The G20 Framework For Strong, Sustainable And Balanced .

The Centre for International Governance InnovationAlthough the G20 is a new forum, many of the economicimbalances confronting it and the instruments itenvisages using to address them sound all too familiar.To prevent future crises, the G20 leaders must overcomethe deficiencies evident in responses to previous crises,in terms of both lessons that went unheeded andgovernance approaches that did not work as intended.History teaches us that simplistic policy views can tooeasily obscure common sense approaches; that policymakers, market participants and the general public canbe lulled into complacency (see Reinhart and Rogoff,2009); that mandates and responsibilities can becomeconfused; and that institutions rarely adapt unless a crisisforces them to do so. Another way of stating this in a moredistilled format is that financial crises arise due in part toinformation gaps and in part to insufficient incentives toact on the information available (Caprio, 1998).In this paper, I explore whether the G20’s “Frameworkfor Strong, Sustainable and Balanced Growth,” launchedat the Pittsburgh summit in September 2009 and aimed,among its key objectives, at preventing future crisesthrough coordinated policy actions, can usefully transcendsuch problems. If the Framework is to be successful,however, an understanding is needed of how this newapproach differs from previous attempts at sustainedinternational coordination on questions of growth andmacroeconomic stability. The G20 members will also haveto find ways to agree on an acceptable balance of effortamong them to reach the Framework’s goals and mitigatestresses that might arise from different legitimate visionsof what constitutes stability and sustainability. I addressthese questions by suggesting ways to implement theframework that would make it an effective tool forinternational cooperation on macroeconomic stabilityand growth issues.What the G20 SaidIn releasing the “Framework for Strong, Sustainable andBalanced Growth” at the Pittsburgh summit, the G20characterized it as acompact that commits us to work together toassess how our policies fit together, to evaluatewhether they are collectively consistent withmore sustainable and balanced growth, and toact as necessary to meet our common objectives.Specifically, the Framework notes that, while “(e)ach G20 member bears primary responsibility for thesound management of its economy,” each also has a“responsibility to the community of nations to assure4the overall health of the global economy,” and that thisresponsibility would be discharged through a three-stepprocess of (i) agreeing on shared policy objectives (whichcan evolve as conditions evolve), (ii) assessing the collectiveimplications of their national policy frameworks andidentifying risks to financial stability and (iii) agreeing onany actions to meet the common objectives.The G20 leaders were quite precise in Pittsburgh aboutwhat they considered the key elements of strong,sustainable and balanced growth, and what they werecommitting to achieve with respect to these elements:they wouldimplement responsible fiscal policies [,]prevent excess credit growth and excessleverage [,] help prevent credit and asset pricecycles from becoming forces of destabilization [,] promote more balanced current accounts [,] undertake monetary policies consistent withprice stability in the context of exchange ratesthat reflect underlying economic fundamentals [,] undertake structural reforms to increaseour potential growth rates and, where needed,improve social safety nets [and] promotebalanced and sustainable economic developmentin order to narrow development imbalances andreduce poverty.The leaders elaborated on some of these commitmentsin their formal statement, including a pledge, “whenthe time is right, [to] withdraw our extraordinarypolicy support in a cooperative and coordinated way”;an agreement that, to be credible, these exit strategies“should be designed and communicated clearly toanchor expectations”; and an agreement that demandpatterns should be rebalanced between members with“sustained, significant external deficits” and those with“sustained, significant external surpluses.” At the sametime, the leaders acknowledged that “there are differentapproaches to economic development and prosperity,and that strategies to achieve these goals may varyaccording to countries’ circumstances.” Likewise, withrespect to the process of coordinating exit strategies, theyrecognized that “the scale, timing, and sequencing of thisprocess will vary across countries or regions and acrosstypes of policy measures.”The Framework concerns mainly macroeconomicstability and structural impediments to growth. But itis also clearly linked to G20 commitments on financialregulatory reform (effected through, inter alia, the

