulus. And for the poor countries, where the recession has pushed tens of millions of people closer to the edge of survival - the G-7 countries have yet to offer any significant debt relief. Loans are better than nothing, although even these will offer only a small fraction of the capital inflows that poor countries have lost due to the world recession that the rich countries have caused. But most of the poor countries have too much debt already, and can't afford to take on more.

Reform at the top of the international economic system is still a long way off.

This column was published by The Guardian Unlimited on September 28, 2009.

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