What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic Governance Forum and the Role of Asia

Cho, Yoon Je Working Paper What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic Governance Forum and the Role of Asia ADB Working Paper Series on Regional Economic Integration, No. 73 Provided in Cooperation with: Asian Development Bank (ADB), Manila Suggested Citation: Cho, Yoon Je (2011) : What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic Governance Forum and the Role of Asia, ADB Working Paper Series on Regional Economic Integration, No. 73, Asian Development Bank (ADB), Manila, https://hdl.handle.net/11540/2291 This Version is available at: https://hdl.handle.net/10419/109582 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/3.0/igo What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic Governance Forum and the Role of Asia Yoon Je Cho No. 73 | February 2011 ADB Working Paper Series on Regional Economic Integration ADB Working Paper Series on Regional Economic Integration What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic Governance Forum and the Role of Asia Yoon Je Cho + No. 73 February 2011 The original draft of this paper was prepared for the conference ―Reshaping Global Economic Governance and the Role of Asia in G20,‖ organized by the Asian Development Bank (ADB) and the Peterson Institute for International Economics, and supported by the Presidential Committee for the G20 Summit, Seoul, Republic of Korea, 25–26 October 2010. Author‘s note: I am grateful to Cyn-Young Park and Edwin M. Truman for valuable comments. I also gratefully acknowledge the support of ADB through Research and Development Technical Assistance project 7501, Asia's Strategic Participation in the Group of Twenty for Global Economic Governance Reform, and the Peterson Institute for International Economics. Any remaining errors are the author‘s. +Yoon Je Cho is Professor of Economics, Graduate School of International Studies, Sogang University, Republic of Korea. Email address : [email protected] The ADB Working Paper Series on Regional Economic Integration focuses on topics relating to regional cooperation and integration in the areas of infrastructure and software, trade and investment, money and finance, and regional public goods. The Series is a quick-disseminating, informal publication that seeks to provide information, generate discussion, and elicit comments. Working papers published under this Series may subsequently be published elsewhere. Disclaimer: The views expressed in this paper are those of the author(s) and do not necessarily reflect the views and policies of the Asian Development Bank (ADB) or its Board of Governors or the governments they represent. ADB does not guarantee the accuracy of the data included in this publication and accepts no responsibility for any consequence of their use. By making any designation of or reference to a particular territory or geographic area, or by using the term ―country‖ in this document, ADB does not intend to make any judgments as to the legal or other status of any territory or area. Unless otherwise noted, $ refers to US dollars. © 2011 by Asian Development Bank February 2011 Publication Stock No. Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Abstract iv 1. Introduction 1 2. Global Financial Crisis and International Monetary System 3 2.1 Demand-side Reform 5 2.2 Supply-side Reform 6 2.3 Historical Experience and Prospects 8 3. Global Economic Governance Reform and the G20 9 4. Reform of the International Monetary Fund 12 4.1 Resources 13 4.2 Lending Facilities 13 4.3 Surveillance 14 4.4 Governance/Management 16 5. Global Economic Governance and the Role of Asia 17 5.1 Take the Leadership of the Open Multilateral System 18 5.2 Take Greater Responsibility for Global Economic Issues 18 5.3 Contribute to the Developing World 18 5.4 Increase Voice in International Financial Institutions 19 5.5 Create New Institutions and Forums 19 6. Concluding Remarks 20 References 21 ADB Working Paper Series on Regional Economic Integration 25 Figures 1. Reserve Accumulation, 1995–2009 23 2. Foreign Investor Share in Stock Markets, 2006 24 Abstract The recent global crisis has reminded everyone of the importance of reforming the international monetary and financial system. The current system is no longer adequate to meet the needs of a complex, integrated world economy. Various proposals, both on the demand and supply sides, have been put forward, and include building a stronger global financial safety net, diversifying the supply of international reserve currencies, and so on. However, these proposals face trade-offs between desirability and political feasibility. In this situation, a practical proposal entails strengthening policy coordination among the major economies and reforming the International Monetary Fund. Success on both fronts depends heavily on reform of global economic governance and the effectiveness of the G20. Asia‘s representation in the G20, and its increased status, give both privileges and responsibilities. To meet these responsibilities, Asians should invest greater efforts in developing their intellectual leadership in global economic issues. Keywords: Global Economic Governance Reform, Reform of International Monetary System, Reform of the International Monetary Fund, The role of Asia in global economic governance JEL Classification: F42, F53, F55 What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic | 1 Governance Forum and the Role of Asia 1. Introduction The recent global financial crisis has been the outcome of, among other things, the mismatch between institutions and the reality of the market in the current global financial system. The world we are living in now is drastically different from that of a half century ago. So is the global financial market. Yet the basic design and operations of the international financial institutions (IFIs) are not now that different from then. The Bretton Woods institutions and the postwar international monetary order were framed by design of and negotiation between, primarily, the United States (US) and the United Kingdom during World War II. In the immediate postwar years, the US was the preeminent power overseeing operations of the international monetary system (IMS) through the International Monetary Fund (IMF); postwar reconstruction and development through the World Bank and bilateral economic aid; and liberalization of trade through the General Agreement on Tariffs and Trade, which became the World Trade Organization (WTO) in 1995. With the recovery of Europe and rapid economic growth of Japan, these countries became more assertive in global economic governance. But it was essentially the US— and Western Europe to a smaller degree—that made the global economic rules, with Japan largely a follower, usually content to go with the US position under the latter‘s nuclear umbrella. This scene started to change in the late 1980s and early 1990s. With the collapse of the former Soviet Union and consequent impact on Eastern Europe, over 400 million people were integrated into the free market economic system. With the opening and accelerated