Kirton: The G20's Global Governance

John Kirton
Co-director, G20 Research Group, University of Toronto
Leuven, Belgium, November 8, 2012

Lecture delivered as part of an international workshop on “The G20 and the Democratic Challenges of Global Governance,” Leuven Centre for Global Governance Studies, University of Leuven, November 8, 2012. This lecture is based substantially on John Kirton (2013), G20 Governance for a Globalized World (Ashgate, Farnham, in press).

Introduction

Four years ago today, on this very day, the finance ministers and central bank governors of the world’s 20 systematically significant states gathered in Sao Paulo, Brazil, for their annual autumn meeting. It was a significant event in several ways. It came amidst the worst financial and economic crisis since the 1930s, and the vivid memories of all the social, political and human tragedies that had come in its wake. The Sao Paulo meeting marked the 10th anniversary of a forum that had been founded to address the Asian-turned-global financial crisis of 1997 to 1999. It was the first meeting to prepare for the first gathering of G20 leaders, taking place in Washington DC one week later on November 14-15, 2008. The Sao Paolo meeting was attended, unusually, by the leader of the host country, the much loved Luiz Inácio Lula da Silva, who brought to the G20 all the democratic legitimacy that came from his enormous popularity at home and his success in reducing economic and social inequality there.

Now, four years later, we have had many more G20 ministerial meetings and seven G20 leaders summits. The G20 has become, in its own proclamation and in actual practice, the centre of global economic governance for the world. It is time to ask, has G20 governance worked — for you, for its member countries and institutions, and for the people of the world as a whole. “Yes it has” is the simple answer, for that is what the evidence clearly shows. But it should and can work better in the future, to meet the growing global needs it was created and crafted to address.

To show the success of G20 governance thus far we first need to go back to the beginning, to see why and how it was formed in 1999, what it was designed to do and how well it did it during its first ten years. Then we need to see why the G20, alone among all the competing international institutions, was chosen to leap to the leaders’ level in 2008 to address the greatest economic crisis of modern times. Third, we need to see what its seven summits have done, both in their individual accomplishment and according to the standards by which such bodies should be assessed. And finally, we need to see what the G20 should and could do in the future, and how you can help bring that potential to life.

Before beginning, two basic points must be made. First, while some might believe that politicians can and should solve all their problems, simply by getting together at home or abroad, such perfectionism is not possible in the real world. We thus need to assess the G20 primarily by what it has done, not left undone, by its performance relative to its competitors, and above all according to the central mission it was created to achieve. Second, if you think back on how you lived your own life over the past week — what you were doing, and who you were doing it with every minute, of every day — you will probably agree that each person on the planet in his or her professional and personal life reserves the right to meet with someone without everyone else, or even anyone else on the planet, having a right to be there, or actually showing up. The same is true of the G20. If democratic legitimacy or effectiveness depends on everyone “being there” — the more the merrier — then we would have been forced to deal with the global problems of the past four years and going forward by relying on summits of the United Nations General Assembly, an idea that almost everyone rejected from the start when the great crisis struck on September 15, 2008.

The Beginnings of G20 Governance, 1999–2008

The Asian-Turned-Global Financial Crisis 1997–99

The vision of what became today’s G20 was born in Toronto, Canada, on June 21, 1988, when the leaders of the Group of Seven (G7) major market democracies at their annual summit concluded, in a passage worth quoting in full:

Nine years later, in 1997 this same G7 had won the Cold War, brought the democratic revolution to the world and unleashed the globalization that would connect so many and create the twenty-first century world, with all its opportunities and uncertainties, that we take for granted today. But when G7 leaders met for their annual summit in Denver, with now democratizing Russia added to the club, they failed to foresee what summit host Bill Clinton would soon call the first crisis of the twenty-first century. A few weeks after the G7’s Denver Summit the financial system of Thailand collapsed, followed by Indonesia in September, Korea in December and then Russia in August 1998, the U.S. almost with the collapse of hedge fund Long Term Capital Management (LTCM) in September, Brazil in October and Turkey and Argentina in the following years.

