The turn of emerging countries

The distinguishing trait of the G20 is the inclusion of the emerging economies (EME) alongside with the advanced ones. The main industrial countries have long had their proprietary policy forum: the G7. On the contrary, until the launch of the G20 summit in November 2008, the group of EME, that together with the developing bloc represent 85 percent of the people on earth and produce half of global output (a share that is rising quickly), did not enjoy this privilege. True, they are members of the IMF and the World Bank; but their influence on 19^th Street still does not match their actual economic weight, let alone the prospective one. Their presence is substantial in the development banks; but these are regional financial institutions, with limited functional and geographical scope. The G20 is different: it is global, exclusive, and political. This is why the creation of the G20 summit marked, potentially, a watershed in terms of the EME’s ability to exert a global economic influence.

Surprisingly, EMEs do not seem in a hurry to exploit this opportunity. Their contribution to the G20 agenda has been modest so far, and their compliance with adopted decisions even lower; a joint paper with Jean Pisani Ferry, about to appear in the Bruegel website[1], gives quantitative substance to these statements. In some circumstances, their effort was entirely devoted to impeding negotiating progress; for example when China adamantly refused, against common sense and with tacit agreement of its peers, to consider exchange rates among the factors driving global imbalances and among the policy variables that can be used to correct them.

Whatever the reasons for this failure (lack of cohesion, lack of interest, diplomatic inexperience, or else), an opportunity for change is coming up: EMEs are chairing the G20 this year (Mexico) and again next year (Russia). After an interval in 2014 (Australia), it will be again their turn in 2015 (Turkey). Now or never, one is tempted to say. For this reason, at least, one should look with interest at the preparatory documents circulated recently by the Mexican presidency, which is convening the first meeting of ministers and governors this weekend in Mexico City. In a discussion paper issued in January (http://www.g20.utoronto.ca/2012/2012-loscabos-disc-en.pdf), the Mexicans listed five priorities: 1) Macroeconomic stabilisation and reform (including macro-coordination and global imbalances); 2) Financial reform; 3) International financial architecture; 4) Commodity prices, including food security; 5) Development and climate change. Another disappointment: not only are these themes a carbon-copy of those proposed by the French presidency in 2011, but the document offers no clue on where and what progress is expected to be made compared to the results of last year  – not very exciting themselves, as we have already noted in this webpage.

Not surprisingly, the press has ignored these unremarkable announcements and concentrated on something more concrete and immediate: whether and how the G20 will help contain the European debt crisis. Some expectations have developed. The IMF managing director, Christine Lagarde, has proposed to increase the Find’s resources by $600 billion, which would bring the lending power of the organisation close to 1 trillion. Though helping Europe was not specifically mentioned as a motivation, the IMF’s current and prospective exposure to Europe suggests that any enhancement of the organisation’s capacity would be first in line in case funding was needed to shore up Europe’s ailing sovereign sector.

There is no doubt that the EMEs, that together supply over a third of global exports and hold two thirds of total existing international reserves, are in a position to contribute to enhance IMF resources, with modest effort.  The issue is whether they should and will do it. At present, the balance of opinions on the second question is in the negative. On the first question, views are more divided. The US have suggested EMEs should refrain from contributing, at least until Europeans will be willing to dig deeper in their pockets, deep enough – so the argument goes – to solve their domestic financial hurdles.

That Europe could, if willing, mobilise enough resources to address its own financial troubles is hard to refute. Whether this is a good reason for EMEs to hold back is more doubtful. EMEs already channel their current account surpluses massively to industrial economies in different forms – through banks and securities markets and, to some extent, FDIs. Supporting IMF resources would amount to a moderate shift of these flows from the private to the official channel. This would enhance their negotiating position and relevance in the international organisations, first and foremost in the IMF. An agreement reached while they hold the rotating chair would enhance the role of the G20 and their own position in it: two results in one. Not to mention the fact that a stronger lending capacity of the IMF, whether used in Europe or elsewhere depending on future needs, would contribute to global financial stability; a desirable side effect for a group of countries that represent, now and in the foreseeable future, the largest global concentration of financial wealth.

A century ago, the US – then an emerging economy with small global influence – promoted its role on the world stage by financing the wartime debt of Europeans; the influence gained in that way was never lost. There is no reason why today’s EMEs should not follow a similar path with today’s peacetime debts.

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[1] The G20: characters in search of an author, by I. Angeloni and J. Pisani Ferry; Bruegel Working Papers, forthcoming.