The G20 and global governance.

• Author: Kirchner, Stephen
• Position: Report

The Group of 20 sees itself as "the premier forum for international economic cooperation" (G20 2009b). This article examines its evolution and performance, and member countries' compliance with G20 summit commitments.

The G20 evolved as a response to the shortcomings of its predecessor, the G7/8. Yet its creation allowed member countries to avoid confronting many of the problems that arose out of the earlier forum. The best defense of the G20 is that it is the only institution of its type, but it still consumes scarce political and diplomatic capital, sometimes to the detriment of the policy objectives to which it is notionally committed.

In this article, I compare data on members' compliance with G20 summit commitments to proxy measures of the quality of domestic policies and institutions. While the proxies predict G20 compliance, it turns out that G20 compliance has no power to predict subsequent changes in domestic policies and institutions. The main implication of this data is that international economic and political cooperation is a symptom, not a cause, of domestic policies and institutions. Improvement in domestic policies makes the best contribution to advancing the G20 agenda, but such improvements do not appear to depend on the G20 process.

I also consider some of the G20's major initiatives in relation to economic policy coordination and financial market regulation. The G20 is assumed to invest these initiatives with greater political legitimacy but, on occasion, the leaders' summit process has actually detracted from this legitimacy. Many of these initiatives arguably would have occurred without the overlay of the G20 leaders' or ministerial processes. In Australia's case, hosting the G20 summit in 2014 detracted from domestic political leadership and the government's ability to advance a domestic economic reform agenda.

G7/G8 Precedents and the Origins of the G20

The G20 can trace its origins to the collapse of the Bretton Woods system in the early 1970s. With the demise of fixed exchange rates, new informal arrangements arose through which the major Western economies sought to address international economic issues. The finance ministers of the United States, Britain, France, and Germany (G4) met in the White House library, forming the so-called Library Group in March 1973 (Bradford and Linn 2011: 1). Japan joined the group in September 1973 to form the G5, followed by Italy (1975), Canada (1976), and the EC/EU presidency (1977), forming what ultimately became the Group of Seven (G7) finance ministers.

A parallel grouping of G7 heads of state began meeting annually from 1975. Russia joined the G7 at the invitation of President Clinton to form the G8 leaders' summit from 1998.

From the late 1960s, a literature grounded in formal theoretical models identified potential economic gains from international economic policy coordination (Cooper 1969). Yet this literature lacked historical and institutional context, and proved misleading about the effective scope and potential of such cooperation. The G7 finance ministers' and G7/8 leaders' meetings were subject to major questions about their agenda, representativeness, and effectiveness.

The G7 presided over two major episodes of economic policy coordination in the 1980s. The 1985 Plaza and 1987 Louvre Accords were designed to address episodes of U.S dollar strength and weakness respectively. The effect of coordinated foreign exchange market intervention on exchange rates, and its economic significance, has long been disputed, starting with the G7's 1983 Report of the Working Group on Exchange Market Intervention (the Jurgensen Report). The report concluded that "the role of intervention can only be limited" (Truman 2003: 247).

Mina Baliamoune (2000) examined the announcement and compliance effects of the G7 summits held between Rambouillet in 1975 and Munich in 1992. She found no evidence for an announcement effect from these summits on a range of economic and financial market variables, implying a lack of credibility for the G7. She also found that compliance with summit announcements was low. Where there was compliance with summit goals, Baliamoune found this did not necessarily improve economic performance.

An analysis by Marcel Fratzscher (2009) of 76 G7 communiques since 1975 found they were able to move G3 exchange rates in the desired direction, especially when supported by foreign exchange market intervention. However, Fratzscher suggests this is due to the G7 successfully identifying, rather than correcting, episodes of currency misalignment. G7 communication did not cause the subsequent realignment of exchange rates.

