El-Erian: On the Need to Listen Carefully to What the G-20 is Saying

This article was originally published on ft.com/alphaville on June 5, 2010.

Click here to read Mohamed El-Erian's biography.

Count me among those that believe that the G-20 is one of the better approaches to global governance in a world that desperately needs improved international policy coordination. While the G-20 has not gotten to where it could and should be, its periodic meetings provide us with important insights into global policy issues.

As such, I joined those dissecting today the communiqué that followed the group’s deliberations in Busan, South Korea. Five key issues stood out in my mind, which I will try to list for you- from the most comforting to the more disturbing.

First, the G-20 communiqué re-iterates the view that the Group’s previous strong policy response “played a pivotal role in restoring growth;” and that countries “stand ready to safeguard recovery and strengthen prospects for growth and jobs…and pursue well coordinated economic policies.” We should draw a certain degree of comfort from this.

Second, it confirms that we now live in a multi-speed world characterized by more than large differences in growth rates and a global economy that “continues to recover faster than anticipated.” There are also enormous differences in the soundness and sustainability of public finances in individual countries.

Third, it repeats well-known financial reform priorities, including the need to “improve both the quantity and quality of bank capital,” “to reduce moral hazard,” “to develop effective resolution tools,” “to protect taxpayers,” “to improve transparency,” etc…

Yet, critically, it makes no meaningful progress in providing a unifying magnet for increasingly disparate and uncoordinated national policy approaches. Indeed, the communiqué opens the door even wider for country differentiation. This criticism also applies to the communiqué’s weak paragraphs on financial inclusion and environmental aspects.

Fourth, and related to the two previous points, it recognizes that “significant challenges remain.” Some of these are behind an important change in the overall G-20 policy approach. As I read the communiqué, the Group has gone from strongly supporting growth stimulus to recognizing two critical issues: the approach has not succeeded in delivering sufficient economic escape velocity (confirming recent sluggish indicators of self-sustaining recoveries in the industrial world, including yesterday’s disappointing US jobs report); and that collateral damage is being strongly felt in the form of increasingly unsustainable deficits and debts (consistent with growing core/peripheral tensions in Europe and the failure of the massive ECB/EU/IMF response to deliver any durable improvement to date).

Finally, it welcomes agreement on “the World Bank’s voice reform to increase the voting power of developing and transition countries by 3.13%.” While this is a signal of ongoing efforts to address longstanding representation and legitimacy deficits in international institutions, it also confirms that the steps being taken are miniscule and slow. This is a further indication that, despite what they say, industrial countries continue to embrace and protect a global governance system that reflects the outmoded world of yesterday, rather than the world of today and tomorrow. This will further undermine hope for effective and durable global policy coordination.