What the G-20 Wants

Carlos Pascual and Thomas Wright

On November 14-15, leaders from 19 nations and the European Union will gather in Washington D.C. to respond to the ongoing international financial crisis. French President Nicholas Sarkozy has described the task ahead as nothing less than designing a “new Bretton Woods”. The G-20 emergency summit not only demonstrates the urgent need for a robust multilateral response to the economic downspin, but also underscores the growing recognition that turbulence in the financial markets can have negative repercussions on broader global security and prosperity.

The Managing Global Insecurity (MGI) project and The Chicago Council on Global Affairs are hosting a special online forum of global perspectives on the G-20 summit. Experts and policymakers from G-20 nations have provided submissions on what their country will seek from the G-20 summit this weekend, as well as a New Bretton Woods process more broadly. The result is an intriguing glimpse into pivotal issues that will dominate discussions well beyond this weekend – and an overview of areas of divergence and convergence in perspectives on this issue from around the globe.


Silvina Vatnick
President, Center for Financial Stability, Buenos Aires

The global financial crisis presents a unique opportunity for emerging economies to differentiate themselves and to attract the more limited capital that will continue flowing around the world derived from diversification and a more conservative search for investment in real assets. A more coordinated approach among regulators and supervisors of financial services, and more independence – both technical and budgetary – for them across countries, would help to strengthen their roles and to avoid further crises in the future. The major change in the international financial architecture would have to be focused on the bank and non-bank financial intermediation process, better governance in corporations, financial institutions and governments, and less risk taking and better risk management in those institutions. The International Financial Institutions (IFIs) could only play a supportive role in that process.

Argentina is not immune to the impact of the recent crisis in international financial markets and the deceleration of economic growth in the rest of the world. As a result of its natural endowment and comparative advantage in a number of increasingly strategic relevant productions, Argentina could pull itself out and potentially generate both domestic savings and attract foreign investment in the years to come to ease the impact of the global crisis. However, recent announcements made by the government and the likely approval of proposed legislation on the nationalization of the private pension system – i.e. dismantling of the second and third pillars of the capitalization system set up in 1994 – have already indicated that the propensity to intervene in the economy is quite high and the private sector would be crowded out. The concept, proposed by the developed countries as part of the rescue packages, of temporary participation in the ownership of corporate or financial institutions with clear exit clauses, has not been understood in this country. The risk of a significant deterioration in the governance of public funds is high and the foregone opportunities for the economy are numerous.

For the upcoming G-20 agenda to be effective, the views of the private and the third sectors in countries like Argentina should be factored in. This would ensure a more balanced assessment of how the country, as part of the Latin American region and the global economy, can adapt itself to the new systemic constraints and can avoid falling into the already well known routines of increasing spending and international borrowing from multilateral sources to postpone structural adjustment.


Michael Fullilove
Lowy Visiting Fellow, The Brookings Institution; Director, Global Issues Program, Lowy Institute for International Policy, Sydney
Stephen Grenville
Visiting Fellow, Lowy Institute for International Policy; former Deputy Governor, Reserve Bank of Australia

At least three lessons flow from the financial crisis. First, in an interconnected world, international policy coordination is just as important to economics as it is to security. It is plain that persistent international payments imbalances, not just domestic problems, created vulnerabilities in the system. The IMF is poorly positioned to provide this kind of coordination because of its antique governance structures. Second, the relative strength of the Asian economies through the crisis reflects the eastwards drift of economic power. Third, the United States retains its unique position in the international system. This crisis originated mainly in the United States – yet Washington is also convening the meeting to respond to it.

Australian Prime Minister Kevin Rudd will push for better international regulation of financial institutions over the long term. But a particular preoccupation will be to ensure that the G-20 becomes the chief forum for resolution of these issues. For Australia this week, the meeting is the message.

Naturally, Australia believes it deserves a seat at the table because it has something to contribute: experience flowing from a robust domestic economy, sophisticated financial sector and tight regulatory system, and a track record of fresh thinking and deep enmeshment in the economies of the Asian region. But leaving aside Canberra’s interest, the G-20 also happens to be the best vehicle for these discussions. It is more legitimate and representative than the G-7 (or other groups constructed around the G-7, such as World Bank President Bob Zoellick’s proposal for a G-14), and more effective and manageable than larger alternatives. It has the signal advantage that it already exists; and indeed it has performed well since its establishment a decade ago. Now it needs to be pumped up, ideally via the addition of a G-20 leaders’ meeting that provides it with political muscle.