growth of the economy of the People‘s Republic of China (PRC) and India, nearly 2.5 billion people became fully integrated into the global economic system. That means, over the last 20 years, that we have seen economies with half the world‘s population integrate into the global economic system. In addition, globalization of national economies across the world, both advanced and developing, started to accelerate in the 1990s. Emerging economies accelerated their financial deregulation and opening, which led to rapid integration of their financial markets into the global market. This also led to massive—and volatile—capital inflows to these economies. The IFIs that were designed more than 60 years ago can no longer effectively meet the challenges of the global economy. While the global financial market has become integrated like a single market, there is no global central bank or global regulatory body. And while global imbalances have intensified, there has been no international instrument or mechanism to drive orderly adjustments of those imbalances. Only the global crisis could stimulate the adjustment, imposing heavy costs on national economies and the global economy. There also has been a rapid shift in the weight of economic power. In purchasing power parity (PPP) terms, the share of the Group of 7 (G7) countries in global gross domestic product (GDP) fell from nearly half to 40% in the last 10 years. During this time, the share of emerging market economies including the PRC (EMEs) increased rapidly. Virtually all projections predict that this trend will intensify. For example, the global GDP share of the ―BRIC‖ countries—Brazil, Russian Federation, India, and the PRC—was 20% in 2000. It has increased to 30% in 2010 and is expected to increase to nearly 40% 2 | Working Paper Series on Regional Economic Integration No. 73 by 2020. This means that we are facing not only inadequate international economic institutions to cope with global economic issues, but also an inadequate governance structure at those institutions. Therefore, the tasks facing us today are to reform (i) the IFIs—mandate, resources, management, and governance structure; (ii) the IMS (which usually refers to the rules and institutions for international payments) and the regulatory framework of the global financial system; and (iii) global economic governance. This last concept is difficult to define. It is abstract in the sense that there are no such governance bodies or organizations as we see in the case of national government. Global economic governance may be a combination of, at this point, international organizations based on treaty or agreement, rules (accounting, capital standards, etc.), norms, practices, and decision making for which rules, guidelines, and codes have arisen to manage the global economy. For the purposes of this paper, however, the main focus will be on the role of the Group of Twenty (G20) summit meetings, largely because at the G20 meeting in Pittsburg in 2009, leaders declared that the G20 would be a ―premier forum for our international economic cooperation‖. At the center of the rapid change in the distribution of global economic weight has been the rapid ascent of the Asian economies during the past half century. Japan took the lead in the 1950s–1960s, followed by Hong Kong, China; the Republic of Korea; Singapore; and Taipei,China in the 1960–1970s, with Indonesia, Malaysia, the Philippines, and Thailand in the 1980s. But the rapid growth of these economies did not pose a serious challenge to global economic governance issues, because they were relatively small economies (except Japan), and broadly under the influence of the US or Europe for various reasons, including security pacts. However, when the PRC and India woke up from their rather long hibernation and started to show staggering rates of economic growth, not only did the ascendency of Asia for this century become evident, but also did a change of international political and economic dynamics. Reflecting these shifts, and with the global crisis, a new global economic governance forum, G20, emerged. In this forum, there are five Asian countries (six if we include Australia) with a seat. This is in great contrast to the ―outgoing‖ forum, the G7, where only one Asian country was represented. Asians have now achieved greater participation in global economic governance. But will this achievement in the near future significantly change the nature of global economic governance, or the global economic order, or the way the IFIs will be run? Asians may be happy and proud to have greater representation in such a forum. But we Asians also have to recognize that we remain ambivalent about our global roles. We want to sit at the high table. We want to alter the rules of the game and have a stronger voice in global governance. But perhaps we still lack vision for the future global economic system. We also do not want to take any greater responsibilities or burdens. Asian countries so far have been passive followers of the international economic order, which was shaped by the West after World War II. They have grown fast in this global environment. Most Asian countries, including the PRC and Japan, are preoccupied with domestic growth and political stability, and lack the vision of how to shape the future global economic system. What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic | 9 Governance Forum and the Role of Asia collapse. This should include efforts at the least to strengthen policy coordination and collaboration among the major economies, and to reform the IMF to make it a more effective institution for bilateral and multilateral surveillance and as an international lender of last resort. The success on both fronts depends heavily on global economic governance reform and the role of the G20. 3. Global Economic Governance Reform and the G20 The global financial crisis provided momentum for the emergence of the G20 Summit as a premier forum for international economic cooperation. It is now clear that the problems of global imbalances, economic recession and recovery, and financial system reform cannot be discussed without involving EMEs. The G7 can no longer be the right forum. For example, the G7 summit meeting started in 1974, and it took 13 years for G7 leaders to agree to meet annually. But it took only one year for G20 leaders to expect to meet annually. This shows how much such a forum was needed. Any governance body is subject to a test of legitimacy, representativeness, and effectiveness—and the G20 is no exception. The G20, like the G7, is a self-proclaimed global economic governance forum. It is not formed on the basis of any international treaty or agreement. The G20 represents about 85% of the world‘s GDP, 80% of its trade, and 67% of its population (Heinbecker 2010). Countries from all continents are included in the G20. In contrast to the G7 membership, the G20 includes all the systemically important countries such as the large emerging economies of the PRC, Brazil, and India. Therefore, legitimacy and representativeness may not be an important hurdle for the G20 to function as a global