By Wang Wen Source: g7g20.com (Canada)
The international monetary system must be realigned to reflect today’s less Western-centric global economy, argues Wang Wen, Executive Dean of Chongyang Institute for Financial Studies at Renmin University of China.
The G20 has been called the premier platform for global economic governance. It should be consolidated as the top-level planning body for the global economy. However, the reform of the International Monetary Fund (IMF) initiated by the G20 in 2010 has run adrift in the United States Congress. Now, the G20 is without the tools it needs to increase growth by an additional two per cent. In fact, at their September 2014 meeting, the G20 finance ministers and central bank governors acknowledged that their countries were on track to raise the rate of economic growth by only 1.8 per cent by 2018. The power of reform needs to be brought back to the G20.
There is a crisis of global governance today. The world must choose: should there be a meaningful overhaul of monetary governance, or just marginally better governance and regulation of financial markets? The original purpose of the G20 in its current form was to respond to the 2008 global financial crisis. Its agenda has focused on the management of financial markets, since it was ‘market disorder’ that caused the crisis. Recently, many in China have begun to suspect that the real cause of that market disorder and the global financial crisis was the international monetary system, specifically its over-reliance on the US dollar. It is time to consider putting reform of the international monetary system on the G20 agenda. China, as the largest holder of international foreign exchange reserves, holds the key to the success of global monetary governance through the G20.
The US and the European Union only consider domestic or regional economic conditions when making monetary policy. Other monetary authorities must consider not only domestic conditions, but also external conditions when they attempt to set their own exchange and interest rates. Countries with non-reserve currencies must try to avoid, or cope by other means with, the damage caused by the unconventional monetary policies of the US and the EU. Nevertheless, China has been the powerhouse of the global economy, contributing more than one-third of global growth during the five years from 2008-13. Without China,the G20 would have no means to execute its agenda for global economic governance.
In the next five years, the global economy will enter a key stage for sustainable growth. As a developing country, China is well aware of the urgent need to promote economic development and growth. Since promoting growth is still at the centre of the G20 agenda, China should host the 2016 G20 summit, so that it can better share its development experience with the world.China is the world’s largest manufacturing country and its largest consumer market, and still expects to see significant growth well into the future. As the proverb goes: “If you want to go fast, go alone; if you want to go far, go together.” In the future, it will be beneficial for both developed and developing countries to participate in global governance on a broader G20 agenda.
From a Chinese perspective, I would offer the following advice to the G20: China offers its philosophy of comprehensive macro-finance – ‘great finance’ – to be part of the global dialogue on global financial values. The greatest risk in the future is that the pattern of economic growth from before the crisis continues unchecked. This necessitates a consensus for structural adjustment. Finance that serves the real economy is a core value that China will promote in the G20. Through the G20, a common framework can be created to integrate global finance and the real economy.
The G20 governance system should be expanded in all directions with ‘variable geometry’. Various regional, bilateral and multilateral mechanisms as well as non-members should be given an opportunity to participate in the G20 process. Non-members should be welcomed into working groups on issues of concern to them.
The meeting of G20 finance ministers and central bank governors held in September 2014 emphasised that investment is critical to boosting demand and lifting growth. To increase long-term investment in infrastructure and to close the global infrastructure funding gap, the G20 should mount a public-private partnership (PPP) initiative. The G20-PPP initiative will include a jointly created capital pool and a project storehouse to match governments and projects with companies in the private sector. The Global Infrastructure Initiative agreed to on21 September at the finance ministerial meeting should be undertaken with the full support and coordination of all G20 members.
As the global economy continues to evolve, the US dollar cannot continue to be so over-represented in global foreign exchange reserves. Early in 2009, Zhou Xiaochuan, Governor of the People’s Bank of China,argued that global financial stability depended on reforming the US dollar-dominated system. The G20 should clearly state this reform as an objective, and think of appropriate and measured reforms to solve this problem.
The G20 needs to create more permanent institutions with the binding force of international law. The end goal should be to establish a G20 secretariat that can oversee the operation of the international system. This would permanently upgrade the G20 from a crisis-management mechanism to the centre of leadership promoting sustainable, long-term global governance.
The G20 should be a forum where developing and developed countries can engage in dialogue as equals to plan and implement an ambitious agenda in order to solve the complex problems of global governance in an age of ever-increasing globalisation. Even though the G20 in its current form is the product of a crisis caused by an old system dominated by developed countries, there is still a chance that further crises could be avoided and the demands of a changing era met by expanding the Western-centric worldview of the G7. It is time to give the G20 its chance to take on a greater and more authoritative role.
The author is Executive Dean of the Chongyang Institute for Financial Studies, Renmin University of China.