G20 (Group of Twenty) | Council on Foreign Relations

G20 (Group of Twenty)

China’s G20 Challenge

Overview China's leadership of the Group of Twenty (G20) in 2016 comes at a moment when the role of the G20 itself is being challenged by disappointingly slow global growth and a trend toward regionalism, epitomized by trade deals such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP), as well as China's own One Belt, One Road initiative. At the same time, issues such as climate change and growing inequality are creating a rift between industrial and developing nations (and between the rich and the poor within countries) that has hampered progress on global solutions. On April 6, 2016, the Maurice R. Greenberg Center for Geoeconomic Studies and the Asia Global Institute convened a workshop in Hong Kong with more than twenty scholars and market participants to assess the agenda facing the G20, why the group had fallen short of expectations in recent years, and whether China's leadership in 2016 provides an opportunity for renewal. Participants included experts from academia, industry, international organizations, and think tanks, and brought backgrounds in economics, international relations, technology, and law to the discussion. The workshop addressed questions about China's ability to reinvigorate the G20, in light of its struggle to deal with slowing growth, and manage a complex structural transformation. Participants also addressed whether the G20 is even the appropriate forum to reach consensus on the critical growth and reform challenges facing the global economy. The report, which you can download here, summarizes the discussion's highlights. The report reflects the views of workshop participants alone; CFR takes no position on policy issues. Framing Questions for the Workshop Prospects for the Global Economy What is the outlook for growth in the short term and what are the central risks facing policymakers? Are G20 countries using the available policy space to support sustainable growth? Are emerging markets at risk from renewed capital outflows? How concerned should we be with continued high levels of debt and leverage in the private sector? What is the outlook for global commodity prices, and what are the risks for the major exporters if prices remain low? What does recent financial market turmoil tell us about the nature of macroeconomic cooperation and the adequacy of policy coordination? Strengthening Global Trade and Development How can the institutions tasked with managing the global economy work more effectively together? Since 2007, global trade has increased more slowly than economic growth. What forces are at play and what should policymakers do to address these trends? With the failure of the Doha round, what more should be done to harmonize regional trade initiatives to strengthen global movement toward more open markets? Is there scope for new multilateral initiatives in trade? Are improvements needed to the rules governing global investment? What is the appropriate development agenda for the G20, and how it can best meet the growth aspirations of emerging markets? Addressing Global Financial Turbulence How should international financial institutions (IFIs) respond to the demands of rising economic powers for a greater say in the management of the global economy? After International Monetary Fund quota reform, what more needs to be done? As global capital markets continue to expand rapidly, do IFIs have the resources in place to address future financial crises? Are central banks sufficiently coordinating? What are the next steps in financial regulatory reform and cooperation? Investing in Infrastructure How can the G20 promote needed infrastructure investment? How can the new, and old, development banks promote additional private investment in infrastructure? How can China's objectives for boosting infrastructure investment be supported and integrated into a G20 agenda? How should the Asian Infrastructure Investment Bank coordinate with other development institutions? Setting China's Priorities for the G20 in 2016 Is the G20 still relevant? How effective has the G20 been in recent years? Has the agenda become too broad? What are the immediate priorities for strengthening the G20 process? Has the participation of emerging economies made a difference? The policy agenda for 2016 includes growth and income distribution, financial regulatory reform, financial safety nets, investment, trade, and development. What's new? Charts From This Report

Report by Greenberg Center for Geoeconomic Studies June 2, 2016 Greenberg Center for Geoeconomic Studies
G20 (Group of Twenty)

