South Korea in the G-20 Spotlight

CAMBRIDGE – South Korea has an historic opportunity when it chairs the G-20 meeting in Seoul on November 11-12, for this will be the first time that a non-G-7 country has hosted the G-20 since the larger body supplanted the G-7 as the steering committee of the world economy. But there is a danger that the G-20 will now prove too unwieldy. 

South Korea justifiably views its role as host as another opportunity to mark its arrival on the world stage. But it should make more of its opportunity than this, and instead exercise substantive leadership. Otherwise, its turn at the G-20’s helm risks resembling the chaotic Czech presidency of the European Union in 2009, which confirmed some larger EU members’ belief that it is a mistake to let smaller countries do the driving.

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The challenge for South Korea stems from the inevitable tradeoff between legitimacy and workability. The G-7 was small enough to be workable, but too small to claim legitimacy. The United Nations is big enough to claim legitimacy, but too big to be workable.

The G-20 has enough legitimacy for its purpose – which is more limited than the purposes of formal institutions such as the UN, the International Monetary Fund, and the World Trade Organization – by virtue of the fact that it accounts for 85% of the world’s GDP, for example.  

But it is too big to be workable as a steering group. A principle of multilateral talk-shops is that conversation is not possible with more than 10 delegations in the room. With 20 delegations, each reads prepared statements; there is no give-and-take, and the communiqué is a watered down least-common-denominator press release.

The G-20 needs a smaller informal steering group, a G-6 or G-9, which could meet on the eve of the main G-20 meeting and discuss how to organize the discussion in the larger group.

It would be unwise to be too specific at this point about who should be in the smaller group. Nevertheless, the United States, Japan, and Europe (represented perhaps by the EU Commission), must be there on the rich-country side; China, India, and Brazil must be there on the developing-country side. Of course the pressure to expand is always irresistible. Europe could be represented by both the United Kingdom and the eurozone. In Seoul, South Korea must be there as the host. The ninth country could be any of the rest.

The G-20 will discuss whatever the bigger countries consider it most useful to discuss. Five possible topics include:

•         More seats on the IMF executive board for emerging market countries, made possible by consolidation of some European seats;

•         More financial regulatory reform, such as coordination of any taxes or penalties that members want to apply to risk-taking banks;

•         An attempt to address global current-account imbalances and ¨currency wars."  There could be a statement agreeing that excessive imbalances are a problem, that exchange rates and budget deficits both bear some responsibility, and that neither should bear the burden of adjustment alone;

•         Macroeconomic exit strategies. I would favor articulation of the principle that the necessary concrete steps toward long-term fiscal consolidation in advanced countries – such as raising the retirement age or taking other steps today to reform public pensions – need not require premature withdrawal of current fiscal stimulus;

•         Re-launching discussion of a new agreement on climate change to replace the Kyoto Protocol after 2012. South Korea is in a good position to lead as the first post-Kyoto country to accept emission targets.

Don’t judge the outcome of the Seoul G-20 meeting by what appears in the media. Press reviews usually pronounce any summit meeting a let-down. But occasionally such meetings are important, in ways that are often not clear until later.

Consider the London G-20 meeting in 2009. It was not obvious at the time that it had been a success in terms of substantive policies. Observers even compared it to the infamous failed London Economic Summit of 1933, which was a way of saying that the world had not learned the lessons of the Great Depression.   

But the 2009 meeting appears far better in hindsight. Fiscal stimulus turned out to be more widespread in 2009 than one might have guessed. Similarly, global monetary policy was easy, avoiding another big mistake of the 1930’s. And the G-20 unexpectedly agreed to triple the IMF’s resources and bring its reserve currency, special drawing rights (SDRs), back from the dead.

Even in the area of trade policy, despite fears of protectionism, the outcome was not bad by the standards of past recessions, let alone compared to America’s infamous Smoot-Hawley tariffs, enacted in 1930. Overall, the immediate response of policymakers to the global recession in 2009 did not repeat the mistakes of the early 1930’s.

Currently, however, the advanced countries are in danger of repeating the mistake that US President Franklin Roosevelt made in 1937, when he cut spending prematurely and sent the American economy back into recession. Perhaps the G-20 will be a venue in which the big emerging-market countries remind the US and the UK of the lesson they once knew but have now forgotten – what it means to run a countercyclical fiscal policy.