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The G20 and the Developing World

Winter 2010 Features

The G20 and the Developing World

g20The rise of the 21st century’s newest governance network means that developing countries will need to be all the more strategic to get their pound of flesh

The G20 Leaders’ group burst onto the international scene in the wake of the global financial crisis. Unlike formal international organizations, the G20 is a network. It has no formal rules of membership, and states have not delegated formal authority to the group to make decisions. It brought leaders of the world’s largest economies together to forge a common response to the crisis.

There are some signs that the G20 might become a new global strategic directorate, replacing and even going further than the pre-existing G8 Leaders’ group. At the G20 Leaders’ first meeting in Washington, DC, in November 2008, they laid out an action plan and tasked specific institutions to take forward elements of the plan. At their London Summit in April 2009, they increased the resources available to the IMF to respond to the crisis. At their third meeting in Pittsburgh in September 2009, they focussed on the impact of the crisis on jobs, the real economy, and included climate change and energy policy. They also “designated the G20 to be the premier forum for our international economic cooperation.”

Does this mean that the G20 is replacing formal organizations, or is it distinct from them? A network is, by definition, a forum in which participants have repeated and enduring relations. Members do not delegate authority to the network to make decisions. Nor is there any designated authority to arbitrate and resolve disputes. Unlike formal organizations, networks have no formal rules of membership or structure of representation, no formal decision-making rules, and no authority to make, implement or enforce rules. The likely role of the G20 network is well signposted in a recent study funded by Canada’s International Development Research Centre (IDRC). The study focusses particularly on the implications for developing countries.

In Networks of Influence: Developing Countries in a Networked Global Order, eight intergovernmental networks in which developing countries have participated are explored. For the most part, the networks aimed to enhance the national capacity and influence of developing countries in respect of various aspects of development finance. Typically, each network was used for one of: agenda-setting and consensus-building; policy coordination; knowledge production and exchange; and norm-setting and diffusion. One of those networks was the precursor to the current G20 Leaders’ group.

The G20 Finance Ministers and Central Bank Governors (G20 Finance) group was established in 1999 as an informal forum for discussion among officials from the G7 countries and ‘systemically significant’ developing countries. It emerged because existing institutions and networks were inadequate. After the Asian financial crisis, it was clear that crisis prevention and resolution efforts required the cooperation and involvement of ‘systemically significant’ emerging economies. Yet these countries were excluded from the leading global network of the day – the G7 or G8 – and equally had inadequate voice in formal institutions like the Bank for International Settlements and the IMF.

As a consensus-building network, the G20 Finance Ministers and Central Bank Governors’ group had some success. It forged consensus on a framework for debt restructuring (collective action clauses and voluntary standards) and the need for IMF quota reform. On these issues, its inclusion of emerging economies (beyond the G7 and G8) was crucial. However, once the group exhausted its original mandate of financial crisis prevention and resolution, it found it increasingly difficult to design an agenda that was relevant to all the members, politically acceptable, and yet narrow enough to be tractable. The group continues to meet, but its influence has declined.

Emerging economies did not gain much influence through the G20 Finance. In its early years, the group’s formal statements echoed those of the G7 Finance. This may have been because the governments of emerging economies preferred to fight policy battles in formal organizations, rather than ‘taking on’ the G7 in the G20 forum. Although they became more active and outspoken as the network matured, this was as the network’s influence diminished. However, where the G7 had strong preferences, G7 positions prevailed.

Some critics of the G20 Finance argue that it was a creation of the G7, successfully diluting pressure to reform the IMF. By creating an informal network in which discussions over the international financial architecture could take place without authoritative effect, the G7 was able to forestall any move by non-G7 countries to collectively advocate for a more radical reform.

What is clear is that, without a bureaucratic machinery of its own, the G20 has always depended on formal international organizations (especially the IMF, the World Bank, and the Bank for International Settlements), as well as other networks (the Financial Stability Forum and the Basel committees) to follow through and implement its recommendations. This is unlikely to change in the future.