Global Economics Monthly: April 2016

Bottom Line: The case for strong and effective Group of Twenty (G20) leadership is as compelling as ever. But if the G20 is to be as effective in noncrisis times as it was in 2008–2009, it needs stronger Chinese leadership, working informally yet closely with the United States—a Group of Two (G2) within the G20. Debt policy is one area where China and the United States should cooperate this year. G20 in Uncertain Times Last week I attended two conferences in Asia on China’s leadership in the G20. My takeaway from the discussions: the global economy is increasingly interdependent and interconnected, and faces substantial headwinds that no country alone can effectively address. Concerns include weak global demand, shockwaves from falling commodity prices, and capital flight from emerging markets, as well as the systemic threats from income inequality and unbalanced development, terrorism, and climate change. It is hard to imagine a more consequential time. Most readers would agree that these challenges call for a strengthened global architecture, anchored by the reinvigorated G20. Yet the moment requires brutal honesty: in important respects, the prospects for effective policy coordination are the poorest in decades. Many leading countries are still repairing the damage from the Great Recession, limiting their economic capacity—and will—to respond to longer-term challenges. Perhaps more worrisome, Europe and the United States are experiencing a strong populist wave, particularly among voters frustrated by stagnant income growth and trade’s dislocations, which rejects the organizing principles and policies governing global markets and threatens to reverse a generation of globalization. If the G20 is to recapture the credibility it had when addressing the worst of the financial crisis in 2008–2009, it will require both growth-supporting policies and a stronger appeal to the general public on trade, integration, and strengthened international policy coordination. I do not wish to be entirely pessimistic here; the world has come a long way since the spring of 1973, when the U.S. treasury secretary met with the finance ministers of France, West Germany, and the United Kingdom in the library of the White House to discuss the international financial system after the collapse of the Bretton Woods agreement on fixed exchange rates. In creating the Library Group, the United States sought a more candid and informal grouping, one less dominated by European countries than the Group of Ten (G10). There were important subsequent efforts to include emerging powers in the discussion, such as the Willard Group, the Group of Thirty-Three (G33), and the creation of the G20 at the ministerial level in September 1999, but the Group of Seven (G7) remained the leading economic policy coordination body. It was not until 2008, when the G20 was raised to the leaders’ level, that the goal of “broaden[ing] the discussions on key economic and financial policy issues among systemically significant economies and promot[ing] cooperation to achieve stable and sustainable world economic growth that benefits all” was achieved. The G20 was extraordinarily effective in 2008–2009, coordinating economic policies, mobilizing emergency rescue funds, and reforming financial markets. It is not surprising that countries come together in times of crisis and coordinate to take actions that would not have occured under ordinary circumstances. But the effectiveness of the G20 has diminished as the sense of crisis has receded and national interests have reasserted. Coordination is easier in times of crisis; it takes more political will to coordinate without a concrete threat to stability. Perhaps this degree of coordination is good enough. In stable times, relationships are developed in international forums, knowledge is gained, and preparations are made, forming muscle memories that prepare for future crises. Incremental progress is achieved on common initiatives, such as rule setting and financial reform. There are at least three reasons why the world should aspire to do better. First, the world’s large, systemic challenges cannot defer progress until the next crisis. Second, there are important benefits from better integrating emerging powers into global decision-making. This year saw the long-overdue passage of International Monetary Fund (IMF) reform, the inclusion of the renminbi in the special drawing rights, and the creation of new regional development banks. But there is more that the emerging powers can and should do to lead in building consensus on critical issues. Third, the world may not be ready for the next crisis. Fiscal policy—the first line of defense against shocks—is constrained by politics and a legacy of deficits and debt. Central banks have aggressively eased monetary policy to support growth but face diminished effectiveness. IMF resources, while ample, have not kept pace with the growth in markets. And populist pressures risk distracting governments at the worst time. All of this has contributed to what former Treasury Secretary Robert Rubin recently termed “secular policy stagnation”—political systems not functioning effectively to address their respective policy challenges. China’s G20 Year For the G20 to be effective in coming years, China will need to move beyond its own perception of responsibility to represent the interests of emerging markets and take a broader leadership role, working closely with the United States on issues of shared interest. This is not a call for a new secretariat or formal grouping, but rather, “a close working relationship … that would supplement (not supplant) the existing steering committees, including the G-7/8 and the newly dominant G-20, and the multilateral institutions (notably the IMF and WTO),” as the economist C. Fred Bergsten explained in testimony before the House Committee on Foreign Affairs in 2009. Recent progress on climate change is one example of strengthened G2 progress. For September’s G20 summit in Hangzhou, China, an agreement is needed on measures to strengthen demand globally (a deal that was sought but failed to materialize at the February meeting on finance ministers and central bankers). China can also play a leading role in fostering better international cooperation on debt restructuring for countries experiencing repayment stress. My Policy Innovation Memorandum from 2014 called for a revamped Paris Club for official creditors, including China as a member, which would carry out transparent, efficient, and fair restructurings for countries such as Venezuela by recognizing internationally accepted principles of good-faith negotiation. Of course, crisis prevention is always preferable to crisis resolution, and Chinese leadership can be constructive in creating conditions for countries to approach the IMF at an earlier stage, without the stigma that international support usually carries. The G20 has already called for improving the terms of existing debt contracts. In addition, the G20 could revisit swap-line proposals that were floated during South Korea’s G20 presidency. Conclusion These are modest steps, reflecting a cautious view of progress that can be made in the coming year. The odds are already stacked against the G20, making breakthroughs on the big issues difficult to achieve in the current environment. New standing committees risk ossifying the process further. Flexible, informal efforts are more promising, including processes anchored on stronger partnerships among the most important countries in the G20, in order to create momentum within the entire group. This is a return to “variable geometry”—relying on different groupings of countries for different purposes—albeit one with an internal G20 component as well. At the center of this effort is a strengthened U.S.-China relationship. Other countries within the G20 may be understandably wary of China’s rising role, making effective communication critical. But such an informal arrangement appears essential to getting the G20 back on track. The G20 remains the preeminent global policy coordination body. It needs new ideas and leadership to move the global economy forward and resist the pressures to reverse course. China should play a central role along with the United States—a G2 within the G20—to support that process with ideas that are ambitious yet realistic, and that can be explained convincingly to the general public. Looking Ahead: Kahn's take on the news on the horizon Greece After months of delay, Greece aims to complete the first review of its 86 billion euro ($98 billion) bailout program by late April. If successful, the review could facilitate the negotiation on debt relief with official creditors, but a new IMF program remains in doubt. G20 The second meeting of G20 finance ministers and central bank governors will be held in Washington, DC, later this week. The last meeting in February did not generate bold policy initiatives, and it is questionable whether the April meeting will produce tangible commitments and actions. South Africa Despite surviving an impeachment vote, President Jacob Zuma will face continuing political struggles. This will hinder the government's ability to effectively tackle the country’s economic troubles, including a weak growth outlook, high unemployment rate, and accelerating inflation.

