Strong advocates of our new G20 process are convinced that it will bring legitimacy to international economic policy discussions, rule-making, and crisis interventions. Certainly, it’s better than the G7/G8 pretending to run things – after all, who elected them?
But who elected the G20? The answer is: No one. And, in case you were wondering, there is no application form to join the G20 (although you can crash the party if you have the right friends, e.g., Spain). The G20 has appointed themselves as the world’s “economic governing council” (to quote Gordon Brown).
Is this a good idea?
Not really – it would be much better to have a structure in which all countries were represented, probably with some weighting according to their economic and financial importance in the world.
The problem is that we have what is supposed to be exactly that structure, at the International Monetary Fund, and it doesn’t work very well. The IMF has 186 members, represented by 24 executive board members, who live in Washington DC and work every day (almost) at the Fund.
The IMF’s resident executive board members are often not very senior, meaning they are long way below the real decision makers in their respective bureaucratic structures; this is cumbersome. But twice a year, finance ministers representing the 24 board seats meet as the International Monetary and Financial Committee (IMFC) to oversee the work of the Fund – with the next meeting in Istanbul, October 6-7.
You might think that Istanbul will advance the G20 agenda – because the people meeting as the IMFC are almost the same people who will meet in November as the G20 ministers of finance. But they are not the same and many other people will be in the room at Istanbul. This is all very awkward and will further slow down whatever progress there is at the global financial reform level. In fact, the G20 suggested that the next productive meeting would be of its finance ministers in November, i.e., implying that Istanbul is a waste of time.
The relationship of the G20 to the IMF is extremely delicate – smaller countries are already beginning to complain, and with some reason. If the goal is to rebuild the legitimacy of the IMF and to encourage countries to trust it to lend fairly in a crisis, this is not going very well. The rules around who will be supported and on what basis are becoming increasingly murky and not rules-based – e.g., Eastern Europe is almost certainly getting deals that would never have been offered to troubled countries in Asia.
It would be better for emerging markets to form their own Fund (let’s call that the EMF). They have plenty of “hard” currency in hand to do so and no shortage of economic expertise; $1 trillion of paid up capital would be more than enough to get it started (and this would also take the pressure off China with regard to its “excess” reserves).
The EMF can cooperate with the IMF but also operate independently – and just as much (vaguely) under the auspices of the G20. This would go a long way towards restoring emerging market and developing country confidence in the international financial system – and towards assuring they will get timely and appropriate help in the event of another world crisis.
By Simon Johnson
The Baseline Scenario 
Interesting idea, but might the existence of an alternate IMF for emerging markets not set the stage for a bitter & damaging rivalry down the road?
On this theme, your francophone readers may wish to check out the conversation with long-ago IMF head Jacques de Larosière on the 9/19 program of “La Rumeur du Monde.” It’s worth the 45 minutes of listening:
http://sites.radiofrance.fr/chaines/france-culture2/emissions/rumeur/fiche.php?diffusion_id=76990
This is nice outline of complicated relationships in international finance.
Prof Simon Johnson points out that; “The rules around who will be supported and on what basis are becoming increasingly murky and not rules-based – e.g., Eastern Europe is almost certainly getting deals that would never have been offered to troubled countries in Asia.” The IMF carries out decision making based on the use of economic theory. That decision making has shifted from very harsh treatment of indebted poor countries to a bit more reasonable but still unfair in recent times. For much of the history ‘our’ IMF news articles were aplenty reporting the inhumanity of monetary and fiscal restraint policies imposed on nations already suffering poverty.
Perhaps the rise of “competing” decision making groups at the international level is more a reflection of intellectual diversity that must exist in the absence of any unity of mind or agreement on a foundation for ‘rules-based’ decision making. Intellectual diversity is important and a reflection of democratic rights to freedom of thought and speech. However disunity in thought can sometimes also lead to even greater political interference, instability and preferential treatment in decision making. There is a point where some sort of unity in thought is needed or the whole system falls apart.
One wonders if the establishment of another decision making body for emerging markets, might be just one more dividing force making it all the more difficult for a foundation for rules-based decision making to take hold, or; if such an ‘EMF’ could increase diversity in thought and in lending options for emerging nations with positive benefit for all. The chances for an agreed upon foundation to offer fair rules for the benefit of humanity is an ideal that has never been fully realized. Regardless of the number of IMF type decision-making bodies a foundation for fair rules still needs to be worked upon. Hopefully such an ideal won’t get lost and abandoned in a mêlée between failure in economic theory, politics and institution building.