The G20 Framework for Strong, Sustainable And Balanced Growth: A Study in Credible Cooperationestablishment of a Financial Stability Board, FSB),3 to arenewed commitment to an open international tradeenvironment and to addressing development and securityissues made worse by the crisis. Thus, the Framework isclearly part of an integrated approach to be implementednot only across policy areas but also across institutions,requiring the involvement of the IMF, the FSB and otherrelevant institutions, such as the World Bank, that havethe analytical and policy-enabling capacity to support thedirection set by the G20.Delivering on Commitments andExpectationsIs the G20 likely to be able to meet the high expectations itraised with the Framework and other reform commitments?One obvious absence from the text concerning theFramework in the Pittsburgh statement is a mechanismto follow up on commitments apart from a reliance onthe public glare of the annual G20 leaders’ meetings andsemi-annual meetings of G20 finance ministers and centralbankers. Rather, the focus is on anticipatory assessments,not on surveillance, a term that might appear moreconstraining. Furthermore, the Framework refers to sharedgoals and “any action” to meet them, not to complianceregarding such potential actions.Now, a focus on assessment is probably a logical startingpoint, once goals have been broadly defined. But theFramework’s absence of explicit commitments to actiontoward collective goals or any mention of the need to followup on commitments or of consequences if commitmentsare not met raises questions about its effectiveness.Perhaps the G20 leaders meant that commitments toact would be essentially collective and that, within theFramework, the G20 would mostly comment on, forexample, the progress of it has made, collectively, towardthe reaching its goals. The Framework might give G20governments an additional means with which to justifytheir individual actions on collective commitments,and existing surveillance mechanisms at the IMF andthe OECD could be mandated to comment specificallyon countries’ progress toward the Framework’s goals.Yet without national commitments, the Framework’smain use would remain one of mutual assessment anddialogue, while the main incentives for action (such asbilateral pressures) would operate outside it.3The FSB consists of finance and central bank representatives ofthe G20 plus five other members from systemically important financialjurisdictions, six multilateral and regional institutions and a number ofinternational financial standards-setting bodies.What is needed, then, is a mechanism within theFramework that spells out actions to be taken to preventharmful outcomes and that ensures commitments areimplemented — or at least that monitors implementation.Any such mechanism, however, would have to bedesigned carefully. For example, a mechanism that wasseen as intruding on national sovereignty could makeindividual G20 countries reluctant to take action or evenlead them to deny that action was needed, but if actionwere expressed only as what the G20 needed to docollectively, rather than individually, responsibility mightbecome so diffuse as to result in insufficient commitments.Obviously, the search here is for an effective system ofassessment, commitments and implementation that G20leaders could also deliver politically from an enlighteneddomestic perspective. Accordingly, to aid in that search,I review some relevant evidence from a variety of pastand existing experiments in multilateral coordination toget a better sense of the pitfalls, but also the possibilities,awaiting the G20 as it seeks to establish an effective andcredible Framework.AssessmentThe G20 has agreed that a thorough, candid and balancedassessment of any potential problem is the key toestablishing a credible diagnostic for deliberate action.Naturally, central elements of such an assessment aretypically highly technical in nature and require extensiveanalytical and modelling capabilities. This is why theG20 asked the IMF to provide an “analysis of how ourrespective national or regional policy frameworks fittogether” and to develop “a forward-looking analysis ofwhether policies pursued by individual G-20 countriesare collectively consistent with more balanced andsustainable trajectories for the global economy.” Indeed,the IMF’s Article V allows it to provide such technicalassistance “upon request,” and the G20’s call for helpbuilds on earlier requests by the G7.In its call for technical assistance from the IMF, theG20 emphasized that it be timely, forward-lookingand integrated with assessments by other multilateralinstitutions. Moreover, technical assistance andassessments should feed directly into the G20 decisionmaking process, within an annual reporting cycle.Obviously, action-oriented G20 leaders want timelyinformation they can use to guide their decisions onhow to reach the objectives they have set for themselvesregarding global growth and stability. But how can suchassessments be more useful, in the particular context ofthe G20 Framework, than they appear to have been in5