Another analysis of G7 summit commitments between 1975 and 1989 found a compliance rate of only one-third in relation to economic policy issues more broadly (von Furstenberg and Daniels 1992). A related study found that many of the economic relationships asserted in summit declarations were contestable, demonstrating that the G7's attempts at policy cooperation were not economically well founded (Daniels 1993).

By the late 1980s, there was growing skepticism about the prospects for effective international economic policy coordination. Stanley Fischer (1987: 4) was representative of this, maintaining that "continued systematic policy coordination on a grand scale among the major economies is unlikely ... the best that each country can do for other countries is to keep its own economy in shape." Fischer did hold out the prospect that improved understanding of policy, and growing interdependence, might see greater cooperation in future, "but only in the very long run." More recently, Jeffrey Frankel (2016: 1) has sought to rehabilitate this theoretical literature "after a 30-year absence," despite its lack of historical and institutional context.

Issues of international economic cooperation again came to fore with the 1997-98 emerging markets crisis, which went beyond the traditional geographic focus of the G7. In this context, it was thought that a broader grouping was needed to better represent the emerging-market economies that were at the center of the crisis.

The first meeting of G20 finance ministers and central bank governors took place in Berlin in December 1999, at the initiative of the United States, Germany, and Canada. The G20 added Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, and the presidency of the EU to the G7's membership. The managing director of the International Monetary Fund (IMF) and the president of the World Bank were also included. The G20 was given a rotating presidency based on five regional groupings but, like the G7/G8, lacked a permanent secretariat or standing organization. As was the case with its predecessors, this lack of a standing organization has been variously interpreted as both a strength and a weakness.

An important outgrowth of the G20 ministerial meetings was the Financial Stability Forum (FSF), which took on responsibility for coordinating issues in relation to international financial regulation and later became the Financial Stability Board (FSB). However, the meetings addressed a wide range of other issues between 1999 and the onset of the 2008-09 financial crisis, with the G20's agenda inevitably reflecting the issues of the moment.

The period between 1999 and 2008 saw continued debate about how best to expand the G8 and address its shortcomings. A small, often government-funded industry grew up in academia and think tanks to address the issue of global governance; the form and effectiveness of the G7/8 and the G20 ministerial meetings was its major focus. This industry is remarkable for its lack of realism: Alex Brill (2012: 20) writes that "too many experts are unclear on exactly how to improve existing multilateral institutions. Many scholars have critiqued these institutions and proposed strategies for reform, but in reviewing various recommendations, the utter vagueness of much of the advice is striking."

One concrete idea that did emerge from this industry was that an elevation of the G20 ministerial meetings process was preferable to an expansion or devolution of the G8 leaders' grouping (Bradford and Linn 2011: 7). This was put into action as a result of the financial crisis of 2008-09. Yet, it is noteworthy that in the run-up to the crisis, there was considerable skepticism from close observers about the value of international economic cooperation. Joseph Daniels (2005: 84) was representative, arguing that "global economic stability depends, first and foremost, on good domestic economic policymaking. International policy cooperation, although ever more important in light of global economic integration, is of second order importance for global stability." Razeen Sally (2001: 55) put it more bluntly: "Most arguments for global governance are in fact bad economics and even worse political economy." A key issue is whether the financial crisis of 2008-09 confirmed or demanded a reconsideration of these judgments about the prospects for international economic policy cooperation and coordination.

The G20 Leaders' Meetings and the Financial Crisis

The onset of the financial crisis in 2008 gave new impetus to international economic cooperation on a broader basis than the G7/G8. The existing G20 ministerial meeting process provided a convenient forum for the organization of a leaders' summit in Washington on November 15, 2008, which also added the Netherlands and Spain to the G20 meetings.

The elevation of the G20 ministerial process to the status of a leaders' meeting was an attempt to address some of the long-standing issues around the effectiveness and legitimacy of the G7/8. However, the origins of the G20 in die emerging markets crisis of 1997-98 and the global financial crisis of 2008-09 meant that many of the longstanding issues around the...