Report by Robert Kahn April 13, 2016
G20 (Group of Twenty)

A G20 Agenda for China: Meeting the World’s Infrastructure, Climate, and Development Needs

This week thousands of government officials, journalists, academics, and private sector and civil society representatives convene in Washington for the spring meetings of the World Bank and International Monetary Fund. But the most important event for global economic governance occurs later this year. And it won’t be in the United States. In September, China will host the eleventh summit of the Group of Twenty (G20) in the eastern city of Hangzhou, one of the country’s ancient capitals. The choice of location is appropriate. Hangzhou is a potent symbol of China’s meteoric rise—and of its grand ambitions. Eight centuries ago, it was the terminus of the Silk Road, described by Marco Polo as “the most beautiful and prosperous city in the world.” Today Hangzhou, which has seen its population swell from 2.4 to 8.9 million since 2000, is the headquarters of the internet giant Alibaba. President Xi Jinping is using the summit—and this year’s G20 chairmanship—to showcase China’s emergence as the world’s most dynamic economy and, alongside the United States, its most important leader. As at past G20 summits, the main focus at Hangzhou will be how to promote sustained global growth, which has proven elusive since the sluggish recovery from the global economic crisis that began in 2007-2008. Stimulating aggregate demand is increasingly important in the face of a slowdown in Chinese growth (to a still-enviable 6.9 percent), anemic performance in the EU and Japan, and contractions in other major economies including Brazil and Russia. At the G20 summit in Brisbane in 2014, leaders committed to add another two percent to the collective G20 GDP by 2018. In Hangzhou, they will assess progress toward this goal. But the G20 summit also offers China an opportunity to advance international cooperation on three urgent priorities. These include closing a yawning gap between the global demand for and supply of infrastructure financing; ensuring that G20 members not only implement but also ratchet up the climate change commitments they made in Paris in December; and advancing the world’s ambitious sustainable development agenda. Meeting global infrastructure needs. Satisfying the voracious global demand for airports, railroads, seaports, power plants, electricity grids, housing, waste management, and the like will require investments on an unprecedented scale. It will also necessitate massive technical assistance to help developing countries formulate “bankable” projects and to help ensure that infrastructure investments not only deliver growth but also contribute to positive political, social, and ecological outcomes. China’s main contribution to date has been promotion of its One Belt, One Road (OBOR) initiative—a modern-day “Silk Road” that promises vast investments in Asian infrastructure to connect national economies to global markets. The OBOR is to be underwritten by bilateral assistance and anticipated funding from the Asian Infrastructure Investment Bank (AIIB) whose creation Beijing spearheaded last year. However, meeting global infrastructure needs—estimated at $100 trillion over the next two decades—will require far more than the public funding available from wealthy donors and multilateral development banks (including not only the AIIB, but also the World Bank, Asian Development Bank, and others). Moving “from billions to trillions” will entail leveraging private finance, including from traditionally cautious institutional investors, who must be convinced that massive projects with up-front risks and uncertain, long-term payoffs are feasible and sustainable and that they will enjoy a measure of protection if things head south. China can begin to square this circle by working with its G20 partners on a financing model that meets infrastructure funding needs over the short, medium, and long term, including through co-investment by bodies like the International Finance Corporation and the Multilateral Investment Guarantee Agency, as well as the development of infrastructure finance as a distinct asset class. Such a pragmatic, multilateral approach would also help the United States and China put last year’s AIIB kerfuffle behind them. Fulfilling—and exceeding—the Paris pledges. Hangzhou will be the first G20 meeting since the breakthrough twenty-first conference of parties (COP-21) to the UN Framework Convention on Climate Change (UNFCCC), at which countries abandoned the fruitless quest for a legally binding successor to the