(Contribution to The Economist’s By Invitation Blog)
The Toronto declaration sounds strangely familiar, as was the case for the disputes leading up to the summit. On the macro side, the only issue for discussion seems to have been the rift between the US and Germany as regards the timing and pace of budgetary consolidation. And on the financial regulation side the agenda is mainly one for implementation by the advanced economies. The emerging countries – the very countries that make the G20 a different body – feature prominently in the section on the International Financial Institution and Development only. So the whole in the end reads as a traditional G7 communiqué as if what really matters for the world economy were decisions taken in Washington and Berlin – not Beijing and Delhi.
It is important to remember that this was not the case for the London and Pittsburgh declarations. In London in April 2009 joint stimulus efforts by advanced and emerging countries, as well as a major increase in the resources of the IMF, were considered necessary ingredients to avoid a world depression. As documented by the IMF the emerging countries actually delivered, as their discretionary stimulus efforts generally exceeded those of the advanced countries. In Pittsburgh in September 2009 it was expected that growth in the advanced countries would not suffice and that a major rebalancing of global demand towards emerging countries needed to be engineered. So it is a surprise to see the old powers back in the saddle at Toronto.
The reason for this apparent change of direction can be found in the note prepared by the IMF for the G20 summit. This note is a result of the “mutual assessment process” initiated at Pittsburgh, which can be seen as a blueprint for coordination prepared by the Fund staff on the basis of information on current policies provided by the G20 members. The IMF note discusses what a set of different polices aiming at strengthening and rebalancing growth could possibly deliver. And its clear message is that most would come from policy changes among advanced countries. Infrastructure investment and social safety net spending in emerging countries would be useful, but second-order, at least as regards its impact on growth, unemployment and real exchange rates in the advanced countries.
There are three reasons for this finding. The first is simply that the advanced countries’ group still accounts for a major share of the world economy. For all the talks about the changing power balance, the G7 still represents a very large part of world GDP at PPP exchange rates (almost 50% according to IMF calculations) and even a larger share of world GDP at market exchange rates. So whatever happens there matters, especially for these countries themselves.
The second reason is that the emerging countries are booming. Growth in China and India is already high enough to create tensions so is no point in asking these countries to do more to stimulate domestic demand. They are delivering what was expected from them and even more in some respect, so the whole purpose of the mutual assessment – to make China and India more responsive – has temporarily at least lost relevance.
The third reason is that neither the IMF nor the G20 are contemplating a major adjustment in real exchange rates. After the US administration decided a few weeks ago not to report to Congress on China currency manipulation, It adopted a more diplomatic tone that has started to pay off. So this was not the time for tense discussions on exchange rates and corresponding evaluations.
If all this is true the G20 has not lost long-term relevance but it is temporarily a less indispensable institution than it was in the past and will be in the future. It may soon come back. The danger, however, is that in the meantime the déjà vu character of the US-German controversy will make the emerging countries more detached and convince participants and/or observers that serious business still take place within the same old crowd. This would be a pity.