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G20 in Seoul: The Search for Consensus

Monday, November 1st, 2010
G20 plaza

The noise-making of demonstrators from outside the tall security fence surrounding the venue of the summit of leaders of the world’s 20 most important economic powers in November will probably not be heard by the summiteers meeting inside the spacious Convention and Exhibition Center in Seoul’s high priced, highrise Gangnam district, south of the Han River that bisects the capital.

The demonstrators may believe passionately that they have much to protest over the spectacle of powerful men in dark suits, flanked by solicitous aides and surrounded by bodyguards, promulgating guidelines for the economic future of billions of people, most of them far less fortunate than they. Inside the conference halls, the world leaders gathering at the G20 will be focusing on protests, far more politely stated but also more relevant, from within their own elite group over policies needed to head off the kind of recession that caught the world by surprise two years ago and never seems to go away.

For South Korea, the first country ever to host a G20 get-together that’s not a member of the G7, the group of seven top economic powers, the pressure to make the summit a terrific success is overwhelming. By the time the world leaders are ready to give their farewell press conferences after two days of meeting, the summit will have met the highest expectations of South Korea’s President Lee Myung-bak, the summit host, if only they can agree on a consensus on critical points that papers over deep differences. The South Korean government, as C Fred Bergsten, director of the influential Peterson Institute for International Economics for all its 29-year history, observed, “is entrusted with a monumental responsibility” as the G-20 “starts to segue into steering the world economy for the long run rather than simply as a fire-fighting brigade.”

SaKong Il, the former finance minister who is chairman of the presidential committee on the summit, is still more emphatic about the need for the summit to go down in history as not just a success but a moment of glory in South Korea’s rise as one of the world’s major economic powers. “We feel a great responsibility to make the Seoul summit another success,” he said after meeting Larry Summers, President Barack Obama’s economic guru. For the summit to accomplish this goal, the global leaders will have to endorse newrules, adopted by financial regulators at a session in Basel, Switzerland, in September, in which they sought to guarantee “never again” would the world plunge into financial chaos as a result of the lack of discipline of banks without enough money to protect themselves and their clients from disaster. At the same time, the G20 would like to come up with a more or less credible resolution of tremendous imbalances in global trade for which artificial exchange rates, such as that of China’s currency, are partially responsible.

The deal at Basel, under the aegis of the 27-member Basel Committee on Banking Supervision, calls for banks to have twice as much capital on hand in case of sudden losses. That makes eminent sense to most finance ministers as well as economists, but needs the formal endorsement of the G20 to take effect. That’s likely to happen – but not without disagreement and controversy. The agreement “represents a significant and welcome increase to the capital that banks will be required to hold,” said a commentary in the Financial Times, but “worries that a rapid transition will cut lending and deepen the global recession mean the full increase will be delayed until 2019.” Such a protracted “phase-in period is unnecessary and potentially harmful,” said the FT commentary. “Instead, a much shorter period should be implemented with regulators forcing banks to meet the new requirements by going to the market to raise fresh capital.” The banks say such stringent demands would inhibit them from lending as much as needed to stimulate a sluggish world economy – and they have the backing of powerful Basel committee members, notably Germany.

The question of global imbalances may be even more difficult. Fred Bergsten, in a statement to U.S. House of Representatives’ Ways and Means Committee, blamed China’s “substantially undervalued” currency for the spiraling U.S. trade deficit. He called on the U.S. “to mobilize a multilateral coalition to press China to let its currency rise by the needed amount” – and stressed the role of the G20 in making that happen. “This currency realignment is an integral part of the global rebalancing strategy adopted by the G20 and laid out in detail as part of its new Mutual Assessment Process,” Bergsten testified. China and all other G20 governments, he said, had already agreed on this basic strategy – and “further development and implementation of the program is to be discussed, and hopefully adopted, at the next G-20 summit in Korea in November.”

If the chances of the G20 resolving this worsening problem seem slim, world leaders are still more than likely to come up with diplomatic double-talk that will somehow postpone real solutions. “A framework is one of the main purposes,” SaKong explained, sitting beside Bergsten in a media session at the Peterson Institute in Washington. In the quest for ways “to weed out global imbalances,” he said, “there are different approaches and different views.” All of them would be discussed throughout a process in which finance ministers and their aides would be scrutinizing all the details before the two-day gathering of world leaders. “All countries will submit policy templates,” said SaKong. “In the end, we will present a comprehensive action plan. We will come up with the Seoul action plan. At the end, they will all agree.”

Bergsten expressed concern that “some imbalances are going in the wrong direction” and that “imbalanced growth could be one of the aspects of the Seoul summit.” SaKong, however, was confident that South Korea, as the host, would avoid signs of bias in a debate in which South Korea, as an exporting nation that is often in the center of trade disputes with the United States and Europe, has a clear self-interest. “Our government’s attitude is we are given a rare opportunity to play a global leadership role,” he said. “If we work toward national or regional interest, we will not fulfill our opportunity.” The whole point, said SaKong, is “for us to make G20 institutionalized and strengthened.” Answering “skeptics who say G20 is in the midst of crisis,” he went on, “that’s another reason why we have to make G20 a success if you are serious aboutG20’s future.” So far, he argued, “G20 is working.”