Wu Jianmin
President, China Foreign Affairs University; former Ambassador of China to the United Nations

The Bretton Woods Monetary System born in 1944 played a vital role in maintaining the world financial order and promoting international trade. Sixty-four years have elapsed. A sea change has taken place in the world. The Bretton Woods System should adapt to the changes in the past sixty-four years. Reform is inevitable.

What kind of reform do we need? I think the reform must reflect the reality of today’s world. First and foremost, the developing countries, particularly the emerging economies, must have more say in international financial affairs. They should get involved in the discussion about the reform of the international financial and monetary systems, and their concerns and interests should be heeded in the process of decision-making. Equality among all countries is crucial to the success of reform.

How should we address the current financial crisis? The financial crisis that started in the United States has spread to the whole world. No country can stay unaffected. The correct way to address this crisis is for us all to join hands and surmount the difficulties.

What should we do now and immediately? To prevent things from becoming worse and even to reverse the situation, the most important thing is restoring confidence. Coordinated action is called for. China is ready to work with other countries to restore confidence.


Justin Vaisse
Senior Fellow, The Brookings Institution

As the country currently holding the rotating presidency of the European Union, France is in a specific situation in this summit. It was President Sarkozy who convinced President Bush to hold it in the first place. He also convened an informal meeting of EU leaders on November 7th to adopt a unified European approach, two weeks after securing support for reform from Asian leaders in a Europe-Asia summit in Beijing.

This specific situation both enhances and constrains the French position. On the one hand, it allows President Sarkozy to play a leading role in shaping the debate. On the other hand, it obliges Paris to stick to common EU agreed positions. As a consequence, the zeal for radical reform expressed by Sarkozy has been somewhat curtailed in favor of a more prudent, but also more powerful, European agenda for reform which can be found here.

The key concepts to describe this common EU approach, which Sarkozy will be advocating in his two capacities as French President and as president of the European Council, are: determination to act and deliver; unity of purpose; solidarity with weaker countries; and the reshaping of the financial system.

On this last point, EU leaders have agreed that “no financial institution, no market segment and no jurisdiction must escape proportionate and adequate regulation or at least oversight.” This should be done at a national level, under international financial institutions supervision. Accountability and transparency of financial transactions should be increased, and instruments encouraging excessive risk taking (like debt securitization) should be regulated through codes of conducts. European leaders also favor a global convergence of accounting standards, and a strict regulation of rating agencies. The IMF should be strengthened to help failing countries and play a leading role in recommending reforms of the financial system as well as monitor macroeconomic imbalances.

Europeans also advocate holding a second summit on February 15th, under an Obama administration, to report on the implementation of the first reforms and adopt further ones. But other types of decision could be announced at the November 15th meeting, such as a global stimulus package and support for free trade. President Sarkozy does not oppose any of them, but he advocates a debate on how to reform trade negotiations at the WTO so as to be more efficient.


Michael Heise
Chief Economist, Allianz Dresdner Economic Research, Frankfurt

Among the many lessons that can be drawn from the financial crisis, from a German perspective, two stand out:

First, financial crises of the 21st century – global, local or regional crises – can easily cause worldwide contagion. Germany is a case in point: despite the overall high quality of its assets, resulting from its refrain from past debt excesses, and despite its financial culture of long-termism and stability, German banks were nonetheless heavily affected. Financial crises easily travel across borders. Consequently, financial stability and regulation have to be addressed as a global issue.

Second, financial markets have become more and more intransparent with all the interconnections and interdependencies. What happens in one corner of the market can easily affect the whole market. The crisis has taught us that the dangers of intransparency can lead to a total loss of confidence. The distinction between regulated and non-regulated market participants no longer holds, and more transparency is also needed in the so-called “shadow banking world.” Consequently, financial stability and regulation have to be addressed as an encompassing issue.

Global, encompassing financial regulation and supervision cannot be achieved overnight, but time is short. The G-20 summit should lay the foundations by forging a common understanding of the challenges ahead. All participants should underwrite these overarching principles. Practical details – e.g. how to bring hedge funds into the scope of financial oversight or how to better align risk-incentives regarding securitization – can be left to follow-up meetings at the expert level. But it is important that the G-20 summit gives clear and robust mandates to the relevant institutions and task forces to come up with appropriate solutions quickly.