In response, two G7 finance ministers — Paul Martin of Canada and Larry Summers of the United States — concluded that they needed a new kind of international institution to govern a new, intensely interconnected world. Its members would, of course, contain the countries with the most relative capability within their still legally sovereign, territorial, exclusive states. But now they would also be the ones with the greatest relative connectivity, because if one of them failed at home, even the most capable country in the world would soon fail — just like LTCM had in Clinton’s post–Cold War victorious United States. These systematically significant countries would no longer largely be just the established powers of the long dominant European-Atlantic world but equally the emerging powers arising in Asia, the Americas and elsewhere. And overwhelmingly they would be democracies, for open polities were needed to govern effectively and legitimately an economically and socially open, interconnected world. Thus Summers and Martin chose as G20 members the G8 powers of the U.S., Japan, Germany, Britain, France, Italy, Canada, Russia and the all democratic, ever expanding European Union. They also chose what are now known as the BRICS group of China, India, Brazil and South Africa (with Russia already a member). They then added financially afflicted Indonesia, Korea, Turkey and Argentina along with Saudi Arabia, Mexico and Australia.

To add representativeness and expertise and to help the G20 fulfill its two core missions, Martin and Summers added two universal, intergovernmental organizations from 1944 — the International Monetary Fund (IMF) to help ensure global financial stability and the World Bank to help globalization work for the benefit of all, including each and every one of you.

The G20 instantly became the centre of global governance two years later, when al Qaeda terrorists attacked what proved to be an acutely vulnerable United States on September 11, 2001. Amidst the flaming ruins of the World Trade Center in New York and the Pentagon in Washington, neither the United Nations nor the IMF–World Bank twins could function. Only the G20 did, meeting in Ottawa, Canada in October to stop terrorist finance. Despite their multidimensional diversity, G20 members united to confront this existential threat to civilization. In doing so the most powerful but now most vulnerable member, the United States, became dependent on Saudi Arabia, Indonesia and Turkey to learn how Islamic financial networks worked and how they could be closed.

In the following years, the G20 proved it was a genuine group of equals in other ways. The chair passed from co-creator Canada following the first three meeting to the emerging country members of India (2002), Mexico (2003), China (2005), South Africa (2007) and Brazil (2008). And in the G20 forum of equals they got what they had long sought and been denied at the Atlantic-controlled IMF and World Bank: an agreement to shift the voting rights and financial responsibilities from the established to the emerging powers, in order to broaden the burden of governing a now globalized world.

The Birth of G20 Summitry, 2008

The G20 thus stood as a global governance centre of proven performance when the Atlantic-turned-global financial crisis struck, again in the heart of New York City, with the collapse of investment bank Lehman Brothers on September 15, 2008. Eight days later, speaking at the United Nations General Assembly, French president Nicolas Sarkozy suggested that a response should come from a special summit of the G8, with a few countries such as China, India and Brazil added. U.S. president George Bush thought first of a response from the G7, which was also the favourite of the world’s second most powerful country, Japan. But very quickly, amidst cascading financial collapse and intense high-level diplomacy, the G20 won — because it already existed and because the departing Bush administration knew that it worked, as it had at the start in that traumatic autumn of 2001. Thus the same countries with the same mission met, now at the leaders’ level, in Washington DC on November 14-15, 2008. It was a vindication of the vision of Paul Martin who as Canadian prime minister from 2004 to 2005 had campaigned hard to have the G20 meet at the leaders’ level to prevent the crises that a globalized world would inevitably bring. He had gotten every one of his G20 colleagues to agree but one — George Bush.

As in the autumn of 2001, no other international institution of global reach was able or willing to meet at the leaders’ level to confront the great crisis then underway. So in judging whether G20 summit governance has worked, one need only ask: are you and the world better off now than you were on November 13, 2008, and better off than you would have been if the G20 had not acted, and the global economy had been governed as it was from October 1929 to 1944?

G20 Summit Governance, 2008–2012

At their first summit in Washington the G20 leaders focused on their first core mission of ensuring financial stability, by addressing the cause and the cure of the current crises — domestic financial regulation. They easily agreed that it must be strengthened and internationally harmonized and supervised. To do so they intruded deeply into the sovereignty of member states and the private sector, to dictate how much bank executives should be paid and how accountants should do their job. If you can go to a bank machine today and get your own money out, that is in part because G20 summit governance has worked for you from the very start.