governance forum. There is no clear reason why those 20 particular leaders should sit around the same table, but any other selection would invite similar questions and criticism. The G20 seems to be a reasonable grouping as it is balanced between advanced and emerging economies, and regionally. Effectiveness, however, could be a serious challenge. As the world may be unable to find an alternative to the G20, the G20 may well stay as the premier forum for global economic governance—for at least some time. Still, although it showed its usefulness as a forum for policy cooperation during the crisis, it is unclear whether it can continue to be an effective global economic governance body. The experience of the G7 suggests that G20 could become no more than an annual diplomatic event of leaders meeting without any significant outcome to address or resolve global economic issues. A meeting with 20 leaders will find it harder to be effective than one with seven or eight. As discussed, however, the global economy desperately needs an effective forum to coordinate economic policies among advanced and developing countries. It has been fortunate that the G20 emerged as a premier forum, and this could be the most profound evolution in global economic governance over the last couple decades. It represents the first adaptation of the global governance structure to reflect dramatic changes in the distribution of power since the end of the Cold War. It is also the only forum in which major established and emerging players meet in a setting of formal equality, unlike the two-tiered Security Council of the UN or the weighted voting in the IFIs. 10 | Working Paper Series on Regional Economic Integration No. 73 The G20 acknowledges that global governance cannot be done by the West alone. It can provide a framework in which established and emerging powers can work out an agreement and negotiate breakthroughs on pressing global economic issues. As Patrick (2010) says ―G20 has the potential to shake up the geopolitical order, introducing greater flexibility into global diplomacy and transcending the stultifying bloc politics that have too often hamstrung cooperation on global governance in formal, treaty-based institutions, including the United Nations.‖ The US proposed a mutual assessment of economic policies on the basis of a ―Framework for Strong, Sustainable, and Balanced Growth‖ at the G20 Summit in Pittsburg in September 2009. The US has subjected itself to peer reviews of the Organisation for Economic Co-operation and Development and the IMF. However, ‗‘this is the first time the US has agreed, even proposed, to submit itself to a structured, full peer review process‖ (Lombardi 2010) in a forum such as the G20 where, at least formally, the peers participate on an equal footing, globally. Through this framework, leaders pledged to devise a method for setting objectives, to develop policies to support such objectives, and to assess outcomes through mutual evaluation. The IMF‘s involvement has been sought in providing analysis on various national and regional policy frameworks and how they fit together. On the basis of country submissions, the IMF has been asked to point out inconsistencies and/or incoherence in national assumptions, to evaluate the mutual compatibility of different country frameworks and policies, and to determine the aggregate effects of various national frameworks and policies in the global economy. Once the entire framework process has been completed (the aim was by the Seoul G20 meeting), it could then be fully implemented annually. This mutual assessment of macroeconomic policies represents the first instance of multilateral surveillance on a global scale in recent history. Previously, such surveillance was, at best, handled within the closed circle of the G7. 3.1 The G20 Role in Global Governance System—A Kind of Legislature? There are three types of institutions in the global governance system: international organizations, government networks, and non-state actors (Mo 2010). The last includes transnational civil society groups and business associations. International organizations and government networks are both intergovernment organizations (IGOs). The main difference is the degree of formality. An international organization is the more structured of the two, that is, it has a constitutive intergovernment agreement and a secretariat. In contrast, government networks are often created without a formal intergovernment agreement and managed without a secretariat. According to this classification, the G20 is a government network in that it has neither a charter nor a secretariat. However, the G7/G8 and G20 are government networks whose jurisdictions overlap with those of existing international organizations that affect their decisions—they are supervisory government networks. Since such networks make decisions that existing international organizations are expected to implement, they should be viewed as a kind of legislative body with international organizations playing the role of executive agency. The fact that the G7/G8 and the G20 exist and have become more influential over time suggests that there is a demand in the global governance system for an effective supervisory and legislative body that is independent of international organizations (Mo 2010). What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic | 11 Governance Forum and the Role of Asia The G7 began as a kind of caucus, an informal group of legislators, with leaders reluctant to involve ministers and refusing to create a permanent secretariat. The global governance system demands a new organization that can work as a legislature and the G20, at this moment, is the available alternative. Some observers say that the G20 is already acting as a sort of legislature as it directs new rules for the global financial system and assigns tasks to the IFIs.2 The role of the IFIs has been limited to their own jurisdiction and, to a large extent, they have not been able to be effective even in their given jurisdictions. They have been marginalized in global economic governance and have failed to address crossjurisdictional issues such as financial stability (Stewart 1996, Varma 2002, Bryant 2010). Of course, the G20 faces difficulties in meeting this role. It is a group of ―systemically important‖ economies. Unfortunately, except for their economic impact, G20 members have little in common with respect to their ideologies and levels of development. This strengthens the need for the G20 to become more institutionalized in its process of making agreements, decisions, and overall implementation. A legislature has two core functions: legislation, and oversight of executive agencies. The G20 should provide the mandate and oversight of the operations of international economic organizations. It should also be a place where effective policy coordination among member countries happens. But for the G20 to meet these two functions, there should be innovative institutional design for the G20. One element of criticism for the G7/G8 summits was the lack of continuity and implementation monitoring. The G20 will have