The Asian financial crisis of 1997-1998 had led to calls for reform of the international financial architecture – the policies and practices of institutions that promote global financial stability. It was argued that the IMF had aggravated the Asian financial crisis by prescribing the wrong medicine (tight monetary and fiscal policies). It was also noted that the IMF’s resources to help countries manage financial crises were limited compared to the scale of cross-border capital flows. In response, Asian countries started to accumulate large amounts of international reserves to “self-insure”. Radical reform plans ranging from reform of IMF policies (especially its governance system) to its abolishment were proposed. The V-shaped economic recovery from the Asian crisis, however, led to complacency, and the reform measures were quickly forgotten.
The on-going global economic crisis has shown that free financial markets do not lead to optimal macroeconomic and social outcomes and that with financial globalisation, national regulatory decisions must be made with domestic as well as external consequences in mind (United Nations, 2009). Once again, therefore, the crisis has ignited interest on the reform of the international financial architecture to prevent a crisis from occurring and to manage one should it occur.
Could the faster-than-expected recovery from the global crisis that we are now witnessing once again lead to complacency and postponement of reforms?1 We hope not because the present round of reforms is being overseen by the G20, in which systemically important developing countries, who are stakeholders, have a voice. In contrast, earlier efforts were under the auspices of the G8, where only the industrial countries were included.
Although it is still too early to judge, there are two ways of looking at the achievements of the G20 summits so far. A clear winner has been the IMF. Its lending capacity was tripled to $750 billion by the G20. Together with the Financial Stability Board, it has been given an important role in the G20’s newly established “peer review” process. To its credit, the IMF has re-invented itself to some extent by streamlining its rigid conditionality and by introducing new credit lines. However, the slow progress in reforming its governance system or the so-called “chairs and shares” reform – including quotas and voting rights, executive board representation, and the choice of the managing director – leads many to argue that the institution continues to lack legitimacy and the trust of its clients. The first phase of quota reforms agreed upon in April 2008 has yet to be implemented and the second phase – shifting at least 5% quota share to emerging markets – will not be effective before January 2011 at the earliest.
A broader view is that developing countries are also winners. At the Pittsburgh Summit, the leaders designated the G20 as the “premier forum” for international economic cooperation, replacing the G8, which will now focus more on security and foreign policy issues. This decision is historic because it recognises the growing economic weight of developing countries in the world economy.
The G20 should be seen as a process and not an event. One important issue is that of membership and inclusiveness (Sachs 2009). How can the views of countries not included in the group be considered? Given the well-known tradeoff between effectiveness and inclusiveness, the G20’s approach has been to invite the chairs of various regional groupings as observers on an ad hoc basis. The ASEAN Chair has been invited since the London Summit and the APEC Chair was invited to the Pittsburgh Summit.
A related issue is that of the G20 agenda. So far the focus has been on issues relevant to the G8 – the continuation of stimulus packages, coordination of exit strategies, and designing a new international financial regulatory framework. Issues of international trade and IMF governance, which are more relevant to the non-G8 countries, have figured less prominently. For example, the Pittsburgh Summit Leaders statement mentions that they are “…determined to seek an ambitious and balanced conclusion to the Doha Development Round in 2010”. But no concrete actions are outlined.
How can Asia leverage its growing economic weight into more effective participation in the G20? Six countries represent Asia: Australia, China, India, Indonesia, Korea, and Japan. These countries could further synergise and leverage their individual country economic and political weight by lobbying for the continued participation of the ASEAN Chair in the future G20 Summits.
The ASEAN Chair could, in turn, be supported by regional meetings convened prior to the G20 Summits. Among the various policy coordination fora in the region, the ASEAN+3 economic review and policy dialogue which brings together the 13 finance ministers and deputies in the East Asian region has been the most successful. This group has also established a system to monitor financial sector vulnerability and an early warning system for banking and financial crises.
In addition to the ASEAN+3 countries, India, Australia, and New Zealand should also be invited to participate in these regional meetings to reflect their growing economic linkages with the region. The deliberations of the “expanded” ASEAN+3 would provide a robust agenda for the ASEAN Chair to table at the G20 Summits.
The G20 has provided an opportunity for developing countries (including those in Asia) to be heard on issues related to reform of the international financial architecture. Whether this happens or not will ultimately depend on the effectiveness of their participation. The onus is on developing countries.
Kawai, M. and P.B. Rana (2009), "The Asian Financial Crisis Revisited: Lessons, Responses, and New Challenges", in Richard Carney (ed.) Lessons from the Asian Financial Crisis. Routledge, New York. pp. 155-197
Sachs, Jeffrey (2009), “America has passed on the Baton”, Financial Times, 30 September.
United Nations (2009). Report of the Commission of Experts of the President of the UN General Assembly on Reforms of the International Monetary and Financial System, New York. 12 September (Stiglitz Commission Report).