The second goal of the summit should to be to set the course for the new global financial governance structure. For one, emerging markets need to be closely involved in any attempt to stabilize currency relations, a topic that should be extensively discussed in the coming years amongst the G-20 countries. Furthermore, a global and encompassing financial regulation and supervision requires an international body that has real power. From Germany’s distinctive perspective, the way forward would be a global system of national financial regulation and supervision authorities. With the Basel committee and the Financial Stability Forum (FSF), there already are successful blueprints. The status of the FSF should be enhanced to form the nucleus for a new global authority that, together with the established Bretton Woods institutions, constitutes the triad of the new global financial architecture.


Arvind Subramanian
Senior Fellow, Peter G. Peterson Institute for International Economics
Aaditya Mattoo
Lead Economist, Development Research Group, World Bank

In the short run, India should support globally coordinated actions to help limit the economic downturn, including a political commitment by all countries to keep markets open.

The medium term agenda would have three components.

  1. Reforming the financial architecture

Two key reforms are to increase the ability of the IMF to respond quickly to a global financial crisis and to enhance its legitimacy by radically altering its governance.

Increasing Fund resources

  • Aggregate resources should be adequate to deal with systemic crises.
  • Extra resources will require increased contributions from all countries, but could also come from credit lines extended by new powers such as China and India.

Governance reform

  • The IMF should eliminate the effective veto of the United States and EU.
  • Quotas should be allocated on the basis of variables that reflect economic status (e.g. GDP at PPP) rather than potential financial need.
  • The selection of the heads of the Bank and Fund should be changed to a transparent, principled, and merit-based procedure.
  • Membership of the Financial Stability Forum and Basel Committee on Banking Supervision should be expanded to facilitate global discussions of regulatory reform.

  1. Keeping trading system open

There should be a more consequential agenda that involves deepening rules in existing areas and developing rules in new areas. These include:

  • Disciplines on sustained and policy-induced undervalued exchange rates;
  • Pro-competitive regulation of the cartelization of oil markets;
  • Stronger rules to guard against investment protectionism;
  • Disciplines to ensure that the environment is not invoked to impose trade restrictions.

  1. Reforming G-7 (the meta-process)

Current governance under the G-7 reflects an antiquated structure that reflects the receded economic realities of the post-World war II era. Here the effort must be to create a genuine sense that new powers have an important voice in the system. Two key objectives for India are to:

  • Enlarge the G-7 to a more representative decision-making body;
  • Ensure that this enlarged body becomes permanent, by insisting that Bretton Woods II be not a one-off summit, but a medium-term process with a clear, well-defined agenda, as proposed above.


Federiga Bindi
Visiting Fellow, The Brookings Institution

Italy will hold the G-8 Presidency in 2009 and will therefore play an important role in the “new” Bretton Wood negotiations. From a domestic politics points of view, G-8 negotiations in the financial and economic sector fall under the responsibility of the Minister of Treasury, Mr. Giulio Tremonti, arguably one of the strongest personalities within the Government. Despite the fact that the Ministry of Treasury is to act in strict coordination with the Foreign Ministry and the Presidency of the Council on the issue of the G-8, Mr. Tremonti is known for his tendency of not involving his fellow Ministers into the decisions that fall into his sphere of influence. It is not surprising, therefore, that it is very difficult to find out the Ministry’s ideas on the new Bretton Woods. Indeed, Italy was one of the countries asking for a new Bretton Woods.

According to Mr. Giulio Tremonti, the G-8 will have to be open to new members – though he has not yet specified whom yet – and new rules are needed for currency exchange, trade and capital. Tremonti is in particular against the use of hedge funds, as there is no control over them and feels that the parallel introduction of the Basel 2 and IAS agreements was a mistake. A concrete proposal on how update Bretton Woods is expected at the beginning of the Italian G-8 Presidency.

In general terms, according to Italy, the current mechanisms of economic governance showed their inadequacy and there should be a “shared responsibility” for the stabilization of the global economic environment. Thus, a better functioning economic governance, based on effective multilateralism, needs to be created. Continuing to hold grand debates about “grand reforms” risk going nowhere. A pragmatic approach is hence needed to fill the current governance gap and save multilateralism. By using a “bottom -up” approach, a web of norms and commitments should be created in order to help consolidating a “new community of responsible powers.”


