What a difference five months makes in the fortunes of our turbulent global economy. When G20 leaders met in London in April, the western financial system teetered on the brink of the abyss. Now, days before the third G20 leaders’ meeting in ten months, at Pittsburgh, the Governors of the US Federal Reserve and the Bank of England have purportedly declared the recession over.
If correct, Mr Bernanke should take most of the accolades for this tidal shift. However, G20 leaders and, more importantly, their finance ministers and central bank governors, are an indispensable supporting act. Starting in Washington last November, continuing through the London summit and beyond, they have stitched together an impressive list of reforms to global finance whilst ensuring its wheels continued to turn by providing huge amounts of credit.
Emerging economies: Keeping Pittsburgh relevant
For the emerging economies in the G20, a big challenge is ensuring the group’s agenda remains relevant to them beyond the crisis. For example, the issue of bankers’ compensation, whilst important, is hardly at the centre of the crisis. It is largely a matter for G7 politicians and their electorates; yet in advance of Pittsburgh, it has stolen centre stage, largely due to its emotive nature.
However emerging economies are hardly unified. Brazil, Russia, India, and China have formerly constituted a “BRIC” grouping within the G20 framework, so it is not obvious that South Africa and the other non-BRIC emerging market economies can rely on them to support their agendas. This raises interesting questions about the South African government’s alliance choices – perhaps it has more in common with middle powers like Argentina, Mexico, Indonesia, South Korea, and Australia?
Coordinating exit strategies
Nonetheless, the major challenge now lies in coordinating “exit strategies” from monetary and fiscal stimulus. This will prove difficult, as G20 countries are at very different stages in their economic cycles. For example, India’s resuming economic growth makes inflation their main concern. But if they unilaterally increase interest rates whilst the major Western economies keep theirs at historic lows, capital will flood into India, causing currency appreciation and generating pressures to devalue, which could spawn trade tensions. So some degree of coordination concerning the sequencing of exit strategies is necessary, and it will be a major test of the G20’s efficacy.
Hence there is now strong rhetorical commitment to the need for the IMF to conduct comprehensive surveillance of the global financial system with a view to pressuring G20 governments to address emerging macroeconomic imbalances such as those which preceded and fed this crisis. The crisis also highlighted the need for a global lender of last resort, which the IMF fulfilled with strong G20 support. Overall, the IMF is the big winner in the G20 process.
But the IMF’s “victory” will be fragile in the medium term. Asians are dissatisfied with the IMF’s apparent favouring of Eastern European crisis countries through allowing conditionalities applied to the latter’s loans to lapse, whereas countries hit by the Asian financial crisis ten years ago did not enjoy such treatment. Incidentally, African and Latin American countries have complained about conditionalities for decades, without much joy. But Asian resentments and associated lack of trust in the IMF fuelled a logical Asian reaction with global consequences – crisis insurance in the form of massive foreign currency reserves accumulated via currency pegs to the US dollar. Those reserves were recycled through the US financial system and played a major role in precipitating the current crisis.
The currency pegs, on the other hand, have generated major tensions in the global trading system and play some, albeit unmeasured, role in current tensions concerning protectionism. Since there is no international forum for mediating currency disputes, some have argued that they should be taken to the World Trade Organization’s binding dispute settlement mechanism. But the WTO faces its own major challenges, not least bedding down the Doha Round. The G20 meeting is not going to solve that problem, and introducing currency disputes into the WTO would run the distinct danger of overburdening it at a delicate time in its history.
IMF governance issues
Hence the IMF’s role in macroeconomic surveillance is crucial. But if its legitimacy deficit is not decisively addressed, global macroeconomic imbalances are likely to rebuild as stimulus packages are unwound. So if the IMF is to evolve into an effective enforcement mechanism, albeit one without teeth, its governance arrangements have to be overhauled and emerging economies, particularly those in Asia, need enhanced representation (for a South African perspective on these matters see Bradlow 2006).
Longstanding African demands for an overhaul of the IMF’s governance arrangements and more flexible conditionalities are favoured by these developments. But it remains to be seen how African, including South African, representation in the IMF will be affected, since collectively we comprise a marginal share of the global economy. So for both narrow selfish reasons and because we purport to represent continental interests in the G20, Pretoria’s economic diplomacy at Pittsburgh and beyond needs to be especially sharp.
South Africa’s agenda for Pittsburgh
What agenda should South Africa take into Pittsburgh? Most of our objectives are in the process of being obtained (National Treasury, 2009), so:
- The first priority should be to ensure that the multitude of work to reform the global financial system initiated by the G20 continues and reaches satisfactory conclusions. Of particular relevance here is ensuring funds earmarked for African economies in distress are delivered on time and without conditions providing such countries pre-qualify on the basis of objective governance criteria.
- The second priority should continued support for IMF reform – ensuring African representation is maintained and extended.
- The third priority is the plethora of new institutional arrangements for governing global finance; they must be bedded down and their work programmes concluded.
- Finally, Pretoria should reaffirm that it will not introduce any new protectionist measures notwithstanding its G20 counterparts’ evident violations of this promise, except where other countries’ introduction of such measures seriously prejudices our own trade interests.
The South African government and its institutions could do a better job of communicating the positions it is taking on the rather lengthy G20 agenda. For example, where does Pretoria stand on the Chinese currency issue, the extent and depth of IMF surveillance, and the host of issues concerning regulation of the financial sector? A more active engagement with South African business, think tanks, and civil society on these issues would both supplement stretched government resources and promote wider understanding of these fundamental issues of our time.
Bradlow D. (2006) “The Governance of the IMF: The need for comprehensive reform”, paper prepared for the G24 Technical Committee meeting, Singapore, September.
National Treasury (2009), Media Briefing, issued after the G20 Finance ministers’ meet in London, September 4-5.