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Scott Malcomson

Scott Malcomson

Posted March 18, 2009 | 05:27 PM (EST)

World Government

The FT columnist Gideon Rachman wrote a column a couple of months ago about the need for world government, and he got more and different readers than he expected (lots of gun enthusiasts). Indeed, he sounded worried. Nevertheless, that column was on the paper's most-emailed list for ages. Following Rachman's lead, I thought I'd title this entry "World Government" as a cheap and base tactic for attracting readers.

But here's the really cunning twist ... it actually is about world government!

The preparations last weekend for the April 2 Group of 20 meeting in London have revealed an interesting set of power shifts. The first and most obvious is the apparent distance and froideur of U.S.-European relations. Some of this can be laid to personalities. Larry Summers can be charismatic in his way but is frequently and easily perceived as over-bearing; and his recent attempts to browbeat the Europeans have only made them spikier. (In passing: Why is Summers out front so much? This crash is dramatic enough without the president's chief economic adviser constantly chewing up the scenery.) The big three of Gordon Brown, Angela Merkel and Nicolas Sarkozy all have their moments as well. But the trans-Atlantic tsurris is not just a clash of personalities. The old Euro-US dynamic -- the Europeans depending on the U.S. to make history go, and bitterly resenting that dependence -- has been on vivid display. It is the very definition of dysfunction. Obama's dreamboat qualities, and the evident warmth of all the major elected European players toward his administration, don't seem, weirdly, to make much difference.

The second power shift is toward Germany. Sarkozy was all very energetic last year as EU president, but in a financial crisis Europeans (especially, I have noticed, the Germans) look to Germany. Berlin has been the critical player in forming a (somewhat) unified European response to American plans for the G20. The collapse of some Eastern European economies is frightening, and Germany has stepped to the plate. It is the regional lender of last resort and the guarantor of solvency. This is a real shift eastward, and will, for example, give much greater significance to the German-Russia relationship as the manufacturing superpower faces its truculent resource provider -- and they both tussle over the same "near abroad." The German rise may have begun at the Bundesbank but it won't end there.

The third shift is toward the major emerging markets. This has been fascinating to watch. There's something judo-like about it (or do I mean tae kwon do?): waiting for the enemy to move, then directing his force so that he falls where you want him to fall. The emerging markets, led by Brazil, Russia, India and China ("the BRICs"), are, at last, going to get more power at the International Monetary Fund and at other global institutions.

The main G20 communique last week announced: "We underscored that the Bretton Woods Institutions must be comprehensively reformed so that they can more adequately reflect changing economic weights in the world economy." This was indeed important, and may well be the one obvious substantive achievement of the actual G20 summit next month. It represents a very odd confluence of interests: the major IMF contributors want Asian cash for their rescue budget; the U.S. thinks the IMF could provide institutional surveillance of fiscal-stimulus efforts (good luck convincing Germany!); the Europeans have warmed to the idea of having the IMF, rather than the EU (in whole or part), be responsible for bailing out some of the eastern brethren, as the IMF indeed began to do last year. What this amounts to, from the BRIC perspective, is a chance to exact greater power as a price for their financial and political participation. They see an opening to represent their own interests on a reformed IMF board and, perhaps, a shot at having an effective IMF that could shield them from currency crises and maybe help get credit flowing again. I wrote a while back about the new circumstance of developed economies looking to major emerging economies for crisis help. This is an example, and the emerging economies hope to get as much as they can out of it. As Brazil's finance minister, Guido Mantega, said, a bit bluntly: "There is still imbalance in the representation at the IMF. There will be no additional funding [by the BRIC countries comprising Brazil, Russia, India and China] to the IMF as long as the representation of the BRICS does not change." The BRICs also want the heads of the IMF and World Bank to no longer be named by the Europeans and US, respectively (this seems to have been agreed by all the G20); a more professional and merit-based approach to the operation/hiring of the IMF's executive board and senior officials; and real equity in IMF surveillance, that is, to have rich and poor countries alike subject to IMF disciplines.

But what almost struck me more than the considerable IMF developments was paragraph 11 of the BRICs' own, separate communiqué from this week: "We welcome the decision to broaden the membership of the Financial Stability Forum (FSF) and invite as new members the G20 countries that are not currently in the FSF. We also welcome the expansion of the Basle Committee on Banking Supervision announced today. The International Accounting Standards Board and other standard setting bodies also need to become more representative, reinforcing the presence of emerging market economies." These are core institutions of global financial supervision and regulation (world government!). Beyond that, it really is arresting that the actual basis for expanding the FSF (and the others, presumably) is to bring in "the G20 countries that are not currently in the FSF."

