The G-20 Financial Summit: A New Day for Global Governance

November 17, 2008

Lectures by President George W. Bush from Wall Street and from the G-20 press conference podium on “free market capitalism” probably do not resonate well in Beijing, Seoul or Tokyo. “The greater threat is not too little government but too much,” George Bush declared. The facts in Asia do not bear him out. South Korea, the first “East Asian miracle story,” grew at 10 percent a year for more than three decades based on a highly interactive relationship between the public and private sectors. In the 1970s and 1980s Japan’s economic success was heralded as ushering in a new Pacific century, as economists fought over whether Asia was following a state-led versus a market-led model, when in fact it was manifesting a combination of the two. Today, the entire global economy feels the effects of the dynamic growth of China, which is a variant of capitalism at the other end of the spectrum from Anglo-Saxon free market economics.

What happened this past weekend in Washington at the G-20 summit was the bringing together, for all the world to see, of countries with widely diverse manifestations of mixed economy capitalism, from the directive approaches of Germany and France to the more interventionist forms of dynamic growth in Asia. The biggest issue on the summit table was financial regulation as a potential preventative of the next crisis. Where did they come out?

“Each country pledges to review and report on its regulatory system,” the summit declaration noted, and “all G-20 members commit to undertake a Financial Sector Assessment Program (FSAP) report.” The importance of this statement is that the United States has never undergone the peer review FSAP reporting process run by the G-20 finance ministers in recent years. On Saturday morning, during a media interview, former Canadian prime minister, Paul Martin, wondered whether the U.S. financial crisis could have been avoided if it had submitted itself to the FSAP process. In the end, the differences in economic systems and experience of the countries around the G-20 summit table yielded up the conclusion that “all countries” should undertake FSAP reviews. Not an insignificant conclusion, given where the world is today.

President Bush, before saying good-bye to the international press corps at his news conference Saturday afternoon, said: “One of the key achievements was to establish certain principles and take certain actions for adapting our financial systems to the realities of the 21st century. Part of the regulatory structures that are in place were 20th century regulatory structures.” Quite a statement, coming from him on the heels of his free market speech the previous week.

What this shows is precisely the value of summits. A current gets flowing; consensus congeals down the center of the group; and conclusions emerge, which reluctant participants go along with because the force field of international cooperation sweeps them into agreement. The larger public interest is served by this process because the idiosyncratic ways of nations, caught up in their own mind sets, get drawn out into the larger global experience and matured by exposure to the views and practices of others.

That ultimately is what is so valuable about the transformation of global leadership which de-facto occurred this weekend in Washington. The fundamental problem plaguing the international system today is that it is based on the post-World War II power structure rather than the emerging configuration of power of the 21st century. The IMF, the World Bank and the G-8 summits each have a disproportionate representation of Europe and North America. The very fact that the summit this past weekend met as a G-20 rather than a G-8 means that the more globally inclusive G-20, including importantly the four big emerging economies in Asia—China, India, Indonesia and Korea—has replaced the G-8 as the global steering committee for the world. This transformation is assured by the fact that G-20 leaders will reconvene again in April in the United Kingdom to follow-up on the action plan agreed to at the Washington summit. This was further buttressed by the G-20 countries stating that they are “committed to addressing other critical challenges such as energy security and climate change, food security, the rule of law, and the fight against terrorism, poverty and disease.”

The G-20 is now the global steering committee for addressing the entire global agenda, including security issues, not just the global financial crisis. The G-8 should now become a transatlantic caucus to prepare for G-20 leaders level summits. G8- enlargement is now dead. The G-20 has replaced the G8 at the center and the apex of the international system.

Now it is up to Prime Minister Gordon Brown to carry forward the momentum for international reform that the global financial crisis has generated. No one could be better suited to do this. Prime Minister Gordon Brown is the national leader with the most extensive economic experience as former finance minister of the UK and the most experience with the Bretton Woods institutions after his long tenure as the chair of the IMF’s ministerial advisory committee. With a new president of the United States in place by the time of the next G-20 summit in April, Prime Minister Gordon Brown hopefully will step out the shadows and into the global spotlight and lead the new global steering committee into taking responsibility for strong actions on behalf of the world as a whole, not just their own countries.