More generally, Networks of Influence demonstrates the extent to which networks emerge as a response to the perceived failures of formal international organizations: failures to represent their membership, to respond to their needs in a timely way, or to fulfill their mandates effectively. For example, the perceived failures of the IMF in East Asia spurred a series networks for monetary and financial cooperation in that region. The failure of formal international development assistance institutions to respond to changing needs and opportunities in Africa spawned several networks to advocate for Africa’s development. The failure of Africa’s regional institutions led to the formation of an all-Africa leaders’ group (‘Africa’s G4,’ as it were). And the slow and cumbersome nature of formal institutional debate encouraged the formation of the G20 Finance Ministers’ group.

The G20 Leaders’ network is no different. It emerged partly as a result of political pressure on world leaders to ‘do something’ about the global financial crisis. But it was also a response to the absence of international institutions, where international coordination could take place quickly along a broad range of policy instruments, including fiscal and monetary policy, financial regulation and development financing. The G20, with its unique combination of top-level political authority and decision-making flexibility, proved to be the most effective institutional response to the crisis.

The G20 is likely to have three effects on international organizations. First, it will have a complementary effect, generating political support for the activities of these organizations, and exerting pressure on them to accelerate their initiatives. The G20 is already doing this by providing a flexible, confidential and non-bureaucratic forum within which the most important economies can exchange views, build consensus and issue directives to international organizations with a single voice.

However, the G20 is only a network: it has no permanent secretariat, no institutional capacity of its own, and no way to implement policies. It must rely on formal institutions for implementation; it has only indirect ways to follow up and ensure that its instructions are implemented by international organizations. Also, the G20 is limited by its lack of legitimacy and partial representation.

Second, the G20 Leaders’ network will have a competitive effect. It is seen by existing institutions as a competitor, wresting authority away from formal bodies such as the International Monetary and Financial Committee of the IMF, as well as the Development Committee of the World Bank. Although ostensibly a network with no formal authority, the G20 has nevertheless made some authoritative decisions, including the Special Drawing Rights allocation in the IMF and the upgrading of the Financial Stability Forum to the Financial Stability Board. At the same time, the G20 Leaders’ forum will compete with existing networks, including the G7 Finance Ministers’ network, and, of course, the G20 Finance network itself.

Finally, the G20 Leaders’ network may have a rebalancing effect on global governance and international organizations. By bringing emerging economies into ‘mainstream’ discussions of coordination and agenda-setting, the G20 may strengthen the influence of these economies in global governance. However, this will depend on how those new countries use the new forum (or side-forums) to strategize, share information and coordinate with one another. The G20 may also serve as a catalyst for the reform of formal international organizations, increasing the voice of emerging and developing countries there. For example, the Pittsburgh Summit Communiqué called for a further shift of five percent of voting power in the IMF from developed to developing and transition economies, as well as a similar shift of three percent in the World Bank.

The impact of the G20 on emerging economies could have one of two manifestations. The G20 may provide a forum in which the emerging economies can enjoy more power and influence in global agenda-setting. Alternatively, it might simply be an extended version of the G7, run by a small group of industrialized countries that use it to build greater support for their preferences. This happened in the early years of the G20 Finance group, when there was a significant degree of G7 ‘capture’ of the agenda.

The first scenario seems more likely for three reasons. First, emerging economies have used the last decade of G20 summits to learn how to use a forum of this nature to their advantage. Over time, emerging economies have adapted to the rhythm of G20 summitry, and have built up specialized capacity in their ministries of finance and central banks to deal with G20 issues. They have also grown more confident and assertive, using the network to put on the agenda issues of interest to them, including standards for sovereign debt restructuring and reform of the Bretton Woods institutions. In short, 10 years of practice in the G20 Finance network means that the emerging economies have come into the G20 Leaders’ network much better prepared for global summitry than they were in 1999.

The second factor is China. China has been taking G20 Leaders’ summits very seriously, mobilizing large teams, coordinating policy positions among its ministries, and undertaking considerable advanced preparation. Indeed, aside from the US, China may have the most resource-intensive approach to G20 summits. This suggests that the ‘G2’ will be operating at the heart of the network, and that US-China negotiations on key issues will be a central factor in shaping dynamics and negotiations with other members.

Finally, there is another new element in the mix that was not present when the G20 Finance network started operating: the BRICs (Brazil, Russia, India and China) summits. BRIC leaders have started meeting and coordinating positions in a summit of their own. For example, they issued their own communiqué prior to the London G20 Finance Ministers meeting in March 2009. In sum, with more informed, prepared and assertive emerging economies – and with the G2 and BRICs groupings operating on the side – it is unlikely that the G20 Leaders’ network will be a vehicle for G7 policy preferences, as was the early G20 Finance network.