Kyoto Protocol for a less formal “pledge and review” process. But these “intended nationally-determined contributions” (INDCs) offer little grounds for euphoria, and averting a global ecological calamity will require parties to the UNFCCC to ratchet up their commitments significantly before 2030. The G20, collectively responsible for three quarters of global greenhouse gas emissions, must use the Hangzhou summit to reaffirm their commitment to full implementation of the Paris accord—and to signal their determination to take additional, dramatic steps. In a promising sign, China has signaled that it is prepared to do precisely that. Meeting with President Obama on the margins of the Nuclear Security Summit on March 31, President Xi pledged to make climate change a major focus of the Hangzhou summit. He also promised, along with President Obama, to ratify the Paris Accord on Earth Day, April 22. Since its creation, the G20 has focused overwhelmingly on traditional financial and economic issues, restricting its involvement in climate to the elimination of fossil fuel subsidies. What Xi, Obama, and other leaders now recognize is that future growth must be “green growth,” and that the G20 will be critical in building the global political will to transition to a low-carbon economy. Underpinning this reorientation is the awareness that the shift toward climate-friendly policies and technologies can simultaneously advance innovation, competitiveness, and the health of both citizens and the planet. In the run-up to Hangzhou, the Xi government should mobilize G20 action on climate financing, which will require many multiples of the $100 billion that wealthy donor governments have committed to provide the Green Climate Fund by 2020. This will ultimately include new financial instruments, including green climate bonds, capable of attracting institutional investors, to support projects from reforestation to clean power plants. Sustaining global development. Since the economic reforms launched by Deng Xiaoping in 1978, the Chinese government has managed to bring some 680 million people out of extreme poverty. China’s dramatic transformation has reinforced the Xi government’s intent to place global development at the heart of the Hangzhou agenda. The timing, certainly, could not be better. Last autumn, the UN General Assembly unanimously endorsed a set of seventeen Sustainable Development Goals (SDGs), intended to drive development policy and investments through 2030. Achieving these ambitious objectives, however, will require high-level political attention of the sort only the G20 can provide. The G20 has already dipped its toe in development waters, of course, beginning with the Seoul summit in 2010. Indeed it has helped shift the development conversation away from official assistance—the traditional preoccupation of the Western Group of Seven (G7) donors. At Hangzhou, China and its G20 partners should endorse the core message of last July’s UN Financing for Development summit in Addis Ababa, which emphasized domestic resource mobilization—that is, funds from public and private sectors in developing countries themselves—to achieve the SDGs. Finally, China can use the Hangzhou summit to share its own experiences with urbanization. At the heart of China’s development has been massive migration from villages to cities. This pell-mell urbanization is increasingly the global norm. By 2030, the number of cities of more than a million will rise to 650. On balance, these trends are positive: cities tend to be hubs of innovation and generators of wealth. But the mega-cities of tomorrow may exacerbate inequality and spawn teeming slums, posing extraordinary challenges to governance and security. To help the G20 tackle this urban agenda, China should invite to Hangzhou the C40, a transnational network of major cities that former New York Mayor Michael Bloomberg helped create, to share lessons of how to manage the transition to an urban planet. Such a leadership role can also build political momentum going into HABITAT 3—the third UN Conference on Housing and Sustainable Urban Development—scheduled to take place in Quito, Ecuador, in October. To be sure, the G20’s priority on promoting global growth is well-placed. But as G20 summits have evolved in scope (and expectations have evolved in step), host countries can no longer afford to focus on a singular issue. Nor can global growth be addressed in isolation from other global challenges. The Hangzhou summit offers an opportunity to make progress on a host of issues that can facilitate sustained and sustainable growth over the long run.