The leaders at Washington were smart enough to know that they could not save the global economy in one gathering of less than 24 hours, for about 8 hours of which they were asleep. So they called a second summit for a quick four and a half months later. When they met in London on April 1-2, 2009, the global economy was in free fall, descending faster than it had during the depths of the Great Depression in the 1930s. The leaders encouraged their central banks to provide massive monetary policy stimulus and their finance ministers to provide massive fiscal stimulus. They added a new package of $1.1 trillion, directed importantly at the hard-hit emerging and developing countries in the world.

At London the G20 agenda broadened to embrace not just macroeconomic policy but also several other subjects, notably climate change control. Macroeconomic policy was not added because America’s Barack Obama or Germany’s Angela Merkel ordered a reluctant China and India to deal with it or else. Rather, it arrived because in the lead-up to London, British prime minister Gordon Brown as host reached out to developing countries to ask what they wanted the G20 leaders to do. From Africa the answer was not development, as Brown and his advisers had expected but, to their surprise, climate change control. Brown’s Commonwealth colleagues from Africa spoke eloquently about the melting mountaintops of once ice-covered Mount Kilimanjaro, and asked the G20 to control climate change before it was too late.

Less than six months later, G20 leaders gathered in Pittsburgh for their third summit in less than a year. With the crisis contained they shifted from defence to offence. They declared that henceforth the G20 would be the permanent, premier forum for their international economic cooperation. They created the macroeconomic Framework for Strong, Sustainable and Balanced Growth with its Mutual Assessment Process to make it work. They agreed to transfer at least 5% of the quota at the IMF from the old established powers to the new emerging ones. And they agreed to phase out fossil fuel subsidies in the medium term. If they can deliver that promise — only one of the 128 produced by the Pittsburgh Summit — they will save the world’s hard-pressed taxpayers and treasuries over half a trillion dollars, cut 10% of greenhouse gas emissions, save the lives of poor mothers and children cooking with primitive cheap fuel, and cut the corruption that flourishes when government subsidies are at stake.

For their fourth summit in Toronto in June 2010, a new financial crisis loomed — this time from Europe out of Greece. To give everyone the confidence that the G20 would have the money to bail out Greece if need be, America adjusted and advanced country members agreed to cut their soaring fiscal deficits in half as a percentage by gross domestic product (GDP) by 2013 and stop the growth in their accumulated debt as a percentage of GDP by 2016. They agreed to create the Development Working Group to pioneer a new approach to development and create new financial safety nets for emerging and developing countries. And Toronto began to bring civil society into G20 governance, with the birth of the Business 20 (B20), the Young Entrepreneurs Summit (YES) and a meeting of G20 parliamentarians.

Thus Toronto marked the great transition in G20 summit governance in several ways. It moved G20 leaders from the relatively easy task of reacting to a great global economic crisis already underway to preventing the next one now starting in tiny Greece — the Thailand this time — before it infected the rest of Europe to become an all Eurocrisis and before it went global to damage all. In response, as both a reactive and preventive forum, the G20 leaders moved from the relatively easy task of discretionary stimulus spending on a large scale to the relatively difficult, politically painful task of reducing discretionary spending by cutting the money sent to the interest groups and citizens who had sent and kept the G20’s democratically elected leaders, and even the other two of China and Saudi Arabia, at the political top. It marked a move from G20 summit governance led, chaired and hosted by the great imperial powers of the past — the United States and United Kingdom — to a smaller if still a G7 power, Canada, and, given the de facto Canadian-Korean partnership seen on development and financial safety net, to one where emerging, especially Asian-Pacific democracies, would have an equal place. It also marked the emergence of the troika, with the U.S., Canada and Korea in the lead in 2010. It finally marked the advent of G20 governance by and not just for the people, as both of the B20, YES and Parliamentarians 20 democratically brought civil society into G20 governance in an institutionalized and ongoing way. With the first ever meeting of G20 labour and employment ministers in April 2010 — a legacy of Pittsburgh — it marked the move of G20 governance into ministerial meetings beyond finance, into a serious focus on microeconomic, structural issues beyond financial regulation into directly generating jobs, especially for the young, to combat the increasing economic inequality throughout the G20. More broadly, with the G8 summit taking place near Toronto immediately before, the Toronto G20 defined the cooperative division of labour and mutual reinforcement between the old G8 summit and the new G20 one.

