As France takes over presidency of the Group of 20 (G20) this year, the international community has great expectations for it achieving a better, fairer and more efficient global economic system. The new mood was encouraging at the first G20 meeting on February 19 when finance ministers and central bank governors from major economies concluded their two-day talks with a major consensus after tense debates in Paris.
Positive step to addressing global economic imbalance
The G20 representatives identified five major topics for the meeting: setting indicators to monitor global economic imbalances; reforming the international monetary system and ensuring financial stability; reducing the volatility of raw material prices; establishing an effective financial regulatory system; and helping improve infrastructure in developing countries and raise funds for them to cope with climate change.
These ambitious topics will be discussed at G20 events throughout the year. Meanwhile, countries will try to reach compromises to substantially enhance the role of the G20 in the global economy.
Among these topics, measuring global economic imbalances was a main point of contention. It was the focus of attention of both the United States and Europe, despite their big differences on how to achieve balance.
On the surface, economic imbalances remain the global economy’s most serious problem. Countries hold different opinions on the root causes of the imbalances. Developed countries tend to believe they are caused by emerging economies' undervalued exchange rates, while emerging countries, such as China, think developed countries' irresponsible fiscal and monetary policies are the prime reason for the global financial crisis and current economic difficulties.
But more fundamentally, the various problems in the current global economy result from defects in the international monetary system – especially the dominance of the U.S. dollar. The dollar's excessive liquidity has caused global inflation, a rise in international food prices, and an increased risk that emerging economies will be hit by “hot” money.
France has always underlined the importance of reforming the international monetary system. The five topics established under the French presidency showed the desire and determination of the G20 to stabilize the world economy and eliminate the many disadvantages of the current systems. As they address these topics, G20 members will contribute greatly to an improved world economy.
During the meeting in Paris, G20 members reached an agreement on measuring global economic imbalances. The agreement marks a positive step toward bridging differences among them. A compromise as it is, it fairly reflects the nature of the imbalances.
It defined debts, deficits and private savings as internal indicators, and trade balance and net investment income flows as external indicators. The most controversial factor – foreign exchange reserves – was excluded from the indicators.
This agreement helped to change the image of the G20 as a "talk shop" and paved the way for more consensus and agreements in 2011. In the meantime, it raised the world's expectations for the G20's upcoming meetings this year.
After Paris, G20 finance ministers and central bank governors will hold two more meetings in Washington, D.C. in April and September. In October, they will meet in Paris again to make final preparations for the G20 Summit in Cannes in November. If they can seize the opportunities to reach consensus on the five topical issues, they will give people new confidence and hope for the world economy.
China's approach to reform: more pragmatic
The Paris meeting reached an agreement on indicators for measuring global economic imbalances. Credit for this achievement should be given to the active and practical attitude of the participants.
Before and after the meeting, some Western media outlets analyzed the divergence between France and China over reform of the international monetary system. They pointed out Chinese policy-makers have avoided discussing reform from a "political" angle; instead, they prefer discussing it from a "technical" perspective.
Indeed, reform of the system should not be a topic for political hype. The Chinese economy's excellent performance in the global financial crisis and its replacing Japan as the world's second largest economy have boosted China's influence in the global economy. Chinese policy-makers tend to regard the reform of global economic and monetary systems as a technical problem. In their view, China should not hastily push for radical reforms before developing a good understanding of the systems.
Debates on the status of the U.S. dollar and the design of new systems are a good example. Many in China think the U.S. dollar and the U.S. economy will remain dominant in the short term. It is difficult to shake their status. Therefore, a prudent reform strategy not only can reduce the suspicion of the United States, but also help promote concrete results.
Of course, the huge challenges in China's economic and social transitions are also reasons for Chinese leaders' practical and prudent attitude. A good knowledge of China's domestic challenges can help explain the stance of Chinese policy-makers.
For example, the Chinese economy is at a critical stage in transforming its development. China aims to change its excessive dependence on exports by enhancing domestic demand's contribution to the economy. The Chinese Government is trying to accelerate the transformation process. But this goal is obviously difficult to achieve in the short term.
In the meantime, inflation, represented by high property prices and high consumer prices, is hindering progress in the reform of China's exchange rate regime. The country must first properly deal with the problem of inflation. In theory, the appreciation of the yuan is conducive to curbing inflation, but in reality, an excessively quick appreciation may lead to economic problems.
Based on global economic realities and its domestic challenges, China has reason to adopt a prudent and practical attitude toward the G20 agenda. Currently, it is feasible for China to seek solutions to issues such as systemic reform from a technical aspect. This approach is also conducive to the steady growth of the global economy and strengthened international cooperation. Therefore, China-France differences on the G20 agenda should not be exaggerated.
Finalizing Doha Round should be included in G20 agenda
We can continue to expect more progress in the five major topics mentioned above, especially in increasing the voice of developing countries in the international monetary system and curbing the rise in global food prices. To some extent, it is easier to reach agreements on these issues.
In the meantime, we should keep a clear mind about the following: It is extremely difficult to realize radical structural reform due to the complex interdependence among different economies and the conflicting interests of different stakeholders. Due to political reasons, many participants at the Paris meeting still reverted to blaming their policy failures on other countries. This practice added to the difficulty of international cooperation.
Given these factors, we should not expect too much of the G20 discussions. Under the current complicated global economic circumstances, G20 members have conducted policy consultation and coordination, while upholding existing rules. These actions are a good manifestation of international cooperation. In this sense, we should not accuse the G20 mechanism of failing to reach certain radical reform agreements.
In addition to the five major topics on the agenda, G20 members should make greater efforts to promote the Doha Round of WTO negotiations. They should strive to reach an agreement during the WTO ministerial conference at the end of the year.
With most agreements already reached, the Doha Round has a good foundation. Therefore, this goal is easier to achieve than the reform of the international monetary system. If the Doha Round of negotiations can be completed successfully by the end of this year, it will surely lend strong vitality to the global economy. Major economies of the G20, such as the United States, the EU and China, should play a more active leading role in completing the round.
Wang Yong is a professor with the School of International Studies at Peking University, and the director of the Center for International Political Economy at the university.