As far as South Korea is concerned, the overwhelming priority is on dealing with the danger of more shocks with worldwide repercussions. The Korean ambassador to the United States, Han Duk-soo, credits the G20 with having seen “the potential of increasing capital volatility” as “a serious risk to the global economy.” With the G20 committed to developing ways “to help countries deal with such problems,” he told a forum in Washing ton, “Korea has listed the strengthening of the global financial safety net as a major item on the agenda” for the summit. In that context, he cited four principles on which to build the safety net – “certainty, sufficiency, freedom from stigma and minimization of moral hazard.” A global safety net, he said, “must work as a forward-looking crisis prevention mechanism rather than a crisis resolution mechanism.”

Ambassador Han, who rose through the ranks of the finance ministry to the post of finance minister and then prime minister before going to Washington, outlined what he said was a “multi-layered network of facilities, national, regional and global,” to meet all contingencies.

“The national layer should have each country deploying prudential macro-economic policies to prevent the contagion of international financial and economic problems,” he said. “Effective national economic and financial policies provide the first and most important line of defense for countries facing external shocks. If needed, a bilateral swap-line should be considered to stabilize the financial markets.” The second layer, he said, “comprises regional financial safety nets” such as regional arrangements set up in Europe in response to the euro area financial crisis and the Chiang Mai initiative of the Association of Southeast Asian Nations. Now, he went on, “We need to find the most effective way for the IMF and regional alliances to cooperate through coordinated surveillance or co-financing.”

Han urged expansion of the IMF’s role in establishing a third layer “of global financial safety nets.” The IMF’s “various liquidity provision facilities make up the global layer,” he said, but “some countries feel the flexible credit line is not sufficient.” As a result of cooperation between the G20 countries and the IMF, said Han, the IMF’s executive board in August increased the duration and amount of available credit in order to establish a “precautionary credit line.” The new credit line, “for countries that have sound economic policies but still may have some moderate vulnerabilities,” said Han, provide “insurance against financing shocks.” At the same time, he called for “more efforts to ward off crises preemptively” – a task that the G20 summit in November could advance by discussing “additional measures to enhance global financial safety nets” and “more cooperation between regional financial safety nets and the IMF.”

A crucial issue when it comes to the IMF role is that of “quota reforms” – that is a huge shift from economically dominant countries to those that are regarded, in the polite language of the statement issued by leaders at the most recent G20 summit in Toronto, as “emerging market and developing countries,” referred to in the lingo of official explanation as “EMDCs.” In numerous behind- the-scenes discussions, “some emphasize a shift of at least 5 percent to dynamic EMDCs while others underline the shift from overrepresented to under-represented countries.” An overview of the summit noted that “adjustments will have to be made” – more polite lingo, in this instance hinting at inevitable disagreement on which the leaders somehow will have to come to an understanding if not precise terms.

Debate on the IMF role reflects the need for the G20’s, as they are called, to consider the plight of poor and struggling economies. “In the wake of the financial crisis, shrinking economies and volatile prices for food and energy are taking their toll on the developing world,” according to a position paper on the summit. “The world cannot continue to tolerate the depth of poverty” and “the level of inequality that persists between nations.” That’s “both a moral issue and an economic imperative,” said the paper, explaining why it’s “appropriate for development to occupy a central place in the G20 agenda.” This summit hopes to go beyond the platitudes of the Toronto summit, where leaders “mandated the G20 to address development issues, recognizing that reducing poverty and narrowing the development gap are essential to the larger agenda of achieving rebalanced global growth and complying with our international commitments to achieve the Millennium Development Goals by 2015.”

The question is whether the G20 can get beyond those high-sounding phrases and get down to the difficult task of turning goals into action that participating leaders will not only endorse but sincerely attempt to fulfill. Somehow the notion that the summit could actually end in failure is simply unthinkable. Skeptics may ask whether the participants are sincerely committed to fulfilling promises made at the summit, and the issue of global imbalances in just about every imaginable statistic is near-insoluble. Interestingly, the summit is happening just as U.S. pressure on China to raise the exchange rate of its currency from an artificially low level is reaching a level of alarming intensity in the American Congress. That’s a dangerous sign when considered in the context of Chinese sensitivity over American navy vessels cruising into the South China Sea and the Yellow Sea on exercises or just on port calls.

By the time the leaders have bid their final farewells, however, we may be confident they will somehow have signed off on a document that will give an impression of cooperation if not unity. “We are quite satisfied to gather all these countries together to give it a try,” said SaKong. “You have to evaluate the results based on total importance You cannot get the whole thing done.”

Fred Bergsten had no doubts. “They are very likely to reach a consensus,” he said. “They are quite skillful in covering over agreements. It’s for the outsiders to assess whether the consensus was adequate for dealing with the problems.”

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