Global Economic Governance
Global Economic Governance can be defined as the international rule-based framework through which economic actors seek to resolve collective action problems and promote cross-border coordination and cooperation in the provision or exchange of goods, money, services, and technical expertise in defined issue areas of the world economy.
Global governance is characterized with states’ and nonstate actors’ governance activities without global government. It involves the provision of government-like services – in particular the supply of public goods – at the international level. In the absence of global government, it is hard to effectively solve global problems in various issue areas. Yet calls for greater global governance have in fact been associated with an impressive series of attempts to provide government-like services at the global level (Frieden 2012: 1). Accordingly, global economic governance involves the provision of public goods in the global economy. It can be defined as the international rule-based framework through which economic actors seek to resolve collective action problems and promote cross-border coordination and cooperation in the provision or exchange of goods, money, services, and technical expertise in defined issue areas of the world economy (Moschella and Weaver 2014: 4).
The Architecture of Global Economic Governance
Global economic governance has become more complex over the past 20 years. The range of issues that require global coordination include not only traditional issues like trade and monetary affairs but also topics which were once viewed as falling exclusively within a state’s domestic jurisdiction, such as banking regulation, inclusive green growth, youth employment, and domestic resource mobilization.
International organizations have been identified as focal points though which member states can negotiate the terms on which global governance takes place. While no longer limited to intergovernmental forums, international organizations such as World Trade Organizations (WTO), International Monetary Fund (IMF), and World Bank remain premier venues of global governance in which international rules are elaborated, decisions are made, and agreements are enforced. The liberalism of the current order is reflected in institutional anchors such as the trade liberalization rules of the WTO, the commitment to capital mobility of the IMF, and economic policy advice favoring market coordination and privatized development (the “Washington Consensus”). International organizations therefore serve as important thermometers for the broader politics of global governance (Stephan 2014: 915).
Following World War II, the primary actors in global economic governance were the Bretton Woods institutions including the IMF, the World Bank, the General Agreement on Tariffs and Trade, and its successor – the WTO. Over the following decades, the number of key actors in global economic governance grew to include the Group of Seven/Group of eight (G7/G8) and international standard-setting bodies in global financial regulation (Bradlow 2013: 973–974). An important characteristic of the Bretton Woods system was that the IMF, the formal international organization charged with promoting international monetary cooperation, did not evolve into the central forum for financial regulatory cooperation. Instead, starting in the 1970s, financial regulators from major markets approached counterparts in other countries to manage the policy challenges of the nascent globalization of finance. Well-resourced agencies – e.g., the Federal Reserve, the Bank of England, and the Securities and Exchange Commission (SEC) – led the way in constructing the web of forums including the Basel Committee on Banking supervision (BCBS), the International Organization of Securities Commissions, the International Association of Insurance Supervisors, and the International Accounting Standards Board (IASB) (Brummer 2012; Davies and Green 2008; Porter 2005).
The Emergence of the G20 as a Premier Forum in Global Economic Governance
Prior to 2008, the overall manager of the global economy was the G7/G8. In 1999, in the wake of the Asian Financial Crisis, the G7/G8 recognized that it could not manage the crisis on its own, and its leading members invited the ministers of finance from a select group of countries and the European Union to meet. In a couple of months, Asian Financial Crisis spread from Thailand to Indonesia and South Korea. Even the USA was involved in this crisis in August 1998, which led to the bankrupt of the US Long-Term Capital Management Corporation. As a consequence, the G7/G8 members were aware that there were not able to maintain the stability of global financial system on their own in the era of economic globalization. Moreover, it amounted to a public acknowledgement that the G7/G8 was no longer capable of managing the global economy and needed to share the responsibility with a broader group of countries (Bradlow 2013: 976).