to demonstrate that it can do better. However, with the increased number of participants relative to the G7/G8 and the likely more comprehensive agenda of the G20, the preparation and follow-up process for the G20 summit will be more complex and demanding as it involves many more players and less continuity in the leadership. Furthermore, unlike the G7, which is a like-minded group, the G20 is extremely diverse in terms of political organization and ideology. Divergences among the G20 were masked during the first year of the crisis, as countries focused on the short-term, urgent goals of preventing global economic depression. As the world has started to come out of the crisis, the underlying diversity of opinions, interests, and perspectives in the G20 could reemerge. Diversity in the composition of the membership has the risk of hindering consensus building within the G20 as was evidenced in the Toronto and Seoul summits, and, therefore, hurting the G20‘s effectiveness as a global decision-making body. To build consensus and ensure effectiveness, the G20 requires creative intuitional innovations. One of them would be to set up a G20 secretariat or something similar (Linn 2 Mo (2010) says for example, ―In thinking about the meaning and significance of the G20 in the history of global governance, it is constructive to take a step back from current issues and ask ourselves what the founding fathers of the new global governance system would make of the G20. Seen from this constitutional perspective, it is clear that the G20 belongs to the legislative branch side of the global governance system. The G20 is already acting like a legislature as it legislate new rules for the world economy and tasks and evaluates international financial institutions.‖ 12 | Working Paper Series on Regional Economic Integration No. 73 2010, Carin 2010). At the finance minister level, the G20 chair is part of a revolving three-member management troika of ―sherpas,‖ consisting of the current chair, as well as the immediately preceding and succeeding chairs. The management picture at the leader level is less clear. The chair country now sets up a temporary secretariat for the duration of its term. The temporary secretariat coordinates the group work with technical support from the IFIs. But the G20 reliance on temporary and rotating arrangements is unlikely to last long as they already create the problem of work discontinuity and conflicts of interests. A rotating secretariat makes it hard for the G20 to maintain organizational coherence. The IMF can play a type of secretariat role for the G20; however, the agenda for the G20 could be broadened beyond macro-financial issues, such as energy and trade. Also, it may not be a good idea for the G20 to depend too much on the IMF for secretariat functions as this may compromise its ability to reform and monitor the IMF. However, concerns have been expressed that leaders would not want to see a bureaucratic structure take over the G20 summit or that the existence of a heavy secretarial structure could undermine the commitment by the national executive agencies to their engagement in the G20 summit processes. The aim is to manage and organize the summit to ensure continuity, institutional memory, and the implementation of plans and promises that are yet to be driven by member governments. The challenge will therefore be to keep any secretariat structure small, non-bureaucratic, and driven by member governments. Alternative options could be considered to ensure effective logistical and technical support for the G20, such as cross-posting of high-level staff from countries that have had the G20 presidency in the past to countries taking on this role. Stronger liaison contact points and implementation-reporting requirements could be established in the key international institutions that are tasked with follow-up on the G20 summits (Linn 2010). The G20 currently works as a ―committee as the whole‖ without select or standing committees. As the number of issues that the G20 takes up increases, the G20 may consider the use of standing committees to divide work among member countries. 4. Reform of the International Monetary Fund The IMF, as a key institution of the IMS, has not played an effective role in the surveillance of the global economy and financial market. The recent upgrading of the IMF by the G20 as the main institution for the surveillance of the global financial market and economy, and the willingness of some G20 countries to include the reform of the IMS in future agenda (Taylor 2010) suggest that the IMF should be substantially reformed to meet the challenges of this upgraded role. The areas to reform are resources, lending facilities, surveillance, and governance/management. Some of them have already been endorsed by the G20 and agreed to by member countries, but in some areas more innovative ideas must be sought. What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic | 13 Governance Forum and the Role of Asia 4.1 Resources The resources available to the IMF are far smaller than current global capital flows, and are a small fraction of total foreign reserves held by EMEs. The G20 summit meeting in London endorsed the move to increase IMF resources, including quota and borrowing capacity. The expansion and modification of the New Arrangement for Borrowing (NAB) by roughly $500 billion will approximately triple the total resources available for lending, from the current level of $250 billion. This will help the IMF to be more effective in meeting the financing gap to member countries when they face foreign-currency liquidity problems. Still, its total available resources may not be enough to support all the new lending facilities under discussion to strengthen the global financial safety net. They will still be less than half the foreign reserves of the PRC alone. Thus, a further increase in resources will be required to support the new lending facilities. To meet this need, perhaps, the current total quota size should also be doubled at the least.3 4.2 Lending Facilities The IMF introduced the FCL in 2009, in response to criticism that its lending facilities to address unexpected foreign liquidity crises faced by EMEs are too rigid and have costly policy conditionality. However, only three countries—Colombia, Mexico, and Poland— used FCL as they faced severe liquidity problems in the global financial crisis. Other EMEs, including the Republic of Korea, refused to use the FCL—though they also faced severe liquidity problems—since they were afraid of the stigma effect. The crisis highlighted three potential gaps in the global financial safety net. First, many countries and observers feel that the FCL is not as predictable and effective an instrument as it was initially planned to be. Second, there is a sense that the FCL caters to only a narrow group of countries and it offers too little to those well-performing countries that are ineligible for FCL. Third, the IMF does not have adequate instruments to act proactively and contain risks in a systemic crisis where several major EMEs, with varying degrees of concern about the stigma effect, may