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On September 25, the G-20 leaders, meeting in Pittsburgh, launched their "framework that lays out the policies and the way we act together to generate strong, sustainable and balanced global growth." The success of this effort will define the success (or failure) of the G-20 in the post-crisis period. Will the framework be regarded as a game changer in international economic policy coordination? The jury is still out. The reason is that in the ensuing 18 months, the principal activity of the G-20 countries has been to focus on process not results.
The final step in process establishment was announced by the G-20 finance ministers and central bank governors on April 15. In February they had reached agreement on a set of indicators of persistently large imbalances in two categories: (1) internal indicators in the form of public debt and fiscal deficits and private saving rates and private debt and (2) external indicators in the form of the external balance composed of the trade balance and net investment income flows and transfers, i.e., the current account balance and its components.
On April 15, the G-20 ministers and governors agreed on a procedure by which these variables (indicators) will be passed through four filters (indicative guidelines) to identify those that are significantly out of line with historical experience. The test of significance will be weaker for the seven countries with shares of G-20 GDP of more than 5 percent based on either market exchange rates or purchasing power parity exchange rates: China, France, Germany, India, Japan, the United Kingdom, and the United States. Countries identified by the application of the filters will undergo a second phase in which the root causes of the potential imbalances that have been revealed will be examined, and countries will either specify their policies to deal with those imbalances or advance the case for why they are not a threat.
When the G-20 leaders assemble in Cannes, France in early November, what will be the likely deliverable? We can be quite confident that the deliverable will be a set of statements by the relevant countries about how they intend to deal with the identified imbalances: The United States will pronounce about reducing its fiscal deficit. China will pronounce about making its currency more flexible.
If this is all there is after two years, and it may well be, then the skeptics will be proven right. Too often in the past, countries have made solemn commitments to act and produce tangible results, and little or nothing has happened. As part of the Plaza Agreement in 1985 and the Louvre Accord in 1987, the United States articulated specific commitments about its budget deficit on which it was unable or unwilling to deliver. In April 2007, a multilateral consultation on global imbalances under the auspices of the International Monetary Fund (IMF) was completed in which each country articulated its policy intentions. It is fair to say that the subsequent global economic financial crisis overtook those commitments and that global imbalances have shrunk, but not much has been recorded next to specific commitments, for example, the US commitment to eliminating the fiscal deficit by 2012 and to enact entitlement reform to strengthen long-term fiscal sustainability.
Enforcement was totally lacking. French Finance Minister Christine Lagarde recently was asked about the enforcement mechanism in the G-20 process. She replied that enforcement "will be for the heads of state and government." Although I do not want to show disrespect, how often does a group of heads of state and government call a member of the group to task and later publicize the scolding? The European Union and Euro area may provide a small number of examples.
How can the G-20 prevent their framework for strong, sustainable and balanced growth from becoming another monument to economic policy coordination futility? I have three suggestions.
First, commitments should be as specific as possible with figures and dates. This has been done before. It is not enough by itself to promote substantial compliance, but it is the necessary place to start.
Second, the process should be as transparent as possible. The results of the application of the filters (indicative guidelines) should be published so that outside observers can validate their application. The IMF staff's independent analysis of countries' policy intentions and whether those policies will produce the intended results relative to the identified imbalances should be made public. The countries' own assessments of their policy intentions should be made public. These elements of transparency would enhance the credibility of overall effort.
Third, and most important, Cannes should not be the end. There must be follow up. It can start almost immediately. In June 2010 in Toronto, the G-20 countries made commitments to halve their fiscal deficits by 2013 and to stabilize or reduce government debt-to-GDP ratios by 2016. By early 2012 the G-20 with the help of the IMF should formally assess progress toward that goal, as the IMF has in part been doing via its Fiscal Monitor and reports for G-20 meetings. At the same time, the indicative guidelines should be reapplied in 2012, and progress on commitments and results should be assessed. Such a continuing application would establish the G-20 peer review process as a repeated game and help to incentivize adherence to commitments.
The objective of these suggestions is to enlist global public opinion as part of the enforcement mechanism. At present, there is no other alternative, although I have suggested some longer-term reforms to IMF surveillance that incorporates enforcement mechanisms.
What is the best metric to judge whether the G-20 succeeds on its key challenge? Results define success. The current preoccupation of the G-20 is to avoid imbalances that destabilize the global economy and financial system. Will such imbalances be avoided? Time will tell. Meanwhile, limiting dangerous imbalances is only one of the three pillars of the G-20 framework. The other two are strong and sustainable global growth. They also should not be forgotten in the preoccupation with imbalances.