At Seoul in November 2010, G20 leaders agreed on the second state of IMF quota reform and on a larger, more automatic redistribution to take place in a few years. They also agreed on a Basel III regime of strong capital and liquidity ratios for financial institutions. And they created the Seoul Development Consensus, embedded in 25 commitments on development and employment.

At Cannes, France, in November 2011, a long one year later, G20 leaders were consumed by the European crisis, reaching a critical place in Greece again and infecting Italy as well. Practising “tough love,” they helped Greece decide to stay in the eurozone, Italy to accept stronger international financial supervision and Italy’s leader Silvio Berlusconi to depart. A new Labour 20 (L20) was added to the civil society mix.

The most recent G20 summit, at Los Cabos, Mexico, in June 2012, was once again consumed by the Eurocrisis, with debt-ridden Spain and even France joining Greece and Italy on investors’ critical list. G20 leaders helped induce the Europeans to return home and take the decisive steps to create regional institutions and regimes to control their problem before it would go global. They also had all G20 members, save the U.S. and Canada, contribute to a new IMF rescue fund, should the Europeans need financial help from Washington again.

The success of these summits ultimately depends on whether the increasingly plentiful and often bold decisions they make are implemented by the leaders once they return home. Despite the many delays and disappointments, on the whole they are. After a strong start at Washington, compliance with G20 commitments dropped for London and Pittsburgh but then rose again to return at Los Cabos to a substantial 75% — a solid B. The G20’s compliance record on the 87 summit commitments assessed thus far shows that the summit makes the commitments that count — that bind the otherwise autonomous behaviour of their legally sovereign member states.

More broadly, G20 summits are transforming the very architecture of global governance, by building the institutions on which the world depends. They have raised the resources and reformed the voting shares at the IMF and World Bank — tasks that these bodies had repeatedly tried but failed to do on their own. And in a world where international financial regulation has become central, the G20 has created the third pillar of the Bretton Woods system, in the form of the now G20-dominated Financial Stability Board.

Improving G20 Governance for the Future

What then lies ahead for G20 governance, now that it has stopped the great global economic crisis of 2008–09 and is containing the subsequent Eurocrisis within its regional home? One obvious answer is to do the same thing as it has just done for Europe for the U.S., before the U.S. falls off its fiscal cliff, and before second-ranked China and third-ranked Japan follow in its wake. A second answer is to help the United Nations and the world meet and extend the Millennium Development Goals due in 2015 and institute a comprehensive, effective climate change control regime at the same time. A third is to stop the economic and human inequality that is increasing almost everywhere, by generating better education and jobs for and from the young.

How can this be done? Basically by creating bigger, better G20 governance in the years ahead. The first step is to have G20 leaders more often, for longer than the 24 hours they will do, after over a year, when they assemble for their next summit in St. Petersburg on September 5-6, 2013. G20 governance works, but only when its leaders show up for work.

The second step is to have more ministerial meetings than just those for finance and more civil society institutions to work with them and the leaders too. As one example, the G20 leaders promised at Seoul to work more closely with the academic community. Yet an “Academic 20” has yet to be born to work alongside the B20, L20, Parliamentarians 20, and bodies for youth and young entrepreneurs.

The third step is to improve accountability — on which both the effectiveness and legitimacy of the G20 ultimately depend. Many of its major achievements — fiscal consolidation, Basel III financial regulation, reform of international financial institutions, fossil fuel subsidy phase-out — are still waiting for the members to comply with the commitments they have already made. G20 leaders now know they need more than the polite report cards on their performance issued at their request by the international institutions they control and fund. Thus they have come to rely on the independent compliance assessments produced by the many students, scholars and professionals working voluntarily in the G20 Research Group. So if you want to make G20 governance work better — for yourself and for the world — come and join us in helping hold G20 governors to account for what they do.

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