benefit from an early and clear signal by having access to financial resources to calm the market fears that stoke contagion. The IMF is not the only institution with a mandate to provide a global financial safety net. Central banks of reserve currency-issuing countries and regional financing arrangements, such as the Chiang Mai Initiative (CMI), also have a role to play. In the case of the Republic of Korea, the swap arrangement between the Federal Reserve and the Bank of Korea in 2009 was the most effective way to calm foreign exchange market instability. Furthermore, careful consideration will need to be practiced in balancing the goal of a more effective global financial safety net against potential moral hazard and the need for adequate safeguards. However, the above observations still call for a reform of the IMF‘s financing facilities. The IMF has recently introduced some innovations to its lending facilities, including the modification of the existing lending program as well as the introduction of new lending 3 Doubling of the IMF quota was endorsed by the leaders in the G20 Summit Meeting in Seoul. 14 | Working Paper Series on Regional Economic Integration No. 73 facilities (FCL and PCL, as discussed above). The IMF has also been discussing with G20 governments on how it might, in well-defined circumstances, use a multicountry swap line mechanism to offer liquidity unilaterally to a limited set of systemically important countries with strong policy records. This has not yet materialized. Moral hazards and resource constraints could be obstacles to the expansion of the global safety net through the reform of the IMF‘s financing facilities. However, given the strong and increasing demand for foreign reserves for self-insurance by EMEs, which threatens the stability of the IMS, these reforms are badly needed. The new facilities would be useful additions to the IMF lending armory and would enhance its capacity to act as international lender of last resort. Bilateral swap arrangements between central banks are only on an ad hoc and temporary basis, while they could be a very effective tool to stabilize the foreign exchange market in time of global financial crisis. Multilateralization and institutionalization of the swap arrangements through the IMF could be an effective way of building a global financial safety net, providing a global public good in the current global financial market environment where national economies are closely integrated and there is little distinction between national and global financial systems. To some extent, it may be the responsibility of the central banks that issue international reserve currency (especially the Federal Reserve) to provide the global financial system with some role of ―lender of last resort‖ themselves. If this is difficult to institutionalize due to these banks‘ national laws, it may be done indirectly through the IMF. These central banks could commit some resources under certain conditions to the IMF, with the IMF in turn providing a modality to use these resources for EMEs according to certain prespecified rules and conditions. 4.3 Surveillance Increased access to and expansion of the IMF‘s emergency lending facilities should be accompanied by greater and more effective surveillance of member country economies by the IMF. The IMF failed to establish itself as a credible monitor of the IMS or as a provider of credible surveillance over macroeconomic and financial sector policies of individual economies. Most severe criticism centered on the asymmetry of its surveillance—too harsh on small developing countries with a deficit while almost mute on advanced economies and surplus countries. The IMF surveillance should be strengthened in both the bilateral and multilateral arenas. The IMF should be able to clearly point out the problems in member countries, including advanced economies, which they can take seriously so as to make the necessary policy adjustments. For that, IMF leverage should be strengthened. This can be done only in a multilateral context such as the G20. The G20 should strengthen its function of mutual assessment of macroeconomic policies with the objective of ―strong, sustainable, and balanced growth.‖ Global economic surveillance should, indeed, be one of the G20‘s important roles. If the G20 mandates some significant role for the IMF in this process, strengthened peer pressure could give the IMF‘s bilateral surveillance more bite. Its multilateral surveillance, too, needs to be strengthened, both on macroeconomic policies What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic | 15 Governance Forum and the Role of Asia and financial market issues. The surveillance role of the IMF should be reinforced to more effectively address problems of exchange rates and payment disequilibria. In order to produce objective and neutral reports on the economic policies of individual countries, it would be necessary to insulate IMF staff from political pressures from their own board. The IMF needs to issue its own reports on exchange rate policies of major member countries, assessing a wider range of policies (including monetary, fiscal, and exchange rate) and financial sectors more frequently and independently. It should perhaps be the IMF management rather than the board that has the authority to approve such surveillance reports, to help keep staff from political pressure. The G20 countries have so far committed to a peer-review process for their economic policies and to a broadly defined policy objective. This does not mean that they have committed to specifically defined policy targets for which they can be held accountable in a multilateral forum. This is reminiscent of early IMF attempts, in the 1970s, to get systemically important countries to commit to a multilateral surveillance framework (Lombardi 2010). Ultimately, these countries distanced themselves from specific commitments and the IMF multilateral surveillance became simply a forum for exchanging views and information on each other‘s economic policies. With the G7, the IMF played an advisory role; but with the G20, its advisory role is more clearly spelled out, and, given the greater number of economies, needs to be much more strategic. Nevertheless, its role of surveillance is not clearly mandated yet. The G20 itself should implement effective mutual assessment on the macroeconomic and financial policies of member countries in the context of well-defined objectives set for the whole group. The IMF should be asked to provide the framework and technical support of this assessment, which should be based on some rigorous quantitative analysis.4 It may be asked to strengthen the ―score-keeping‖ capacity by allowing it to issue its own quarterly reports on exchange rate and other relevant policies (Subacchi and Driffill 2010). The IMF would thereby become more vigorously engaged in the mutual assessment process. This would help to increase its leverage in its bilateral surveillance of its major member countries. The success of mutual assessment or peer-review surveillance depends critically on two essential ingredients: competent staff