Shijuro Ogata
Deputy Pacific Asia Chairman, The Trilateral Commission; former Deputy Governor for International Relations, Bank of Japan

In view of the seriousness of the current financial crisis, we do hope that the representative of the U.S. President-elect, possibly the Treasury Secretary-designate, will also participate in this Summit.

In my view, this Summit, often called “Bretton Woods II,” should deal with not only the structural problems of the international financial architecture, but also with the pressing problems at the moment. My suggestions for possible agreements at the Summit are as follows: 

  1. G-20 leaders should reaffirm their coordinated efforts to support systematically important financial institutions while improving further regulatory supervision through the Basel Committee, the Financial Stability Forum and the IMF in order to strengthen financial discipline. 
  2. They should pledge jointly to take every possible macroeconomic policy action to reverse the downward trend of the global economy and to reduce enlarged global imbalances over time, particularly through gradual increase in American saving and more domestic demand-led growth of East Asian economies. 
  3. The assistance of the IMF and the World Bank Group to emerging countries in great difficulty should be strengthened with additional contributions, if necessary, from those countries mostly in East Asia and the Middle East, which have ample foreign exchange reserves.
  4. A group of experts should be organized to examine within a certain time frame possible steps to be taken to improve and/or reform the international financial architecture. 


Dr. Alejandro Werner Wainfeld
Vice-Minister of Finance, Mexico

The world is living through challenging times. The financial crisis in industrial countries is now considered to be the most serious one since the Great Depression and the confidence crisis associated with it could make advanced countries fall into a deep and protracted recession. While emerging markets were little affected initially by the turmoil in richer countries due to stronger policy frameworks and external accounts, financial contagion eventually developed as a result of extreme levels of risk aversion in industrial countries, and no country will be immune to the anticipated global slowdown.

In this context, we need to undertake measures that contribute immediately to a reestablishment of orderly conditions in financial markets and that support aggregate demand, as well as important reforms to the international financial architecture in order to avoid a repetition of the current crisis.

The measures that have been adopted in industrial countries to stop the possibility of a financial meltdown are very positive and now they need to be implemented as soon as possible. They also need to be complemented with fiscal and monetary policies that stimulate aggregate demand. A strengthening of international financial organizations such as the World Bank, IMF and regional development banks is required so they have sufficient resources to support economic activity and the liquidity needs of their member countries. In addition, they need to undertake adequate surveillance of the development of macroeconomic and financial imbalances in any country in the world, irrespectively of whether they are industrialized or emerging.

As for emerging markets, it is important that they use their stronger policy frameworks in order to sustain local aggregate demand and global activity. They are already making a higher contribution to global growth than industrial countries, and this is the best contribution they can make to insure an orderly resolution of the current crisis.


Igor Ivanov
Former Secretary, Russian Security Council; former Foreign Minister of Russia

The financial crisis engulfing the world is only one of many signals of the urgent need to create the new mechanics of global management. The runaway finance is just the tip of an iceberg, another sign of current disarray in many spheres – global politics and security included.

If you want to manage this crisis efficiently, you have to display a collective effort, in finance, economy, and security, and lay a firm legal foundation for gradual movement into the future.

The fact that twenty key nations are going to cooperate in this common task is highly commendable. But you can hardly expect an instant magic solution to emerge from the Washington summit. The best result to be obtained there would be a good start of a complicated process.

At that meeting Russia may favor the idea of giving more teeth to IMF, raising there the profiles of Russia, China, India, Brazil and others. Russia approves of bank control experience applied to controlling collectively other financial institutes. They have to provide more information, their use of derivatives has to be more transparent, and risk management has to be more stringent. Sovereign funds should be made important instruments of global financial architecture.

Getting out of a recession means preventing protectionism. It will require quick amendments of the WTO rules, where they concern financial services. The WTO must also be made universal, by removing obviously artificial barriers in Russia’s way.

We may need a gradual transition to a multilateral currency rates corridor, by making money supply transparent. Currency battles and other popular games of that kind should be excluded and an investor’s behavior code has to be adopted, ensuring transparency of operations and banning market manipulations.

The twenty nations Politbureau will incur many problems on its collective head if it ignores the rest of the world. Even a small national disaster may trigger a domino effect in the global economy, as well as in global security, which is almost the same thing now. The United Nations should join the G-20 effort by creating a think tank – a kind of an international commission of financial gurus.