Blog Post by Stewart M. Patrick April 12, 2016 The Internationalist

G20 (Group of Twenty)

G20 Hopes for a Cure

Five things we learned from this weekend’s G20 meeting of finance ministers and central bankers. A desire for better. The communiqué candidly acknowledges growing threats to the global economy, and signals a desire for stronger growth at a time when “downside risks and vulnerabilities have risen.” There also was recognition that monetary policy has carried most of the load in recent years, and going forward more responsibility rests on governments to accelerate long-promised fiscal and structural reforms. Other people’s money. The problem with a full-throated call for growth is that there is no evidence that any major country leaves the meeting with different policies than they entered the weekend with. The U.S. government would like to see more demand, but Congress is unlikely to go along with new spending proposals. German finance minister Schauble threw cold water on the idea of new debt financed spending ahead of the meeting, and Japan remains committed (for now) to future fiscal consolidation. Only China seems focused on fiscal expansion, though its unclear the extent to which the boost to demand from the budget goes beyond allowing the automatic adjustment of spending to the slowdown. One area of coordination was on infrastructure, where the G20 again called for more spending by the World Bank and other international financial institutions, but the amounts involved are likely to be small. China gets the benefit of the doubt. One question prior to the meeting was whether there would be an effort, led by the United States, to press the Chinese for stronger and more explicit commitments to support demand and avoid further depreciation. While Chinese officials did embrace these objectives and reportedly made strong statements in the meeting that they did not intend further devaluation, the communiqué largely avoided the type of specific commitments markets were hoping for. With China continuing to lose $100 billion in reserves each month, some will see this as opening the door for further depreciation against the dollar. The Plaza is still just a hotel. Prior to the meeting, there were a surprising number of analysts talking about the prospect of an agreement on currencies similar to the Plaza Accord of 1985. Such ideas were always fantastical. The G20 called for countries to refrain from cheapening their currencies to gain a competitive edge. They reaffirmed their policy that exchange rates should be market determined, and that governments should adopt policies aimed at domestic macro balance and not intervene in foreign instruments. This formulation has been in place since the yen weakened in the spring of 2013 following the introduction of Abenomics. There was a mild hint at future possible action in their commitment to consult closely on exchange markets and their reminder that markets can get it wrong, but no binding commitments. A possible new sovereign debt initiative. Among the issues for further action (buried at number 12) is to explore “market-based ways to speed up” the strengthening of existing sovereign debt contracts. Recall that last year, in the wake of Argentina litigation and concerns about holdouts in the Greek debt restructuring, the G20 endorsed the inclusion of new clauses in debt contracts that would make it easier to get broad participation in debt deals. That was a significant step, but there was always a question about what to do with the nearly $1 trillion in existing bonds that didn’t have the new clauses. In a paper I did with Greg Makoff, we argued that the G20 should take the lead in encouraging market-based transactions to swap old debt for new debt, and it now seems the G20 is open to going in this direction. This could be a meaningful step toward a better functioning debt market (but it wouldn’t help Venezuela). In sum, the communiqué is about as much as can be expected in the current environment—a commitment to stay the course, combined with a recognition of the risks and a promise to do more if needed. Tomorrow, we will see if markets take confidence from such commitments, or were hoping for something a bit bolder.

