Towards the Cannes Summit: managing the G20 in times of hardship
Susilo Bambang Yudhoyono, president, Indonesia
The G20 proved invaluable in tackling the worst effects of the financial crisis and must continue its crucial role in providing a coordinated, international approach to dealing with the economic problems that persist around the world
From "The G20 Cannes Summit 2011: A New Way Forward," edited by John Kirton and Madeline Koch,
published by Newsdesk Media Group and the G20 Research Group, 2011
To download a low-resolution pdf, click here.
In 2008-09, the G20 played an indispensable role in bringing the global economy out of the abyss of a crisis. The unprecedented macroeconomic policy coordination it provided was attributed as the major ingredient for recovery, something that was missing during the Great Depression of the 1930s. Last year, when we thought we had successfully turned the page on the global economic crisis, we were too optimistic. Global growth remains sluggish and downside risks are even greater. If they cannot be managed carefully, we may open another gloomy page in our history. This is a gentle reminder that complacency would never serve our purpose.
The temptation to resort to protectionist measures usually arises during hardship. Again, the G20 managed this quite successfully by mandating related international organisations to monitor trade and trade-related policies of G20 members that might hamper international trade. The commitment by a group that represents more than 80 per cent of world trade has thus proven effective.
The G20 also played a critical role in reforming international financial institutions. The shift of six per cent of the quota shares of the International Monetary Fund (IMF), including the shift of two chairs on its executive board to the dynamic emerging-market and developing countries, is a step in the right direction to represent these countries better in the IMF.
So why, then, is the downside risk of the global economy still high, perhaps even increasing?
The world is currently encountering the pressing challenges of the eurozone crisis and the fiscal situation in key advanced countries, volatile capital flows and the risk of overheating in emerging economies, and the problem of sluggish economic growth.
Some measures should be taken to address those challenges. First, in the advanced economies where fiscal debts are mounting, such as in the eurozone, credible medium-term fiscal consolidation is needed more than ever. This is the only way to restore market confidence in those economies. Of course, the impact of such consolidation should be balanced well with the need to sustain growth.
Contagion effects from the financial crisis in Greece should not be treated lightly. The eurozone countries should act hand-in-hand to prevent the situation from deteriorating in Greece and in other countries experiencing a similar situation.
Second, structural reform should be undertaken in advanced economies. This is the hardest and most difficult to do in terms of social and political policies. Indonesia understands only too well, remembering its bitter experience during the 1997 Asian financial crisis. It slashed its budget and maintained only what was most essential for economic recovery. Today, countries facing similar difficulties must also have the courage to take the same course. Subsidies that distort the economy, especially in agriculture, should be cut substantially. Such cuts will not only make the fiscal condition healthier, but will also boost the long-overdue Doha trade talks of the World Trade Organization.
Third, emerging and developing economies should carefully manage their large and volatile capital inflows. Overheating the economy is not only a macroeconomic problem, but also a serious problem for poor people in underdeveloped remote areas. Price hikes in food commodities will hit them hardest since the majority of their expenses are for food.
Fourth, the G20 should enhance its effectiveness in coordinating macroeconomic policies. The Mutual Assessment Process is a powerful vehicle. However, to realise its potential, it should be utilised more for real policy coordination than merely for information sharing.
Besides resolving current financial and economic issues, the G20 should take up the issue of development as part and parcel of its endeavour to attain strong, sustainable and balanced growth. The G20’s legitimacy will be questioned if it is silent on the interests of the majority of the world’s countries. The deadline of the Millennium Development Goals is just four years away in 2015, and the G20 should contribute to their achievement.
Indonesia shares the view of G20 French presidency of prioritising the issues of infrastructure and food security in the deliberations of Development Working Group this year. Indonesia is also a strong advocate for strengthening good governance, believing that enhanced good governance will contribute to the improvement of fair competition and prevent misconduct among officials and business players. For this purpose, Indonesia, together with France, has served as co-chair of the G20 Anti-Corruption Working Group.
The global economic recovery cannot be separated from regional dynamics. Interconnectedness throughout the world should therefore be enhanced. As the most vibrant region, Asia should again become the prime mover for recovery and prosperity. Other regions could and should benefit from a growing Asia through better connectivity.
Indonesia is playing an important role in this regard. As chair of the Association of Southeast Asian Nations (ASEAN) and host of the East Asia Summit in 2011, it is keen to promote better connectivity of the region with the world. Asia – and East Asia in particular, as the most populous region coupled with high economic growth – could be a global economic powerhouse.
In the context of ASEAN, Indonesia has agreed to establish the ASEAN+3 Macroeconomic Research Office, supporting the Chiang Mai Initiative of Multilateralisation. With regard to food security, it has also agreed to establish the ASEAN+3 Emergency Rice Reserve.
We are now at a critical juncture. To remain ahead of the curve, it is in the interest of all that G20 members continue their united, solid and effective support of the Framework for Strong, Sustainable and Balanced Growth. The Cannes Summit should highlight several key issues.
First, it should address the pressing global economic challenges, such as the eurozone crisis, to prevent contagion. This is a matter of priority and urgency, as the credibility of the G20 will be at stake if it does not act to address this serious problem.
Second, it should reverse the problem of a low-growth global economy by creating new sources of global demand. The Cannes Summit should lay out the G20’s commitments to increase global growth.
Third, it should highlight the G20’s commitment to trade as an engine of global economic growth. Although the stalemate of Doha Development Agenda looms, G20 leaders should reiterate their commitment that open trade regimes continue to be essential.
Whether the G20 is able to deliver its meaningful contribution to solving today’s pressing global economic challenges will depend very much on members’ own solidity and effectiveness. The essence is to lead by example. Possessing 85 per cent of the world economy and representing two-thirds of the world’s population will not be meaningful without leadership. Therefore, the most effective way for the G20 to influence the future course of global economic governance is by demonstrating its quality leadership.
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