Therefore, they decided to dialogue with emerging market economies on equal footing, resulting in the formation of G20 Ministers of Finance and Central Bank Governors. On 15–16 December 1999, Ministers of Finance and Central Bank Governors of 19 systematically important countries in the international economic system and the EU met to take part in the first G20 meeting in Berlin, leading to the formation of the G20. In 2008, a major global financial crisis erupted in the Wall Street in the USA. In only a few months, the crisis diffused from financial sectors to real economy and spread to other major economies around the world. The G7/G8 was not able to respond to the crisis in an effective way. The limited scope of the G8 members ruled out the participation of emerging powers, which could play a major role in solving this global problem collaboratively. Against this background, the G7/G8 members decided to upgrade the G20 from the ministerial level to the summit level. On 14–15 November 2008, the G20 leaders gathered to discuss the management of global financial crisis and global economic governance in Washington and were “determined to work together to restore global growth and achieve needed reforms in the world’s financial systems.” This led to the formal birth of the G20 summit.
With the rapid growth of the emerging powers’ economy, the global economic system is significantly influenced by the views, interests, and requirements of these powers. It is clear that the problems of global imbalances, economic recession and recovery, and financial system reform cannot be solved without involving emerging market economies. It has been fortunate that the G20 emerged as a premier forum, and this could be the most profound evolution in global economic governance over the last couple of decades. It represents the first adaptation of the global governance structure to reflect dramatic changes in the distribution of power since the end of the Cold War. It is also the only forum in which major established and emerging players meet in a setting of formal equality. As the global economy was besieged in crisis, it is important to ensure the sustainability of the current system and avoid its collapse. This should include efforts to reform the IMF to make it a more effective institution for bilateral and multilateral surveillance and as an international lender of last resort. The success on both front crucially depends on the effectiveness of global economic governance and the role of the G20 which emerges as a premier forum for international economic cooperation in the aftermath of global financial crisis (Cho 2012: 12). As Patrick says, “the G20 has the potential to shake up the geopolitical order, introducing greater flexibility into global diplomacy and transcending the stultifying bloc politics that have too often hamstrung cooperation on global governance in formal, treaty-based institutions, including the United Nations” (Patrick 2012).
The Legitimacy of the G20: Challenges Ahead
In contrast to the G7/G8 membership, the G20 includes all the systematically important counties such as the largest emerging economies of China, India, and Brazil. Therefore, legitimacy and representativeness may not be an important hurdle for the G20 to function as a global governance forum. There is no clear reason why those 20 particular leaders should sit around the table, but any other selection would face similar questions. The G20 seems to be a reasonable grouping as it is balanced between advanced and emerging economies, and regionally.
Although the representativeness of the G20 is much higher than that of the G7/G8, many middle and small powers criticize the G20 for its lack of representativeness. They demanded for more representativeness while recognizing the role of the G20 in global economic governance. Facing the criticisms of those middle and small powers, the G20 justified its legitimacy on the ground that the legitimacy of the G20 is attributable to its economic power and the broad scope of its membership as well as its strength in managing global economy. Nevertheless, this justification has not given a satisfactory answer to the question of how the nonmembers are represented in the G20. As it is the major concern of the middle and small powers, the G20’s justification has not relieved its pressure resulting from the lack of legitimacy.
The G20 plays a leadership role in global economic governance primarily by converging the members’ different preferences into a single political consensus (as far as possible). Although international agreements reached in the G20 summits are not legally binding, they matter precisely because they reflect the political consensus of the members. In the ensuing actions, some international organizations may put the political consensus into practice and implement the international agreement reached in the G20 summits. These international organizations include the IMF, World Bank, WTO, UN, the International Labor Organization (ILO), the Financial Stability Board (FSB), and the Organization for Economic Cooperation and Development (OECD). If the international agreements were implemented, global economic governance would be reformed in the direction set by the G20. In the process of implementing the G20 agreements, nonmembers’ disagreement with the legitimacy of the G20 would result in their noncooperative attitudes, thus exerting negative impact on the effectiveness of the G20.
A high level of legitimacy is helpful for the effectiveness of an international institution. Conversely, a high level of effectiveness can help to improve members’ and nonmembers’ identification with the legitimacy of an international institution. Actors’ loyalty for a particular institution is partly attributable to the actual and predictable welfare the institution generates. Furthermore, the fact that the actors have not found and expected to find a more efficient alternative institution would contribute to reinforcing the legitimacy of the institution (Reus-Smit 2007). The G20 performed well in responding to the global financial crisis and played a significant role in solving the collective action problem when coordinating the members’ macroeconomic policies (Buekley 2014; Callaghan et al. 2014). This could help the members and nonmembers form a positive expectation of the G20’s welfare-improving effect and therefore make them more confident in the G20, leading to the members’ and nonmembers’ increased identification with the legitimacy of the G20. To some extent, this reduced the legitimacy pressure facing the G20.
