If time had stopped in mid-2009, the Group of 20, or G20, would undoubtedly have been recognised as perhaps the most successful multilateral effort ever. After all, the group did come up with a collective and co-ordinated response to the financial crisis precipitated by the collapse of Lehman Brothers in September 2008. The strength of the response and the confidence that the sense of togetherness instilled in markets led to a surprisingly quick reversal from what many believed would be the next Great Depression. But time doesn't stop for anybody and since that defining moment, the group has been increasingly challenged to retain its relevance and effectiveness in dealing with a host of global co-ordination problems that are more structural in nature. In a perfect illustration of the "horses for courses" principle, a group that was very effective in crisis management finds itself being mostly a talking shop once the crisis passed.
Actually, this should not come as a surprise. Common purpose and/or common threats are what make groups work effectively together. Once the threat abated, the G20 proved itself to be a relatively heterogeneous group, which really could not identify a common purpose to provide the glue. Different groups of countries recovered from the crisis at different rates, causing all kinds of friction between their policy priorities and response. At a time when the emerging market economies were showing signs of strong recovery, Europe was threatening to melt down. When the United States Federal Reserve Board embarked on the second round of quantitative easing in late 2010, the emerging economies, led by Brazil, complained vociferously about the destabilising impact of this on their currencies. The Chinese exchange rate policy was always a contentious issue, which stood in the way of any practical convergence on a co-ordinated and integrated global macroeconomic policy framework. Reform of International Monetary Fund (IMF) governance, on which the group put so much priority, was stymied by the US Congress last month. And so on. Meanwhile, each year, the new president of the group used its privilege to introduce new agenda items, making the whole structure unwieldy and even more contentious. Finding shared common ground is clearly becoming more and more difficult, as reflected by the bland nature of the communiques issued after every meeting, including the recently concluded finance track meeting in Sydney, Australia.
So, does this mean that the whole edifice can be brought down with no real threat to global stability? There certainly is some value in the regular meetings and exchanges as well as development of familiarity and trust between each country's economic managers. Also, while there are persistent differences between positions on major policy issues, progress on co-ordination in relation to several nitty-gritty issues is also important. Here, the group seems to achieve something. Convergence on prudential norms, tax co-ordination and common transparency standards on a variety of fronts are all areas in which an interlinked global economy benefits from standardisation and harmonisation. It is important to preserve these gains while being realistic about the limits to this group functioning as an effective global economic governance mechanism. Setting the agenda based on these considerations - and sticking to them - is what is going to keep the group relevant in the absence of a firefight.