to support the process, and a strong analytical foundation for studying macroeconomic interactions. It would, in fact, be difficult to find a better alternative to the IMF for this role. What, then, should the IMF do to fulfill this task? In essence, it should perform sharply defined multilateral surveillance, generate greater value and traction from bilateral surveillance, and integrate the two better. For that, it should do more analysis of outward spillovers, and generate new reports covering such spillovers from countries whose policies or circumstances affect the overall system. In order to increase the effectiveness of bilateral surveillance, especially with advanced economies and surplus countries, the IMF should try to reach broader audiences than it 4 At the Seoul Summit Meeting, the leaders agreed to enhance the mutual assessment process to promote external sustainability. Persistently large imbalances, assessed against indicative guidelines to be agreed by finance ministers and central bank governors, would warrant an assessment of their nature and the root causes of impediments to adjustment as part of the process. 16 | Working Paper Series on Regional Economic Integration No. 73 does now by producing more timely and topical reports, and increase engagement with stakeholders. By increasing the peer pressure of the global community through its timely and credible reports, it can improve the effectiveness of its bilateral as well as multilateral surveillance. Setting up an independent outside panel of experts, which can regularly evaluate and monitor the IMF‘s performance in such surveillance, could also be a helpful measure. 4.4 Governance/Management Enhanced surveillance by the IMF would mean increased IMF interventions in member countries‘ economic policies. However, unless changed from previous practice—one dominated by the traditional powers—it would be regarded by most EMEs as a worse outcome. Hence the most important element of IMF reform is radical change to its governance structure. There was wide criticism in the past that the IMF has been used as an instrument for industrial nations to achieve their policy objectives. It bailed out creditors of industrial countries and imposed very costly adjustment programs on debtor countries. Mistrust in the IMF is in part due to the perception that its surveillance has been asymmetric, with greatest attention paid to the weaker developing states or those in deficit, while the major deficit and surplus countries, including the US and the PRC, are given too much leeway. Mistrust is also in part due to its policy conditionality based on too much (or sometimes axiomatic) ―belief in the market.‖ This is not to say that the IMF has made no attempt to overcome this criticism. In recent years, it has in fact become more flexible in its approach to individual country situations and has somewhat shifted its position from emphasizing quick adjustment to expanded financing as a possible alternative to rapid adjustments (Adam, Collier, and Vines 2010). Nevertheless, further efforts are needed to establish trust among all its member countries, and this can be done most effectively through rebalancing of the governance/management structure of the institution. There are two major problems with present governance arrangements: the composition and voting structure of the board, and the appointment of management and those at senior positions. The board is too heavily weighted toward industrial countries, especially in Europe, and it fails to give sufficient weight to EMEs and developing countries, which are of course seriously affected by its decisions. Currently, the quota share of advanced economies is more than 60% (US 17.6%, Europe 31%). EMEs and developing countries‘ share is about 39%. However, Europe‘s voice can be potentially much bigger than this figure suggests, due to the current composition of the executive board. At the G20 Seoul Summit it was agreed that 6% of the quota share would be transferred from Europe to EMEs, though the formula to achieve this has not been fully sorted out. It was also agreed that two seats of the executive board currently occupied by Europe would be transferred to EMEs. However, these two measures would not change the governance structure significantly—the US and Western Europe would still dominate decision making through various rules (including the ―85% rule‖ and the veto power of the US) and through the composition of the executive board. Would EMEs, say Asian EMEs, welcome strengthened IMF surveillance with this unchanged governance structure? Unlikely. What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic | 17 Governance Forum and the Role of Asia The governance structure should be more radically changed, for without it, the IMF risks becoming marginalized as an agent solely for a group of industrial countries. (As noted, there is a large asymmetry between the governance structures of G20 and the IMF.) Ideally, the formula for IMF quota reallocation should give emerging economic powers more representation than their current economic weight (which is based on nominal GDP) justifies. However, as this would be difficult to implement in reality, other measures would have to be sought. One way would be a reconfiguration of the composition of the board of directors, cutting the number of European seats—a single eurozone seat could be an option. Another way would be to have the G20 finance ministers meeting as a steering committee for IMF governance, determining the direction of major policy issues. If the G20 became a decision-making ministerial body within the IMF itself, it would reduce the asymmetry both between global economic governance forums and the governance structure of the IMF. This would also help reassert the centrality of the IMF‘s role as a key institution in the IMS. This proposal has been featured in a recent advisory report to the IMF Managing Director (the ―Fourth Pillar‖ report) and has been put forward by a number people, including Mervyn King, governor of the Bank of England (Lombardi 2010, King 2010).5 The progress of reform of the IMS, including increased allocation and wider use of SDR as international reserve assets, could be facilitated when this kind of significant change in the IMF governance structure occurs. On the second problem, that of appointments, the selection process for managing director should become more transparent and be open to qualified non-Europeans, including those from EMEs. Appointments to senior positions should be more meritbased, and better balanced between staff from advanced economies and EMEs. (Similar changes will be required for the World Bank.) 5. Global Economic Governance and the Role of Asia Although the global financial crisis prompted the G20 Summit, it was, more fundamentally, a decision to integrate rising powers, mainly from Asia, into the multilateral system. In the G7/G8, only one Asian country, Japan, was represented; in G20, five (six with Australia). So the question now is: If Asia secured proper representation for itself in the global governance system, what would it do with it? Does it have a clear vision—or any vision—for the future global economic system? Under the current global economic order, indeed, Asian economies developed quickly and prospered, and to a large extent have been the main beneficiaries of the postwar settlement, taking full advantage of it. Successive trade rounds of the General Agreement on Tariffs and Trade (which significantly reduced trade barriers of industrial nations while allowing developing countries some preferential treatment), as well as the export-oriented growth strategy of most Asian nations, made their rapid growth and industrialization possible. Increased capital flows and investment (direct and portfolio) by the West accelerated their growth potential. Further back over the last four centuries, the world has been dominated by Western ideas, knowledge, ideology, philosophy, 5 Mervyn King, speech at the University of Exeter, 19 January 2010. 