History at Gyeongju

G20 comes into its own with IMF reform

Gyeongju, in South Korea, is imbued with history and is home to the famous tombs of the kings of the Kingdom of Silla. It was not, therefore, entirely out of place that history was made at Gyeongju this week when the finance ministers and central bank governors of the G20 countries issued a communiqué calling for important changes in the shareholding and governance structure of the International Monetary Fund (IMF). Their proposals are, of course, more reformist than revolutionary, and the timetable for change more slow-paced than the current rate of growth of the world economy, but the direction of change is welcome and change itself overdue. The IMF’s Managing Director, Dominique Strauss-Kahn, claimed more than is warranted by the final recommendations of the G20, but he should be pleased that the G20 has put the Fund at the centre of the new architecture of global financial governance. The so-called Bric countries — Brazil, Russia, India and China — see their voting shares rise, and Europe will see a decline in its share as well as its representation on the Fund’s board. Clearly, the Brics have graduated from being “emerging” markets into becoming “emerged” markets (though some would regard both China and India as, in fact, being “re-emerging” markets). By pushing through IMF reform, the G20 countries have also given themselves a new status as a global executive committee. If more such important decisions on global economic governance and policy are taken by the G20, and seen to be implemented by all countries, the G20 can evolve into a new institution of global governance.

 

Apart from IMF reform, the Gyeongju communiqué also said all the right things about the current state of the global economy, the persistent uncertainties about the sustainability of economic growth in the advanced industrial economies, the need to eschew protectionism and beggar-thy-neighbour trade and exchange rate policies, the need for fiscal correction in developed market economies, the need to ensure price stability and prevent volatility of capital flows, the importance of structural reforms and employment generation, the critical importance of financial sector regulation and reform, and so on and so forth. Few will disagree with the broad thrust of the G20 communiqué. This in itself is a significant achievement, given the sharp differences that have come to surface between China, on the one hand, and the developed market economies, on the other. While China may take heart from any specific reference to its policies, it cannot ignore the consensus view expressed by G20 finance ministers that all countries must “move towards more market-determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies”. For the G20 to acquire global credibility and a unique personality, it must at once ensure consensus among its own membership and their collective ability to influence the behaviour of multilateral institutions and national governments. South Korea can feel satisfied with the outcome of the finance ministers’ meeting. Hopefully, this will create the environment in which G20 leaders can take next steps in the direction of financial stability, regulation and reform.