Call it the summit of “compartmentalizing”. When President Obama and fellow leaders convene in St. Petersburg, their toughest challenge will be to focus on economic recovery while ignoring the elephant in the room: namely, the rift between host Russia and the United States on a possible U.S. military strike to punish Syrian use of chemical weapons. Setting aside diplomatic acrimony—and personal animosity between Obama and Russian President Vladimir Putin—will not be easy. But it is imperative to ensure coordinated multilateral support for global growth and meet past G20 pledges.
Nearly five years have passed since President George W. Bush convened the first, emergency meeting of G20 leaders. Over the past half-decade the G20 has done remarkable things. It prevented the Great Recession from becoming a “Great Depression by injecting capital into the world economy. It held the line against protectionism, adopting “standstill” provisions against new trade barriers. It negotiated shifts in the “shares and chairs” governing international financial institutions, to the benefit of emerging economies like China. It endorsed stiffer capital requirements for banks under Basel III and new regulations for systemically important financial institutions (SIFIs). Finally, it began the slow, painful process of global rebalancing between the world’s chronic surplus and deficit countries.
Much work remains to be done, however. Global recovery has been anemic, financial markets are volatile, and the G20 has promises to keep. In July, the World Economic Outlook of the International Monetary Fund (IMF) downgraded projections for growth in both advanced and emerging economies. Within the OECD, Japan has emerged as a bright spot, but the success of “Abenomics” will require painful structural reforms. In the United States growth has been steady if unimpressive and equity prices have surged, but long-term fiscal problems cloud the future. The Eurozone is barely treading water, making little dent on unemployment despite recording its first positive growth after six quarters of contraction. The BRICS, meanwhile, have entered a less heady era, though they will continue to outpace advanced economies. The overall result is a “three-speed recovery,” with growth slower than desirable everywhere. Nothing dire. But nothing to write home about, either.
What is clear is that restoring global demand is beyond the capacity of any single country or region. The United States, as U.S. officials ceaselessly repeat, can no longer serve as the consumer of first and last resort. At the same time, the benefits of unconventional monetary policy, as pursued by the Federal Reserve, the Bank of Japan, and the Bank of England, appear to have run their course. Getting the world moving again will require reinvigorating multilateral cooperation within the G20.
Effective during crisis years, the G20 has since lost momentum. Its solidarity has eroded, as economic trajectories and preferences of its members diverge. St. Petersburg offers a chance for G20 leaders to regain their mojo and restore global confidence. They must throw their collective political weight behind credible, practical policy initiatives that go well beyond central bank cooperation to address the chronic obstacles to global growth and employment.
Here are four priorities for leaders:
- Keep focused on global rebalancing: The belated appreciation of China’s currency and the narrowing of many countries’ current account imbalances has left many complacent. In fact, this respite may be a temporary function of cyclical factors, including low demand in advanced economies. As growth picks up, familiar divisions between persistent net importers (including the United States) and exporters (notably China and Germany) will reassert themselves. Chinese President Xi Jinping, attending his first G20 summit, pledges to encourage consumer spending, but China continues to pursue investment-led growth. Meanwhile, imbalances persist in the Eurozone, with high German savings and profligacy in the periphery.G20 leaders in St. Petersburg must recommit to correcting these chronic imbalances.
- Adopt a robust system of peer review: Rebalancing will require accountability. In 2009 in Pittsburgh, the G20 agreed to an innovative Mutual Assessment Process (MAP). This was intended to allow members to evaluate the impact of national policy choices (regarding exchange rates, say, or fiscal matters) on growth in other countries. Unfortunately, the MAP has remained a toothless. “We need a more serious peer review” process, declares IMF First Deputy Managing Director David Lipton. A reformed MAP, allowing G20 members to hold one another accountable for negative spillovers of their domestic choices, must become the concern not only of finance ministers but G20 leaders themselves. Getting G20 leaders to agree to such a commitment in St. Petersburg would be a “huge” achievement, argues Lipton.
- Complete the IMF governance reforms: With strong U.S. backing, the IMF Executive Board agreed in 2010 to reallocate the Fund’s quota shares and governing board chairs to benefit emerging nations. It also agreed to double the IMF’s coffers. At stake in these “essential” reforms, declares Managing Director Christine Lagarde, is nothing less than the “legitimacy and effectiveness” of the IMF. Alas, these reforms have languished, as the U.S. House and Senate refuse to ratify the implementing legislation, despite its revenue-neutral nature. (The proposal would merely reallocate an existing $65 billion U.S. commitment under the New Arrangements to Borrow to the U.S. national quota). So doing, Congress threatens the credibility of U.S. global financial leadership. President Obama cannot “deliver” U.S. ratification in St. Petersburg, of course. But he must persuade his partners that he can convince Congress to abandon its disastrous course—and soon.
- Lead on global trade: Finally, the G20 can give a political push to global trade liberalization. As Caroline Atkinson, Deputy U.S. National Security Advisor for International Economics, notes, the World Trade Organization (WTO) has recently taken a back seat to narrower free trade arrangements like TPP and TTIP. In St. Petersburg, she says, G20 leaders may have their last opportunity to save the moribund Doha Round, by laying the groundwork for a successful WTO ministerial in Bali this December. That may be a bridge too far. But the G20 must do more than promise to avoid protectionism. One practical step would be improving trade facilitation, by committing to remove inefficient and excessive customs and other procedural impediments to commerce.
Russia’s government has placed other items on the St. Petersburg agenda, reflecting the proliferation of G20 working groups. These include global development issues, including food security, financial inclusion, and infrastructure financing. Picking up on the G8 summit in June, the agenda also includes steps to cooperate on tax evasion and avoidance, as well as “fighting corruption.” (The latter is a challenge the hosts are presumably familiar with, given Russia’s miserable rank—133 out of 176 countries surveyed—in Transparency International’s 2012 Corruption Perceptions Index). Working groups will also discuss financial regulation, promoting energy security, eliminating “wasteful” fossil fuel subsidies, and reducing commodity market volatility through transparency. Each of these worthwhile issues may deserve a line or two in the communique.
But few merit deliberation by G20 leaders themselves. They should focus their limited and valuable time on discussing those few topics that demand a policy breakthrough at the highest level—and for which no other global institution has the authority or competence to take the relevant decisions.
The St. Petersburg summit will not occur in a geopolitical vacuum, of course. Syria—including the wisdom and legitimacy of a possible U.S. strike, and congressional authorization for it—will dominate media headlines. The leaders, too, will find the subject irresistible. To address such issues of high politics, as I’ve written, it’s time for the G20 to consider adding a parallel foreign ministers track (alongside its meetings of finance ministers and central bank governors). Until then, such conversations will likely occur in informal “sidebars,” outside the plenary sessions. The juxtaposition of these two separate conversations—one on economics, the other on security—reflects a reality of global interdependence: even strategic rivals have a common stake in an open, stable financial and trading system. There is no alternative, as the cliché would have it, but to walk and chew gum at the same time.