Blog Post by Robert Kahn February 28, 2016 Macro and Markets
Global

The World Next Week: November 12, 2015

Turkey hosts the G20 summit, tensions mount in Burundi and APEC leaders meet in Manila.

Podcast with James M. Lindsay and Robert McMahon November 12, 2015 The World Next Week
Global

The World Next Week: February 5, 2015

German Chancellor Angela Merkel visits the United States; the UN Security Council takes up Yemen's future; and the G20 finance ministers meet in Istanbul.

Podcast with James M. Lindsay and Robert McMahon February 5, 2015 The World Next Week
Europe

G20 Worries About Growth

The central message from the G20 Summit in Brisbane last weekend was the need for more growth, and there was a clear sense after the meeting that leaders are worried. David Cameron captured the mood with his statement that “red warning lights are flashing on the dashboard of the global economy” and his concern about “a dangerous backdrop of instability and uncertainty.” While Europe came in for the most criticism (Christine Lagarde rightly worries that high debt, low growth and unemployment may yet become “the new normal in Europe”) concerns about growth in Japan and emerging markets also weighed on leaders. In the end, though, the diplomacy conducted on the sidelines was more meaningful than the growth proposals put forward at the summit. Leaders put forward over 800 policy commitments that they assert will raise global growth by over 2 percent by 2018, but on first look there is little additional here that will actually be implemented. For the United States, for example, the commitments reflect the Administration’s fiscal agenda, including stimulus proposals with no real chance of congressional approval. In Europe, the commitments also reflect fiscal and structural measures that seem highly optimistic and at odds with the current policy paralysis there. Leaders also made sweeping commitments in the areas of trade and infrastructure, with a commitment to information sharing on best practices in infrastructure that makes a lot of sense but is unlikely to move the needle on global growth. Nonetheless, the IMF gave cover to leaders, stating the measures would meet the growth target “if implemented fully,” an assessment that was polite but not a service to the debate. Perhaps the peer pressure embedded in the process (leaders committed to review these policies next year), will produce better policies in the future, but the effort looks a lot like the IMF’s failed mutual assessment process (MAP) and I am not optimistic that it will work better at the leaders’ level. These summits also give a push to ongoing reform efforts, and the Brisbane iteration was no exception. There was endorsement of an anti-corruption action plan, focusing on improving transparency in financial flows (including importantly going after shell companies offshore). Leaders also called on countries to ensure that information is shared between domestic and international agencies, including law-enforcement bodies. Work on international tax avoidance was endorsed. Measures to end too-big-to-fail were advanced. These are good and important steps, and represent a lot of serious expert work leading up to the summit. The challenge now is to match words with deeds. From a U.S. perspective, the most important achievements came outside of the G20 meetings: an agreement with India to advance the WTO trade facilitation package agreed in Bali last year, apparent progress on the Trans-Pacific Partnership (TPP), and accords between China and the United States on limits of CO2 emissions and on IT trade. The energy shown on the trade agenda is heartening, but at the same time I worry that any agreement will be a tougher sell with the Congress than many expect. The administration’s request for trade promotion authority will be an early test. Overall, the G20 Summit and surrounding meetings did as much as could be expected, and perhaps a little more. At times of crisis, the G-20 is extremely effective at finding common cause and working together on crisis solutions. In calmer times, such as the present, agreement is harder to achieve. Despite this trend, let’s hope that the next G20 summit isn’t a crisis meeting.