Having fulfilled the tasking of managing the global financial crisis, the G20 is evolving from an improvised crisis management institution to a steering committee in global economic governance. It is evident that while the G20 leaders discussed the issues of macroeconomic coordination, international financial market regulation, international financial institutions reform, and international monetary system reform which focus on managing the global financial crisis in the first three summits, the issues less relevant to the crisis management, such as development aid, energy security, food security, and commodity price volatility, were included in the agenda from the G20 Toronto summit taking place in June 2010 onward. The proliferation of the issues discussed in the G20 along with the weakening disciplinary effect of the global financial crisis would exert a negative impact on the effectiveness of the G20.
The disciplinary effect stemmed from the strong sense of urgency of the G20 members facing the crisis. When the G20 members responded to the crisis collectively, the strong sense of urgency prompted them to reach political consensus and coordinate their policies. After the crisis became less urgent, the weakening disciplinary effect made it hard for the G20 members to reach political consensus. As such, in the process of transforming from an improvised crisis management institution to a steering committee, the G20 is no longer able to employ the disciplinary effect of the crisis to facilitate the formation of the political consensus and the convergence of the members’ different preferences. This would damage the effectiveness of the G20.
In addition, the proliferation of the issues discussed in the G20 reduced the members’ compliance pressure, which would further damage the effectiveness of the G20. Although the G20 members do not have legally binding obligation in complying with their commitments, there are institutional arrangements designed to ensure a relatively high level of compliance. In an attempt to facilitate the members’ compliance with their commitments, the G20 has established a procedure of peer review, in which the G20 leaders can review other members’ level of compliance. The G20 members showing less compliance with their commitments would face a situation of naming and shaming, thus putting compliance pressure on them.
Due to the proliferation of the issues discussed in the G20, the number of commitments on the leaders’ table increased substantially. For this reason, it is hard for the G20 leaders to conduct the work of peer review well in limited time. Furthermore, as the G20 leaders have to rely on relevant expertise to review other members’ level of compliance, the proliferation of the issues enlarges the gap between the leaders’ expertise in hand and the required one, which inevitably reduces the quality of peer review. Because of the decreased quality of peer review, even if a G20 member receives a negative review result, it is very hard for other members to use the tactic of naming and shaming convincingly. As a result, the peer review procedure puts less compliance pressure on the G20 members. Given that the peer review procedure cannot put sufficient compliance pressure on the G20 members, it has been not able to perform well in facilitating the members’ compliance with their commitments. Hence, the G20 is becoming less effective in solving various problems in global economic governance.
The above analysis suggests that the G20 is becoming less effective than that in hard time. It implies that it is hard for the G20 to rely on a high level of effectiveness to reduce its pressure resulting from the lack of legitimacy and that the G20 has to improve its legitimacy by other means. Although the G20 is in need of improving its legitimacy by reforming itself, the reform could not be conducted at the expense of damaging its effectiveness. There are two reform measures through which the G20 can improve its legitimacy while not damaging its effectiveness. The first reform measure is to strengthen the peer review procedure in the G20 ministerial meetings. The second reform measure is to institutionalize the linkage between the members and nonmembers.
