Spotlight G20: International monetary system reform: G20 chooses the wrong priorities

Aldo Caliari, guest blogger, part of our 2011 Spotlight G20 Series

When the first G20 Summit was launched in 2008 in order to provide an emergency response to the global financial crisis, the premise was that dramatic reforms were needed in a short period of time. Those reforms could never happen in the slow-moving machineries of the institutions with full representation of all countries, such as the UN, hence, the need for the G20.

Three years down the road, and based on the preliminary agreements that one can foresee happening in the coming Summit in Cannes, the G20 has negligible progress to show, calling such premises into question. The world veers dangerously close to a new global recession that, if it happens, will catch developing countries in a worse position than three years ago. The President of the World Bank informed last month that developing countries’ fiscal positions are, in the average, two percentage points of GDP down from where they were pre-crisis. In the face of what is arguably a more pressing emergency than three years ago, the Group cannot even agree to throw its full weight behind the coordinated stimulus measures of the kind and scale to which they’d previously agreed. The idea that grand agreements can be reached by the most powerful countries, if only small countries stop acting as spoilers or brakes in the multilateral machinery with their delaying tactics or parochial views, has evidently no merit to it.

The area where the G20’s failure to make progress will be most costly to the world economy is the reform of the international monetary system. Because of political and ideological constraints, the US and Europe seem to have run out of options to introduce stimulus measures, either fiscal or monetary. Agreements on a sensible set of steps to transit towards an international monetary system with a wider range of options for stimulus, support for trade stability and an adequate mechanism for adjusting global imbalances without recessionary consequences are, however, not to be expected from Leaders meeting in Cannes.

The G20’s agenda for the monetary system has, indeed, chosen the wrong priorities. In order to achieve better macroeconomic coordination, it has chosen to prioritize discussions on surveillance and lending tools within the IMF, rather than mechanisms to guarantee the credibility of such agreements.

In order to achieve more stability, it is promoting a “framework for managing capital flows.” This process seems headed towards curbs on the right of countries (under Article VI of IMF Articles of Agreement), to implement capital account restrictions, a recipe for greater, not less, volatility.

The existing diverse and more flexible regional monetary cooperation agreements that have evolved in line with the needs and history of countries in different regions, are being asked to fall together under an IMF-coordinated umbrella of one-size-fits-all principles. More uniformity in the behavior of economic units leads to greater, not less, systemic risk, one would have hoped is a lesson learned from the crisis.

Finally, after a promising start, the discussion on how to make Special Drawing Rights the cornerstone of the monetary system has been brushed aside. Instead, one sees a narrow agenda that seeks to broaden the currency basket not guided by any particular rationale to make the basket more stable and flexible, but by geopolitical realities and some countries’ push to make the renminbi a fully convertible currency.

Aldo Caliari is Director of the Rethinking Bretton Woods Project at the Center of Concern.