I think it’s a very good idea that emerging markets establish their own fund. But I doubt the Chinese who hold staggering reserves will have the guts to lead such an endeavor.
The CCP that governs China is too fearful of a popular backlash in case things go bad and they lose money. Remember the anger when some Chinese sovereign fund invested in Blackstone and lost money. The CCP will not take that sort of risk unnecessarily. At least with the IMF they can blame foreigners.
Since the US, Europe, and Japan are the largest shareholders of the IMF they have the greatest voting quotas. The only way for the South and Emerging markets to have a fair voice is to set up their own fund.
Maybe the new fund could stress infant industry protection and support Keynesian stimulus during recession instead of completely free markets and a strict balanced budget.
Pretty good book on this by Ha-Joon Chang:
Has not China already begun its own non-‘rules based’ process of entering into a series of bilateral currency support arrangements, agreements to settle trade in the trading partners’ currencies rather than dollars, and so on?
While the advantages to small and vulnerable countries of having a ‘reliable’ source of emergency support on tap are indisputable, I suspect an interim stage in which they must shop for help from those with non-economic geopolitical motives for preferential treatment (in Eastern Europe, the IMF, in Asia, the Chinese, in Africa and Latin America, the ???) is inevitable.
It may be grubby, nasty and unpredictable, but it will be the world of the future.
Seems to me we have a meld of the company store and musical chair economy. Any help?
And in what currency would capital be lent in this EMF ???
If the only legitimate reserve currencies are the Dollar and Euro, a few key countries (and people) will continue to dominate world finance.
No ‘Asian Century’ without an Asian currency.
Why is Spain especially influential?
Would you include the US in a group of emerging market members? (Or even just recognizing it’s great potential as a future emerging market?)
The whole point of the IMF is to make sure the 20 countries with 75% of global economic output keep their share of the wealth.
If this EMF got off the ground, who knows what other ways the G20 would come up with to make sure their share of world economic output increased.
Also, I might add the the IMF does a wonderful job of enriching the elites in the other 180 countries at the expense of their countrymen. There is no incentive for them to turn over a new leaf and help their own countries for a change.
Wonder what the least corrupt, most egalitarian country is, in the world. Not according to the published lists, but for real.
This is the tyranny of the elites. Why should anyone accept their “rule” when they’ve proven themselves so completely inept, with pollution, with finances, overpopulation, with wasting the planets natural resources… other than pilfering all the planet’s money for themselves, there is not one thing they are good at… oh, I correct that… they are really really good at building huge homes in the Hamptons, and at keeping 5 star restaurants in the black. We’re back to needing a magna carta. Isn’t this why god invented pitchforks? The French had the right idea…
Creating an EMF is the best idea I have read on this blog in the few months that I have been following the discourse.
While we are in the “create competition for the monopolies” mood, why not consider restoring the countywide commercial national banking system that was in place 1980, before the madness of centralized banks took hold and took the nation for its jewels.
You mean in a period when the world economy is going through very difficult times, China maybe should spend that HUGE amount of reserves they’re sitting on?? Maybe spend it inside their own economy so their people could eat something more than a bowl of greasy noodles and formaldehyde flavored beer??? Maybe the Chinese government would go wild and they’d have enough to spend for a reconstituded pork tube for dessert. Madness!!! I tell you it’s madness!!!
No, I think it’s much better that Chinese officials have expensive dinner banquets while college graduates migrate away from their families to Guangdong province looking for work. It’s good to see young people wandering around for jobs away from home. Makes the country seem more active.
Where do you get these wild ideas Simon?!?!?!
You say that a new global financial body should be organised “probably with some weighting according to their economic and financial importance in the world”.
How would such “importance” be calculated? If the weighting is according to the size of economies, would the big economies not have the preponderant vote still? It seems to me that what you propose would only entrench the current system, while inviting a few more “new biggies” to the table.
I have personal experience of the depredations visited upon us by the international financial institutions admittedly with the complicity of our ruling classes. I don’t trust the IMF. Its policies (structural adjustment in particular) kill people.
Why propose a weighted voting system? Is that what obtains in the countries (such as yours, the UK)that we are currently pleased to call established democracies? What happened to the one person one vote principle? Or is democracy only good for some?
I find economists a particularly disappointing bunch.
I too find economists disturbing because they create for me an impression of an education that has a near complete ignorance of how a culture works.
The very reason why I proposed a “G6,800,000,000” this morning.