Developing countries, unlike emerging economies, are unlikely to find their interests advanced by the G20 Leaders’ network. They may find themselves further marginalized and excluded from the ‘top table’ where decisions are being made. Some African leaders have noted that the G8 was so exclusive that they ended up being invited to give the G8 some legitimacy. But in the G20, many developing countries do not feel represented. They fear that G20 membership simply strengthens the claims of countries like Argentina, Brazil, India, Indonesia, South Africa, Saudi Arabia and China to play the dominant role in their particular regions, further reinforcing their exclusion. In practice, the onus of representing smaller poorer countries has fallen on the UN Secretary-General, the President of the World Bank and the Managing Director of the IMF, all of whom participate in the G20 Leaders’ meetings.

The emerging economies are unlikely to be strong advocates for the interests of the world’s small and poor countries. The emerging economies have been focussing on issues of special concern to them, such as increasing their voice and participation in the IMF and the World Bank. While developing countries would also benefit, in theory, by far the biggest beneficiaries will be emerging economies. Other emerging economies, and in particular the European area ‘transition economies,’ have had their immediate needs and interests well represented by their European neighbours in the G20 and the international financial institutions.

So far, the G20 has not delivered on promises to assist developing countries. The financial crisis that began in 2008 has created a ‘development emergency,’ which spurred G20 leaders in April 2009 to state: “We recognize that the current crisis has a disproportionate impact on the vulnerable in the poorest countries and recognize our collective responsibility to mitigate the social impact of the crisis to minimize long-lasting damage to global potential.” But the evidence to date suggests that actions in relation to international finance and instruments have not matched rhetoric in order to ensure that people in the poorest countries of the world do not suffer disproportionately from the financial crisis, and that their longer-term prospects are not blighted.

What should developing and emerging economies do? Emerging and developing countries will need to strengthen networks among themselves to lobby the G20, to coordinate their policy positions, and to build up their capacity in areas in which the G20 pronounces.

First, within the G20, developing and emerging economies should strengthen their own networks. Policy coordination within this forum is crucial. The leaders and finance officials of emerging economies should form a caucus of their own within the G20 to coordinate in a counterbalancing way. Even relatively weak countries could gain from quiet, informal coordination where countries in the network share a particular opposition to a dominant view: cases in point include the Finance Ministers of countries targeted in the High Indebted Poor Country Initiative, as well as the group of four African leaders who coordinated a shared vision for Africa’s new relationship with its donors.

The agenda-setting and consensus-building activities of the G20 are important. However, to fully use the G20’s agenda-setting power, developing countries may need to form parallel networks. For example, when the G8 seized debt relief and the idea of a new compact with Africa, it was lobbied not just by NGOs and the media, but also by (and through) other networks, such as the Commission for Africa, as well as a small network of African leaders. These parallel networks played key roles in shifting the agenda of the G8.

Second, outside of the G20, developing and emerging economies should build their own networks. Capacity-building and knowledge creation are stated objectives of many intergovernmental networks and international institutions. Yet, often in both informal networks and formal organizations, powerful states have simply sought to impose their own ready-made solutions in the name of capacity-building or knowledge creation.

The Networks of Influence study demonstrates how capacity-building and knowledge creation may work best in networks exclusively comprising emerging or developing countries, such as in East Asia’s finance networks. Key to their success has been shared purposes pursued within a network in which there is no one dominant country. A shared leadership (Japan and China) can be mutually restraining and permit smaller states to play more significant roles. Equally important to success is a gradual building of trust and cooperation that can lead to deeper shared purposes and the building of an institutional capacity in support of such purposes.

The lessons for developing and emerging economies in the G20 are that to negotiate with the G20 and those international institutions to which the G20 has assigned specific tasks requires knowledge, information and capacity that developing and emerging economies will have to build up. Intergovernmental networks can play a key role in this regard, and these networks must be carefully structured and resourced if they are to succeed.

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Leonardo Martinez-Diaz is deputy director of the Global Economy and Development at the Brookings Institution (Washington, DC).

Ngaire Woods is Professor of International Political Economy and Director of the Global Economic Governance Programme at University College, University of Oxford.

(Illustration: John Weber)
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