18 | Working Paper Series on Regional Economic Integration No. 73 technology, and vision. Many Asian countries were colonized by the West. Even now, Asians have been passive followers of the West‘s global economic order. So, would the global order that Asians want be different from the current one? If so, how? We Asians have long wanted to sit at the high table, but do we have the ideas, vision, skills, or knowledge to lead the global economy? The answer to these questions is not yet clear—at least to me. Asians might have wanted to increase their economic weight and participation in global governance, but we may not want more global governance: we want to be recognized as an important power, to have a greater share and a bigger voice in international organizations, but not necessarily either to be more governed by global rules, regulations, and institutions, or to take a leadership role and accept greater responsibility for addressing global issues. But increased representation at the G20 by Asian nations not only gives a greater privilege, but also presents a great responsibility. How should Asia respond? 5.1 Take the Leadership of the Open Multilateral System Asian countries should lead the efforts to maintain and contribute to further strengthening the open multilateral system. This system has been a lynchpin of Asian success since World War II. Most Asian economies are very open, depending heavily on international trade and investment. Maintaining an open system will be a key to their future success. The West‘s leadership of the multilateral system has been dwindling recently, and Asia should now assume this mantle. Asia will suffer more than any other region if the world allows the system to fail. 5.2 Take Greater Responsibility for Global Economic Issues Asian countries should take greater responsibility for global economic issues, concomitant with their economic status. Increased economic power and status should come with increased responsibility. Asian countries are still preoccupied with their own domestic issues. (The PRC, for example, is reluctant to assume a leading role as its priority is still heavily skewed toward domestic political stability and economic growth.) Asian countries should play a more active role in economic policy coordination and collaboration even though this may temporarily slow down their export growth. Asian economies have already grown too big to continue relying on exports for growth. Their growth strategy should rely more on expanding domestic demand through macroeconomic policy adjustments (including exchange rate policies) and structural reforms. 5.3 Contribute to the Developing World Asian countries should more actively contribute to the developing world‘s economic performance. They have emerged as industrial powers from poor, developing countries and this experience is still embedded in the current generation. They should share this experience not only within the region but also across the world. Wealthier Asian What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic | 25 Governance Forum and the Role of Asia ADB Working Paper Series on Regional Economic Integration* 1. ―The ASEAN Economic Community and the European Experience‖ by Michael G. Plummer 2. ―Economic Integration in East Asia: Trends, Prospects, and a Possible Roadmap‖ by Pradumna B. Rana 3. ―Central Asia after Fifteen Years of Transition: Growth, Regional Cooperation, and Policy Choices‖ by Malcolm Dowling and Ganeshan Wignaraja 4. ―Global Imbalances and the Asian Economies: Implications for Regional Cooperation‖ by Barry Eichengreen 5. ―Toward Win-Win Regionalism in Asia: Issues and Challenges in Forming Efficient Trade Agreements‖ by Michael G. Plummer 6. ―Liberalizing Cross-Border Capital Flows: How Effective Are Institutional Arrangements against Crisis in Southeast Asia‖ by Alfred Steinherr, Alessandro Cisotta, Erik Klär, and Kenan Šehović 7. ―Managing the Noodle Bowl: The Fragility of East Asian Regionalism‖ by Richard E. Baldwin 8. ―Measuring Regional Market Integration in Developing Asia: a Dynamic Factor Error Correction Model (DF-ECM) Approach‖ by Duo Qin, Marie Anne Cagas, Geoffrey Ducanes, Nedelyn Magtibay-Ramos, and Pilipinas F. Quising 9. ―The Post-Crisis Sequencing of Economic Integration in Asia: Trade as a Complement to a Monetary Future‖ by Michael G. Plummer and Ganeshan Wignaraja 10. ―Trade Intensity and Business Cycle Synchronization: The Case of East Asia‖ by Pradumna B. Rana 11. "Inequality and Growth Revisited" by Robert J. Barro 12. "Securitization in East Asia" by Paul Lejot, Douglas Arner, and Lotte SchouZibell 13. "Patterns and Determinants of Cross-border Financial Asset Holdings in East Asia" by Jong-Wha Lee 14. "Regionalism as an Engine of Multilateralism: A Case for a Single East Asian FTA" by Masahiro Kawai and Ganeshan Wignaraja 26 | Working Paper Series on Regional Economic Integration No. 73 15. "The Impact of Capital Inflows on Emerging East Asian Economies: Is Too Much Money Chasing Too Little Good?" by Soyoung Kim and Doo Yong Yang 16. "Emerging East Asian Banking Systems Ten Years after the 1997/98 Crisis" by Charles Adams 17. "Real and Financial Integration in East Asia" by Soyoung Kim and Jong-Wha Lee 18. ―Global Financial Turmoil: Impact and Challenges for Asia‘s Financial Systems‖ by Jong-Wha Lee and Cyn-Young Park 19. ―Cambodia‘s Persistent Dollarization: Causes and Policy Options‖ by Jayant Menon 20. "Welfare Implications of International Financial Integration" by Jong-Wha Lee and Kwanho Shin 21. "Is the ASEAN-Korea Free Trade Area (AKFTA) an Optimal Free Trade Area?" by Donghyun Park, Innwon Park, and Gemma Esther B. Estrada 22. "India‘s Bond Market—Developments and Challenges Ahead" by Stephen Wells and Lotte SchouZibell 23. ―Commodity Prices and Monetary Policy in Emerging East Asia‖ by Hsiao Chink Tang 24. "Does Trade Integration Contribute to Peace?" by Jong-Wha Lee and Ju Hyun Pyun 25. ―Aging in Asia: Trends, Impacts, and Responses‖ by Jayant Menon and Anna Melendez-Nakamura 26. ―Re-considering Asian Financial Regionalism in the 1990s‖ by Shintaro Hamanaka 27. ―Managing Success in Viet Nam: Macroeconomic Consequences of Large Capital Inflows with Limited Policy Tools‖ by Jayant Menon 28. ―The Building Block versus Stumbling