Due to the limited time and the G20 leaders’ limited expertise, the peer review procedure in the G20 summits is not able to put sufficient compliance pressure on the members after the G20 evolved from an improvised crisis management institution to a steering committee. In order to solve this problem, the G20 needs to conduct peer review for the members’ compliance with their commitments in the ministerial meetings. On the one hand, as the issues discussed in the G20 ministerial meetings focus on specific policy fields, the G20 ministers have more time to review other members’ compliance in these fields. On the other hand, the G20 ministers have relatively sufficient expertise and management experiences in the policy fields they are responsible for, thus ensuring the quality of peer review. As such, the G20 can conduct peer review in the ministerial meetings to put more compliance pressure on the members. Having covered the policy fields of finance, energy, development, labor, and employment, the G20 ministerial meetings can facilitate the member’s compliance in these fields by conducting peer review. In addition, the G20 needs to hold ministerial meetings in other policy fields and conduct peer review in the newly held ministerial meetings, thus broadening the scope of compliance pressure put by the peer review procedure in the same pace as the issues discussed in the G20 are proliferating. By strengthening the peer review procedure in the G20 ministerial meetings, the G20 in transition can maintain a high level of effectiveness and therefore continue to use its effectiveness to reduce the pressure resulting from the lack of legitimacy.
For an informal international institution like the G7/G8 and the G20, accepting more members is not the sole way to improve its representativeness. The G7/G8 has sought to establish dialogue mechanism with large developing countries. In 2007 G7/G8 summit, this dialogue mechanism was set up as the Heiligendamm process. Like the G7/G8, the G20 has adopted the strategy of institutionalizing the linkage between the members and non-members to improve its representativeness. Some non-members were invited to attend the G20 summits for the purpose of making their voice heard. Also, the G20 has attempted to improve its representativeness by letting the members express concerns on behalf of the non-members in their regions. For instance, some G20 members participated in the outreach program to realize proxy representation, discussing with the non-members in their regions regularly. Australia is one of the participants of the outreach program. The Australian government expressed its willingness to hold outreach meetings with its neighbors for the purpose of ensuring that the decisions in the G20 reflect the interests of its region. Although these measures provided the non-members with opportunities of being represented in the G20, the linkage between the members and non-members remains less institutionalized. A higher level of representativeness requires that the G20 should institutionalize the linkage between them. The G20 can set up a dialogue mechanism between the members and some key non-members like the Heiligendamm process. In doing so, the legitimacy of the G20 can be improved while not damaging its effectiveness.
In the aftermath of the global financial crisis in 2008, the G20 emerged as a primier forum in global economic governance. Because of the lack of representativeness, the legitimacy of the G20 was questioned by many non-members. The lack of legitimacy exerted negative impact on the effectiveness of the G20. For the G20 aimed at effective governance, this negative impact is not negligible.
The impressive performance of the G20 in managing the global financial crisis reduced its pressure resulting from the lack of legitimacy. When the G20 is evolving from an improvise crisis management institution to a steering committee in global economic governance, however, it is hard for the G20 to maintain a high level of effectiveness due to the weakening disciplinary effect of the crisis and the proliferation of the issues discussed in the G20 (Cooper 2010). This made it hard for the G20 to take advantage of a high level of effectiveness to reduce its legitimacy pressure. In order to improve its legitimacy, the G20 needs to strengthen the peer review procedure in the ministerial meetings and institutionalize the linkage between the members and non-members. If the G20 was successfully carried out toward the direction of improving its legitimacy, it would become a real steering committee in global economic governance.
- Bradlow DD (2013) A framework for assessing global economic governance. Boston Coll Law Rev 54(3):971–1003Google Scholar
- Brummer C (2012) Soft law and the global financial system. Cambridge University Press, CambridgeGoogle Scholar
- Buekley RP (2014) The G20’s performance in global financial regulation. Univ N S W Law J 37(1):63–93Google Scholar
- Callaghan M, Ghate C, Pickford S, Rathinam FX (eds) (2014) Global cooperation among G20 countries: responding to the crisis and restoring growth. Springer, New DelhiGoogle Scholar
- Davies H, Green D (2008) Global financial regulation: the essential guide. Polity, CambridgeGoogle Scholar
- Moschella M, Weaver C (2014) Global economic governance: players, power and paradigms. In: Moschella M, Weaver C (eds) Handbook of global economic governance. Routledge, London, pp 1–22Google Scholar
- Patrick S (2012) The G20: shifting coalitions of consensus rather than blocs. In: Bradford C, Lim W (eds) The new dynamics of summitry: institutional, policy and political innovations for G20 summits. Korea Development Institute, Seoul, pp 38–42Google Scholar
- Porter T (2005) Globalization and finance. Polity, CambridgeGoogle Scholar