Blog Post by Robert Kahn November 18, 2014 Macro and Markets
Financial Markets

The G-7, the G-20 and Exchange Rates

For those interested in policy coordination and exchange rate policy, last week was both entertaining and informative. U.S. Treasury official Lael Brainard’s G-20 background briefing last Monday, interpreted by some as signaling a green light to Japan for further yen depreciation in support of growth, was followed by statements that seemed to repudiate, support, then reinterpret the statement. The result was significant volatility in foreign exchange markets. I suspect that was the opposite of what was intended. Beyond the noise, events last week signal a policy environment where countries have great latitude to take measures that have significant effects on exchange rates. “Currency wars” is hyperbole, but it’s capturing something real. On the surface, policy appears unchanged. The G-7 statement on Tuesday reiterated established policy–a commitment to market determined exchange rates, a call to not target specific rates, and a willingness to act when there are excessive volatility and disorderly movements: We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate. --Statement by G-7 Finance Ministers and Central Bank Governors, February 12, 2013. The G-7 doesn’t always issue statements, so it was reasonable to assume that this time: (1) there was concern that the yen’s depreciation had gone far enough, for now, and that Japan shouldn’t use the bully pulpit to further talk down the currency or use foreign currency instruments to intervene; (2) concern that discussion about “currency wars” was building momentum; and (3) a desire to put down a marker that exchange rate policy coordination is primarily the domain of the G-7, not the G-20 (with U.S.-China exchange rate issues handled bilaterally). In this regard, it succeeded. The key paragraph from the G-20 communique, along with comments from participants, signaled a tamping down of the debate: 5. We reaffirm our commitment to cooperate for achieving a lasting reduction in global imbalances, and pursue structural reforms affecting domestic savings and improving productivity. We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments and in this regard, work more closely with one another so we can grow together. We reiterate that excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open. --G-20 communique, February 16, 2013. But context matters. In a world where the major countries are enacting unorthodox policies to spur their economies, where the new Washington consensus allows for a greater role for capital controls and other macro-prudential measures, and where the United States arguably has less leverage on countries’ policies, these words take on different meaning. My take is that, looking ahead, any country that can make a domestic case for measures that weaken the exchange rate can do so without concern for sanction from the G-7. The country shouldn’t talk down the currency, or use a foreign currency instrument that specifically targets exchange rates, but otherwise the door is more open than it has been for some time. Of course, the lines on what is acceptable are fuzzy and will be debated. When monetary operating systems differ, one country’s unorthodox monetary policy is another’s exchange rate intervention. For example, it appears unacceptable in any circumstance for Japan to buy foreign currency bonds for yen, while at the same time it’s ok for countries to buy mortgage backed securities in their own currency. Also, while fixing exchange rates is not allowed, China’s commitment to incremental, managed yuan appreciation remains acceptable. If we do have a new policy, it may be first seen in capital controls in emerging markets to stem hot money inflows. Large scale Quantitative Easing (QE) programs, though motivated by domestic considerations, have the result that some of the newly created money will flow overseas. This is particularly true when QE creates an expectation of currency depreciation. As these flows make their way to emerging markets, we should expect them to react. Speculation revolves around Korea and Taiwan, given both stated hot money concerns and the importance of their trade relationship with Japan. The hot-money story was well captured by Mexican Central Bank Governor Augustin Carstens in Singapore earlier this month (as reported by the Wall Street Journal): "Today my fear is that a perfect storm might be forming as the result of massive capital flows to some emerging-market economies and some strong performing advanced economies," Mr. Carstens said in his speech. "This could lead to bubbles characterized by asset mispricing. [Countries could] then face a reversal in flows as the major advanced economies start exiting their accommodative monetary policy stance." Carstens called for more work on when macroprudential policies should be used to address these concerns. Carstens has strong market credentials so when he warns of a problem, his words catch attention. It may be that, within the G-20, current monetary policies are broadly appropriate for domestic considerations, and there is little reason in the near term to expect an outbreak of competitive depreciation. But if pressures continue to build, it may become clearer that the debate over exchange rates has entered a new phase.