The Centre for International Governance Innovationthe past in other contexts? As a high-ranking IMF officialrecently declared,what the current crisis showed was the needto improve our understanding of cross-borderspillovers, macro-financial linkages within andacross countries, and broader systemic risks forthe global economy (Kato, 2010: 1-2)The G20 mutual assessment process is supposed tobuild “on the IMF’s existing bilateral and multilateralsurveillance analysis.” However, the various multilateralassessments regularly conducted by the IMF — such as theWorld Economic Outlook (WEO) and the Global FinancialStability Report (GFSR) — have not received particularlykind reviews in either the academic literature or fromthe IMF’s own Independent Evaluation Office (IEO). Thereports are seen as useful mainly as a source of publicinformation, rather than as a first step toward a moredeveloped multilateral discussion. As one study concludes,the multilateral surveillance of the IMF is notfocused on generating debate about urgentproblems and possible cooperative solutions The limited involvement of the [IMF’s] ExecutiveBoard, in turn, implies that the exercise hasbecome focused on the production of the reportitself, rather than on the process of coordinatingnational member states’ policies (Lombardi andWoods, 2008: 717)Similarly, bilateral assessments have been criticized forbeing useful sounding boards, rather than tools integratedwith multilateral assessments, and for being insufficientlyexplicit on core issues directly related to external stability,such as exchange rate issues (United States Departmentof the Treasury, 2009).These shortcomings, to be fair, are not exclusive tothe IMF — the trade policy review mechanism of theWorld Trade Organization (WTO) has been criticizedon the same grounds (Laird, 1999). Nonetheless, theywere made particularly salient by the recent globaleconomic crisis. Indeed, even in 2006, IMF memberswere requesting that the Fund’s very broadly appliedsurveillance activity focus more on “crisis prevention,global financial stability, and international spillovereffects” (Lavigne and Schembri, 2009: 1) — the threeelements being obviously closely intertwined. And in2007, a “Decision on Bilateral Surveillance over Members’Policies” (IMF, 2007b; hereafter, “the 2007 Decision”)ushered in a renewed focus on “external stability” as theobjective of IMF surveillance.4 Further, as a precursorto the G20 Framework, in fall 2008 the G20 launched anEarly Warning Exercise (EWE) in which the IMF and thenew FSB would periodically assess systemic risks for theglobal economy, identify vulnerabilities and assess “risksof unlikely, but not implausible, downside scenariosthat would result in policy recommendations differentfrom those underlying the baseline scenarios in the WEOand GFSR” (Kato, 2010: 4).How would a new, G20-driven mutual assessmentexercise yield more useful results? According to the IMF,its analysis and assessment would depend on informationvoluntarily provided by G20 members and collectedaccording to a template that “includes all salient policycommitments as well as projections for key economicvariables” (IMF, 2009b: 3). Fund staff would thenidentify any inconsistencies and incoherence of nationalassumptions within the G20, analyze the multilateralcompatibility of country submissions and the aggregateimpact of national policies on global economic prospectsand identify what additional policy commitments mightbe needed to reach the objective. Unlike the WEO andthe GFSR, which are “entirely based on the independentprojections, analysis, and assessments of the Fundstaff and management as discussed and concluded bythe Board,” in the context of the G20 Framework “theassessment [would be] undertaken and conclusionsdrawn by the G-20 members” (IMF, 2009b: 7). Thus, theprocess established under the Framework requires theprovision of new and timely information, with reportspresented directly to decision makers — which mightwell increase their commitment to the assessmentprocess and its outcomes, which would reinforce theeffectiveness of the process — and focuses on integratingmultilateral and national scenarios with a view toachieving well-defined objectives. Furthermore, thespecific objectives set by the G20 could help focus existingIMF multilateral and bilateral surveillance exercises —with the exercises of the two bodies helping to providevaluable information checks on each other (IMF, 2009b:4-7). Moreover, the EWE and the G20 Framework arelikely to be mutually supportive, all the more so sincethe emphasis on “coherence” and “consistency” in thework the IMF is expected to undertake needs to bebalanced by an understanding of alternative views ofhow things could unfold.Nevertheless, important questions remain related tofocus, to the linking of expertise at the IMF and othermultilateral institutions and to transparency.4External stability refers to “a balance-of-payments position thatis not likely to generate disruptive real exchange rate movements”(Lavigne and Schembri, 2009: 7-8).6