Block Debate of Regionalism: From the Perspective of Service Trade Liberalization in Asia‖ by Shintaro Hamanaka 29. ―East Asian and European Economic Integration: A Comparative Analysis‖ by Giovanni Capannelli and Carlo Filippini 30. ―Promoting Trade and Investment in India‘s Northeastern Region‖ by M. Govinda Rao What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic | 27 Governance Forum and the Role of Asia 31. "Emerging Asia: Decoupling or Recoupling" by Soyoung Kim, Jong-Wha Lee, and Cyn-Young Park 32. ―India‘s Role in South Asia Trade and Investment Integration‖ by Rajiv Kumar and Manjeeta Singh 33. ―Developing Indicators for Regional Economic Integration and Cooperation‖ by Giovanni Capannelli, Jong-Wha Lee, and Peter Petri 34. ―Beyond the Crisis: Financial Regulatory Reform in Emerging Asia‖ by Chee Sung Lee and Cyn-Young Park 35. "Regional Economic Impacts of Cross-Border Infrastructure: A General Equilibrium Application to Thailand and Lao PDR" by Peter Warr, Jayant Menon, and Arief Anshory Yusuf 36. "Exchange Rate Regimes in the Asia-Pacific Region and the Global Financial Crisis" by Warwick J. McKibbin and Waranya Pim Chanthapun 37. ―Roads for Asian Integration: Measuring ADB's Contribution to the Asian Highway Network‖ by Srinivasa Madhur, Ganeshan Wignaraja,and Peter Darjes 38. "The Financial Crisis and Money Markets in Emerging Asia" by Robert Rigg and Lotte Schou-Zibell 39. ―Complements or Substitutes? Preferential and Multilateral Trade Liberalization at the Sectoral Level‖ by Mitsuyo Ando, Antoni Estevadeordal, and Christian Volpe Martincus 40. ―Regulatory Reforms for Improving the Business Environment in Selected Asian Economies—How Monitoring and Comparative Benchmarking can Provide Incentive for Reform‖ by Lotte Schou-Zibell and Srinivasa Madhur 41. ―Global Production Sharing, Trade Patterns, and Determinants of Trade Flows in East Asia‖ by Prema–Chandra Athukorala and Jayant Menon 42. ―Regionalism Cycle in Asia (-Pacific): A Game Theory Approach to the Rise and Fall of Asian Regional Institutions‖ by Shintaro Hamanaka 43. ―A Macroprudential Framework for Monitoring and Examining Financial Soundness‖ by Lotte Schou-Zibell, Jose Ramon Albert, and Lei Lei Song 44. ―A Macroprudential Framework for the Early Detection of Banking Problems in Emerging Economies‖ by Claudio Loser, Miguel Kiguel, and David Mermelstein 45. ―The 2008 Financial Crisis and Potential Output in Asia: Impact and Policy Implications‖ by Cyn-Young Park, Ruperto Majuca, and Josef Yap 28 | Working Paper Series on Regional Economic Integration No. 73 46. ―Do Hub-and-Spoke Free Trade Agreements Increase Trade? A Panel Data Analysis‖ by Jung Hur,Joseph Alba,and Donghyun Park 47. ―Does a Leapfrogging Growth Strategy Raise Growth Rate? Some International Evidence‖ by Zhi Wang, Shang-Jin Wei, and Anna Wong 48. ―Crises in Asia: Recovery and Policy Responses‖ by Kiseok Hong and Hsiao Chink Tang 49. "A New Multi-Dimensional Framework for Analyzing Regional Integration: Regional Integration Evaluation (RIE) Methodology" by Donghyun Park and Mario Arturo Ruiz Estrada 50. ―Regional Surveillance for East Asia: How Can It Be Designed to Complement Global Surveillance?‖ by Shinji Takagi 51. "Poverty Impacts of Government Expenditure from Natural Resource Revenues" by Peter Warr, Jayant Menon, and Arief Anshory Yusuf 52. "Methods for Ex Ante Economic Evaluation of Free Trade Agreements" by David Cheong 53. ―The Role of Membership Rules in Regional Organizations‖ by Judith Kelley 54. “The Political Economy of Regional Cooperation in South Asia‖ by V.V. Desai 55. ―Trade Facilitation Measures under Free Trade Agreements: Are They Discriminatory against Non-Members?‖ by Shintaro Hamanaka, Aiken Tafgar, and Dorothea Lazaro 56. ―Production Networks and Trade Patterns in East Asia: Regionalization or Globalization?‖ by Prema-chandra Athukorala 57. ―Global Financial Regulatory Reforms: Implications for Developing Asia‖ by Douglas W. Arner and Cyn-Young Park 58. ―Asia‘s Contribution to Global Rebalancing‖ by Charles Adams, Hoe Yun Jeong, and Cyn-Young Park 59. ―Methods for Ex Post Economic Evaluation of Free Trade Agreements‖ by David Cheong 60. "Responding to the Global Financial and Economic Crisis: Meeting the Challenges in Asia" by Douglas W. Arner and Lotte Schou-Zibell 61. ―Shaping New Regionalism in the Pacific Islands: Back to the Future?‖ by Satish Chand What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic | 29 Governance Forum and the Role of Asia 62. ―Organizing the Wider East Asia Region‖ by Christopher M. Dent 63. ―Labour and Grassroots Civic Interests In Regional Institutions‖ by Helen E.S. Nesadurai 64. ―Institutional Design of Regional Integration: Balancing Delegation and Representation‖ by Simon Hix 65. ―Regional Judicial Institutions and Economic Cooperation: Lessons for Asia?‖ by Erik Voeten 66. "The Awakening Chinese Economy: Macro and Terms of. Trade Impacts on 10 Major Asia-Pacific Countries" by Yin Hua Mai, Philip Adams, Peter Dixon, and Jayant Menon 67. ―Institutional Parameters of a Region-Wide Economic Agreement in Asia: Examination of Trans-Pacific Partnership and ASEAN+α Free Trade Agreement Approaches‖ by Shintaro Hamanaka 68. ―Evolving Asian Power Balances and Alternate Conceptions for Building Regional Institutions‖ by Yong Wang 69. ―ASEAN Economic Integration: Features, Fulfillments, Failures and the Future‖ by Hal Hill and Jayant Menon 70. ―Changing Impact of Fiscal Policy on Selected ASEAN Countries‖ by Hsiao Chink Tang, Philip Liu, and Eddie C. Cheung 71. ―The Organizational Architecture of the Asia–Pacific: Insights from the New Institutionalism‖ by Stephan Haggard 72. ―The Impact of Monetary Policy on Financial Markets in Small Open Economies: More or Less Effective During the Global Financial Crisis?‖ by Steven Pennings, Arief Ramayandi, and Hsiao Chink Tang * These papers can be downloaded from: (ARIC) http://aric.adb.org/reipapers/ or (ADB) www.adb.org/publications/category.asp?id=2805 What do Asian Countries Want the Seat at the High Table for? G20 as a New Global Economic Governance Forum and the Role of Asia The current international monetary system is no longer adequate to meet the needs of a complex, integrated world economy, and it requires reform. However, current proposals face trade-offs between desirability and political feasibility. Ensuring successful reform depends heavily on an effective role for the G20, a new global economic governance forum with Asian representation. But a seat at the top economic table gives both privileges and responsibilities for Asians. About the Asian Development Bank ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries substantially reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to two-thirds of the world’s poor: 1.8 billion people who live on less than $2 a day, with 903 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration. Based in Manila, ADB is owned by 67 members, including 48 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance. Asian Development Bank 6 ADB Avenue, Mandaluyong City 1550 Metro Manila, Philippines www.adb.org/poverty Publication Stock No. Printed in the Philippines