There is a need for quick fixes, but then there are also long-term decisions to be envisaged. For that you may have to make the present G-20 meeting a regular event to monitor financial markets and make other decisions.

Mutual understanding is the key for a start of a process of strengthening international trust. The success in that task will, in turn, lead to solutions of other global problems like disarmament or security.


Xolela Mangcu
Executive Chairman, Platform for Public Deliberation, Wits University, Johannesburg
Peter Draper
Programme Head, Development through Trade, South African Institute of International Affairs, Johannesburg
Elizabeth Sidiropoulos
National Director, Programme Head EU-Africa, South African Institute of International Affairs

The global economic crisis coincides with the rise in South Africa of a new government that is likely to look positively at government intervention to regulate the operation of financial markets, both domestically and globally. South Africa may thus be in a position to offer modest fiscal expansion to support global economic growth. Provided funds are spent for investment purposes, there may be scope for escalating expenditures. However, if supplementary expenditures are deployed to importing capital goods, this will aggravate our current account deficit and thereby weaken the Rand, thereby keeping imported inflation relatively high. The combination of high inflation and a high current account deficit therefore places a floor under the prospects for monetary easing via interest rates. So whilst South Africa may be able to offer some contribution on the fiscal side, there is relatively little room for manoeuvre on the monetary front.

South Africa may support France and Germany in pursuing financial regulatory reform and multilateral oversight. However, our government is mindful that ambitious regulatory reform proposals are unlikely to succeed, owing to U.S. and UK opposition. Furthermore, the Europeans are the principle obstacle regarding increasing developing country participation in the IMF and other multilateral institutions concerned with regulating global finance. And such reforms will probably culminate in a diminished African “voice” within the IMF especially. Therefore, South Africa may hold the line on maintaining a “floor” below which African representation should not subside, and push for restructuring the IMF’s board in order to increase African representation. Finally, South Africa will reaffirm its willingness to seeing the Doha round through. Concretely, it may join the UK, Brazil, and Australia in pushing for further concessions on agriculture from France, Germany, the United States, Japan, and India, in return for which some flexibility on industrial tariffs and services should be proffered.


Harold James
Professor of History and International Affairs and Director, Program in Contemporary European Politics and Society, Princeton University

The United States has a strong interest in the effective and efficient operation of the Bretton Woods institutions. In particular the IMF should have a central role in both the prevention and management of financial crises, especially in emerging market countries, as these have the potential of hurting both the global and the American economy. A major problem of the past ten years is that the IMF has been slipping in perceptions of its effectiveness and its legitimacy. In part the waning of the IMF is a result of the changing economic geography of the world. In part also it follows from the curious financing of the IMF, which is dependent on revenue from its loan portfolio so that it is weakened when there is no crisis. But the IMF also has limits in the extent of the funding that it can commit, so that it can handle no more than a few emerging market crises at a time and would be powerless in the face of substantial contagion effects.

The problems of effectiveness, financing and legitimacy all require as a solution an increased participation of emerging market countries, especially those such as China with very substantial surpluses. What is needed is much larger than the rather small voting reforms currently being implemented. The counterpart should be a reduction in voting shares of the European countries, which are overrepresented. So far, however, the United States has been the largest shareholder and the dominant influence. But it is no good being the boss of a club that only you really want to belong to. In consequence, if the IMF is to continue to be useful in tackling international issues, there will need to be an acceptance of reduced U.S. and European influence, and compensation in the form of increased institutional presence for the big emerging markets.

What should the United States require in return as part of an overall package of global economic reform? A continued and general global openness to trade, the renunciation of mercantilist currency practices, a level playing field in international bank regulation and in crisis management, and the responsible and transparent behavior of sovereign wealth funds are all important interests of the United States. All these issues demand complex negotiations, and it is difficult to imagine that they could all be solved at a stroke in a unique round of bargaining.

Trade openness requires a completion of the Doha Round of the WTO negotiations. Suspicions of mercantilism will remain as long as major economies – especially China – manage their exchange rate. The national provision of support for internationalized banks has generated many frictions during the current crisis. Sovereign Wealth Funds looked as if they were acting as an international Lender of Last Resort in the first stages of the financial crisis of 2007, but then drew back as the scale of the losses became apparent in 2008. Their actions often prompt suspicions that finance is being used for political influence and leverage. In all these cases the United States has an interest in international solutions, and in stopping cycles of protectionism and the perversion of finance for geo-political purposes.