Blog Post by Robert Kahn February 19, 2013 Macro and Markets
International Organizations

The G20 Mexico Summit

World leaders will gather June 18-20 in Los Cabos, Mexico, for the Group of Twenty nations summit. Watch the Internationalist interview below with Enrique Berruga, the president of the Mexican Council on Foreign Relations, about the upcoming meeting and future of the group. Berruga says: 1. The G20 "has to deliver." With the global economy slipping back towards recession and the threat of a European crisis looming, "there’s no time to spare." Members of the International Monetary Fund have agreed to provide that institution with almost $500 billion, but "the question is what to do with that money" and how to "revamp" the global financial system to make it more stable. 2. The Mexican presidency will propose a climate fund to promote growth that is "more efficient and cleaner at the same time." 3. Mexico depends on the welfare of the other G20 members and therefore highly values the forum. "Mexico and Canada are the two more-addicted-to-the-G20 countries of them all," Berruga notes. http://youtu.be/9qzXGI2n_2Y Watch this video on youtube here. 4. While some believe that Mexico represents Latin America at the forum, Mexico really only represents its own national interest, and calls for such regional representation are overly idealistic. However, Latin American countries do ask their regional partners in the G20 (Brazil and Argentina in addition to Mexico) to push some of their agenda items. 5. For the first time, the Mexican G20 presidency convened a meeting of all G20 foreign ministers because the issues under debate are "so important that the foreign ministers have to be engaged." G20 summits generally gather finance ministers from member countries and yield a nonbinding communiqué without real commitments and deadlines. Including foreign ministers in the discussion will help add important diplomatic architecture to the debates and outcome document, in terms of follow through and substantive expertise. However, countries must avoid trying to replace the UN Security Council and take on issues beyond their remit, such as Syria. This video is part of The Internationalist, a series dedicated to in-depth discussions about leveraging multilateral cooperation to meet today’s transnational challenges.

Blog Post by Stewart M. Patrick June 13, 2012 The Internationalist
Climate Change

The G20 and Climate

Trevor Houser has a new working paper out that takes a careful look at what the G20 can and should do on climate change. He argues that the G20 is the wrong place to try and resolve the tough issues in the UN negotiations, at least right now. In particular, he writes, “ there is significant risk that marrying climate change and the G-20 will end up introducing the acrimony of the UN negotiations into G-20 discussions rather than bringing the civility of the G-20 to climate change diplomacy.” That sounds about right to me. I’d add that while many in the climate world seem to believe that the G20 has been a spectacular success, many folks in the international economics world don’t quite seem to see things the same way. Without the firm institutional foundation that climate experts mistakenly think already exists, though, it’s far from clear that the G20 is ready to tackle thorny issues like those blocking the climate talks. But Trevor also emphasizes the potential for the G20 to move forward on a host of concrete agenda items that are directly relevant to greenhouse gas emissions, including fossil fuel subsidies, development bank reform, exit paths as “green stimulus” ends, open markets for environmental goods and services, and global rebalancing. I can nitpick about some of the details – I’d have liked to see more on oil in the context of global rebalancing (though I’ll admit that the analytical foundation for working through that issue is poor), and I’m skeptical that the G20 is the right place to be hashing out how the World Bank should handle climate-friendly development – but overall, it’s a great piece of work. Everyone thinking about how we move forward internationally on climate change should check it out.

Blog Post by Michael Levi October 28, 2010 Energy, Security, and Climate