This is why countries fight to get onto global governance bodies -- because late one night, when the communiqué is in draft 112, someone will say, "But on what basis shall we expand this vital institution?" And someone else will say, "Why don't we just say everyone who's already in the room gets to be on it? No objections?" And the deed is done.

Membership in the G20 is not an arbitrary basis for determining membership in the FSF. The G20 has always been, since it began in 1999, a group of finance ministers and central bank governors of the largest industrial economies. It's a reasonable measure of economic size. Yet there is still something impressively ad hoc about it. I suspect there are ministers of G20 member states who, after cocktail hour, could not tell you with complete assurance who is and isn't a member of the G20. The G20 came into existence to replace the Group of 33, itself a short-lived (less than a year, just two meetings) alternative to the Group of 22, which emerged from the Asia Pacific Economic Cooperation forum in 1997. The Asian countries were, of course, reeling from terrible currency crises, and the notion was that a finance-ministers' group, focused on financial reform, might be useful. None of the resulting groups had a secretariat to speak of; nor can it be said that they were super-effective. For the record, the Group of 20 is the Group of 8 (Canada, France, Germany, Italy, Russia, Japan, UK and US) plus Argentina, Australia, Brazil, China, India, Indonesia, Korea, Mexico, Saudi Arabia, South Africa, Turkey, and the EU. (Malaysia, Thailand, Singapore and Poland lost out in the 1999 sorting; Saudi Arabia and Turkey got in.) For the London summit Prime Minister Brown also invited the Netherlands and Spain, who attended the Washington G20 summit last November. Why? I don't know. Will Spain also be joining the Financial Stability Forum? Hard to say!

What I will note is that a body born in reaction to Asian financial crises soon got less Asian, and has remained so. It also seems to be getting more European. And there is exactly one representative of Africa.

So the Group of 20, in its composition, purpose, and methods, is rather less than transparent. It may also be -- it almost certainly is -- the best institutional hope for introducing a measure of realism into the reconfiguring of global power. That reconfiguration may also occur, one sunny day, on some moral, pro-democratic, or international-law basis (League of Democracies, Security Council reform, etc.). But the first moves and first movers, it seems, will be decided on an economic basis.

* * * * *

Two other points in last week's G20 communiqués stood out, at least to my eye: the macroeconomic reference in the main document (citing "inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes") and the quick mention of reserve currencies in the BRICs' own communiqué ("major reserve currency issuing economies should step up information sharing and policy coordination and work to ensure that the macroeconomic policy is more balanced"). The two references are, of course, related, and the best quick-yet-sophisticated summary of those interrelations I have seen is Steven Dunaway's "Global Imbalances and the Financial Crisis" (Council on Foreign Relations Special Report # 44), which came out earlier this month. (With Dunaway, Brad Setser and Sebastian Mallaby, CFR has been notably strong through this crisis.) Dunaway's background is perfect for the subject: his 25 years at the IMF included high-level stretches working on North America - and, later, on China. He begins by stating simply, "The current economic and financial crisis has brought about a significant change in global economic governance as the international forum for discussions on the crisis has shifted from the small group of advanced countries in the Group of Seven to the Group of Twenty."

Dunaway neatly summarizes the three main macroeconomic problems: "a country that issues reserve assets [that is, the U.S.] can finance current account deficits for an extended period" ; "a country [China] facing upward pressure on the value of its currency can manage its exchange rate to ... delay adjustment in its balance of payments"; and a country [Japan] with a floating exchange rate can use a depreciating currency "to ignore enduring structural challenges." The macroeconomic imbalances that are enabled by these features of the current global financial system, as expressed in American deficits and Chinese surpluses, for example, are at the root of the current disaster. Dunaway wants the G20 to address these problems, and has interesting suggestions about how to do so (increased US government savings, for one). So far, the statements of the various players have not suggested a reigning spirit of rational and enlightened compromise. The Germans have been expressing outright contempt for the U.S.'s demand stimuli, and, well, it just looks grim. The Chinese seem to be ruing their exposure to the dollar. Meanwhile the Obama administration is trying to take deficit spending and "quantitative easing" to new heights, and, per the WSJ, "net foreign capital outflows [from the U.S.] totaled a record $148.9 billion in January, compared with $86.2 billion in inflows in the previous month."