The past week saw the global economy staring into the abyss as stock markets the world over crashed, currency markets witnessed wild gyrations and the creditworthiness of the most advanced countries became suspect. One would have thought that having learnt the lessons of the 2008 global financial and banking crisis, the leaders of the major economies would come together to reassure the markets and fashion a co-ordinated response. But the premier institution for global economic governance, the G20, is “missing in action”. Once again we are witness to a series of ad hoc, uncoordinated and inevitably ineffective measures, taken nationally, which the markets refuse to accept as credible.
When global markets were confronted with the prospect of a meltdown in 2008, the G20 summit was convened to enable a co-ordinated and collaborative rescue effort. For the first time, advanced industrialised economies and emerging economies came together to evolve a consensus on measures to overcome the immediate crisis and set in place a continuing process to undertake long-term reforms that could prevent the recurrence of crises in the future. Through the adoption of parallel stimulus packages, the rejection of competitive trade protectionism and a commitment to multilateral regulation, the G20 leaders managed to revive confidence among the markets, accelerate economic recovery and begin the difficult task of reforming the world’s outdated financial and monetary architecture. This new-found sense of solidarity was sustained in the two subsequent G20 summits in London and Pittsburgh, both in 2009. In these summits a number of key decisions were taken on establishing new and more stringent norms for banking and financial institutions around the world, while committing governments to adopt coordinated policies to address global fiscal and trade imbalances. Pittsburgh was the high point with the assembled leaders declaring that henceforth the G20 would be the premier forum for global economic governance.
Since Pittsburgh, the G20 has in fact become the victim of its own success in averting a global economic disaster. The multi-speed recovery in the world’s major economies, with relative stagnation in some but strong rebound in others including India, has led to the adoption of unilateral measures, on a national basis, and an unwillingness to engage in consultation with G20 partners to evolve and implement co-ordinated policies in this incipient recovery phase. The US went ahead with the second round of its quantitative easing programme despite the concerns raised by its major partners. Emerging economies were hit by volatile capital flows as a result of this huge spike in dollar liquidity. China and Germany, two of the largest economies with growing fiscal and foreign exchange surpluses, refused to draw them down to reduce global imbalances. Some countries argued that stimulus measures should not be withdrawn prematurely (the US for example), while others believed that fiscal consolidation was already overdue (the UK and Germany among others). The subsequent summits at Toronto and Seoul saw the beginning of the unravelling of the initial consensus and a relapse into ad hoc, national decisions.
Since then the economic recovery in the US has been stymied by a dysfunctional political system. In Europe measures to deal with the sovereign debt crisis have remained two steps behind a rapidly deteriorating situation. Both China and India are facing inflationary pressures that refuse to go away. It is no surprise, therefore, that the markets across the world have begun to doubt the ability of political leaders in all major countries to deal with the worsening situation, particularly since they see no prompt crisis management initiative of the kind that saved the situation in 2008. Where is the G20 when it is needed the most? If a sense of urgency and collective danger brought the G20 together in 2008, are we not facing a similarly critical and potentially disastrous situation today? World Bank chief Robert Zoellick recently warned that we were entering a “danger zone”. Yet we see no G20 response in fulfillment of its own self assumed mandate. The incoming French chairman appears preoccupied and mostly quiescent.
It should be clear by now that the global economy is in continuing crisis precisely because it is in reality an interconnected, interdependent organism which demands co-ordinated stewardship. It cannot be governed through a weak and fragmented governance structure which is repeatedly trumped by narrow and domestically generated political compulsions and which delivers ad hoc and one-off responses instead of the sustained, global and collaborative responses required.
The assumption that the G20’s role as crisis manager came to an end as economic recovery appeared to have commenced has been proved to be wrong. It was always clear that we were not dealing with a temporary hiccup that would be overcome and the trend line of sustained growth and prosperity would resume. We are in the midst of a structural crisis that demands continuous attention at the highest levels and a willingness to act in concert at all times. The G20 has failed in this respect and risks irrelevance. And the world risks a collective descent into economic chaos.
Emerging economies like India and China have an enormous stake in how the current crisis plays itself out. Our relatively healthier economies give us a certain credibility in leading an effective and co-ordinated response to the unfolding crisis. We also have a greater stake in the consolidation and efficacy of the G20, where we are recognised as equal partners with industrialised economies. One hopes that India will, in concert with other emerging economy partners, take an initiative to mobilise the G20 summit process, help in the search for answers to the dilemmas we all confront and contribute to shaping a new architecture for global governance. This is what sitting at the high table means. The prospects for sustaining India’s remarkable growth story may well depend upon our willingness to assume an active role in this regard.
The author is a former foreign secretary and currently chairman, Research and Information System for Developing Countries and senior fellow, Centre for Policy Research