The G20 Framework for Strong, Sustainable And Balanced Growth: A Study in Credible CooperationFocusSome G20 members no doubt see in the Pittsburgh listof commitments a mandate for the IMF to focus onspecific indicators of external imbalances that would bepolitically expedient to highlight at any time. Exchangerates are particularly vulnerable in this respect, and the2007 Decision makes particular mention of exchange ratepolicies and potential exchange rate misalignment andmanipulation as a major focus of IMF surveillance. But,as Lavigne and Schembri note, it would be unfortunateto “give the impression that it is only through exchangerates and the balance of payments that domestic stabilitycan affect external stability” (2009: 8). Since, for example,financial instability in the United States in 2007-08provoked global instability without being accompaniedby a currency crisis and appears to have been assisted inpart by efforts by Congress to subsidize homeownership,a superficial focus only on the exchange rate — or,indeed, on any single variable — could hamper the abilityto anticipate future crises and to devise policy actions toprevent them.In this context, the G20 Framework rests on the viewthat domestic economic stability will reinforce externalstability and, thus, G20 members should be discouragedfrom focusing on one at the expense of the other whenthey assess their respective individual policy stances. AsLavigne and Schembri note, the IMF’s 2007 Decisionspecifies that external stability is a forwardlooking concept that demands an assessmentof domestic as well as external risks andvulnerabilities [and] clarifies that these twotypes of stability are compatible and mutuallyreinforcing (2009: 7-8)Indeed, the general obligations of IMF members can beinterpreted as meaning that domestic policies that foster“orderly economic growth with reasonable price stability,”with due regard to their particular circumstances, aswell as “orderly economic and financial conditions anda monetary system that does not tend to produce erraticdisruptions” are the bedrock of external stability (IMF2009a, Article IV, Section 1 (i) and (ii)).The Framework goes beyond treating internal stabilityas strictly a matter of sound fiscal and monetary stancesand explicitly references growth-enhancing policies ingeneral, as well as social policies. Conducting assessmentsunder the aegis of the Framework, therefore, requires theneed for an in-depth look at the complex interactionsbetween structural domestic and external policies thatgoes beyond anything embodied in the 2007 Decision orthe obligations of IMF members. A solid assessment ofhow to pursue these objectives as well as those relatedto external stability likely would require more than IMFexpertise alone could provide to be truly effective.Sharing ExpertiseFrom this probably arises the G20 Framework’s call foran integrated assessment of global and national scenariosby various organizations. Porter (2007) foresaw thebenefits of such a collaborative effort between differentinternational institutions, each contributing according toits own comparative advantage.In effect, then, the G20 is ordering all hands on deck: “Wewill work together to ensure that our fiscal, monetary, trade,and structural policies are collectively consistent withmore sustainable and balanced trajectories of growth” and,as echoed by G20 finance ministers and central bankers,We will be assisted in our assessment by IMFand World Bank analyses and the input of otherinternational organizations as appropriate,including the FSB, OECD, [multilateral developmentbanks], [the International Labour Organization],WTO and [the United Nations Conference on Tradeand Development] (G20, 2009b: 3)As the G20 finance ministers and central bankers noted,the OECD is one organization whose input likely would beinvaluable as the G20 Framework institutionalizes policydialogue, including on domestic policy. The OECD’seconomic surveys do not bind members to a particularcourse of action, but they do contain an assessmentand recommendations section subject to peer reviewwithin the organization’s Economic and DevelopmentReview Committee, which includes the entire OECDmembership. The surveys’ thorough attention to domesticstructural factors and the peer review system thus makethese exercises useful ways to discover and ensure thespread of best practices. Already, the OECD has extendedits economic surveys beyond its own members to includeChina, India, Brazil, Mexico and South Africa. Peerreview of countries’ structural policies along those lineswould be a valuable complement to the work of the IMF.Keynes is reputed to have said that it is better to beapproximately right than to be exactly wrong. Themultiplicity of perspectives that would result from theassessment and analysis of different institutions and,I submit, the inclusion of less technical perspectivesin envisaging possible scenarios and approaches tothe future of national and global economies wouldgive the G20 leaders a better chance of getting thingsapproximately right.7

The Centre for International Governance InnovationTransparencyFinally, there is the question of whether candid assessmentsunder the G20 Framework would run up against callsthat have been made for more transparent assessments ofindividual members’ policies by the IMF. Of course, thosewho usually know the most about a country’s situation —representatives of that country’s government — shouldparticipate in an assessment and even, in the normalcourse of business, endorse it in some fashion before it ismade public; this is how assessments at the IMF, OECDand other organizations are conducted. However, thiscreat

“International Governance Innovation: Issues for the 2010 Summits,” May 3–5, 2010, Waterloo, Canada. The opinions expressed in this paper are those of the author and do not necessarily reflect the views of The Centre for International Governance Innovation